Fear was keeping formal hiring suppressed
In the shadow of a pandemic that erased nearly half a million formal jobs, Peru's government reached into the machinery of labor markets with a calculated act of persuasion: pay companies to hire, and hire formally. Issued on a November Sunday, the emergency decree offered tiered wage subsidies to businesses willing to bring workers back onto official payrolls, with special weight given to youth employment and permanent contracts. The measure was less a rescue than a wager — that fear, not economics alone, was holding the formal economy back, and that the state could price that fear out of the equation.
- Peru's formal workforce had shrunk by roughly 500,000 workers since the pandemic began, and without intervention, new hiring was quietly migrating toward the informal sector where no contracts, benefits, or taxes apply.
- Companies were paralyzed by uncertainty — willing to work, but unwilling to commit to formal payrolls while the pandemic's end remained unclear.
- The government responded with a tiered subsidy structure covering 35 to 55 percent of wages, deliberately sweetening the deal for permanent hires and young workers to steer behavior, not just stimulate it.
- Strict eligibility rules — requiring verified revenue losses of 20 percent or more — and monthly payroll audits were built in to prevent fraud and ensure the subsidies created real jobs rather than reshuffling existing ones.
- The program runs through April 2021, with the government targeting a return to pre-pandemic formal employment levels of 3.7 million workers by mid-2021 — a gap of roughly 500,000 jobs that must be closed in under a year.
On a Sunday in early November, Peru published an emergency decree aimed at reversing one of the pandemic's quieter devastations: the hollowing out of the formal job market. Nearly half a million workers had disappeared from official payrolls since the crisis began, and the government's response was blunt — pay companies to hire them back.
The decree offered wage subsidies ranging from 35 to 55 percent, calibrated by contract type and worker age. Fixed-term hires earned companies a 35 percent subsidy for three months; permanent hires, 45 percent; permanent hires of young workers, 55 percent. The logic was deliberate: youth unemployment had become acute, and the tiered structure was designed to push companies toward longer commitments rather than temporary arrangements.
Labor Minister Javier Palacios Gallegos framed the program around five goals — recovering lost jobs, creating new formal positions, drawing workers out of informality, targeting youth specifically, and favoring permanent contracts. Before the pandemic, Peru's formal payroll had stood at 3.7 million workers. By late 2020, it had fallen to 3.2 million. The government wanted that gap closed by mid-2021.
Palacios acknowledged the central obstacle plainly: companies were afraid. Without a financial push, new hiring would flow toward the informal economy — cheaper, faster, and unburdened by obligations. The subsidy was designed to make formal hiring the more rational choice.
Only genuinely affected businesses qualified. A company had to demonstrate at least a 20 percent revenue drop in April and May of 2020 compared to the prior year, verified through tax records. Subsidies would arrive as reimbursements roughly two months after hiring, and the program window ran through April 2021. Monthly audits would confirm that payrolls had actually grown — not merely reshuffled — and companies with corruption cases, tax debts, or ongoing mass layoffs were excluded entirely.
Whether the program would reach its target of 350,000 workers remained an open question. The government had correctly identified fear as the suppressing force. Whether the subsidy was large enough to overcome it would depend on how much companies trusted that the recovery was real.
On a Sunday in early November, Peru's government published an emergency decree designed to pull the formal job market back from the edge. The pandemic had hollowed out the payroll—nearly half a million workers gone from the formal sector since the crisis began. The government's answer was direct: pay companies to hire.
The Decree of Urgency No. 127-2020 offered subsidies covering 35 to 55 percent of worker wages, depending on the contract type and the worker's age. A company hiring someone at minimum wage on a fixed-term contract would receive 35 percent of that salary for three months, then 17.5 percent for three more. Hire the same person permanently, and the subsidy jumped to 45 percent initially, then 22.5 percent. Hire a young person on a permanent basis, and the state would cover 55 percent of wages for the first quarter, then 27.5 percent after that. The incentive was tiered, deliberate, and aimed at a specific problem: youth unemployment had become severe, and companies were hesitant to commit to permanent hires in the fog of ongoing crisis.
Javier Palacios Gallegos, the labor minister, announced that roughly 350,000 workers would benefit from the program. He laid out five objectives with the precision of someone trying to solve a puzzle with multiple missing pieces. First, recover jobs already lost. Second, create new formal positions. Third, pull workers out of the informal economy and onto official payrolls. Fourth, target young people specifically—they had been hit hardest by the shutdown. Fifth, encourage permanent contracts rather than temporary ones. Before the pandemic, Peru's formal payroll had held 3.7 million workers. By late 2020, that number had fallen to 3.2 million. The government wanted to close that gap by mid-2021.
But there was a catch, and Palacios named it plainly. Companies were afraid. The pandemic's end remained uncertain. Without a push, new hiring would drift toward the informal sector—no contracts, no benefits, no taxes. The subsidy was meant to overcome that fear, to make formal hiring cheaper and faster than the alternative.
The program applied only to companies that had genuinely suffered. To qualify, a business had to have lost at least 20 percent of its revenue in April and May of 2020 compared to the same months in 2019. The government would verify this through tax records. The subsidies themselves would be paid as reimbursements, arriving roughly two months after a worker was hired, and the program window ran from November 2020 through April 2021.
The government built in safeguards against gaming the system. The labor ministry would check monthly that companies actually had more workers on their payrolls during the subsidy period—not just swapping one person for another. It would verify that total wage bills had grown. Companies undergoing mass layoffs, those with corruption cases, those barred from state contracts, or those carrying tax debts above a certain threshold were excluded entirely. There would be a fraud-prevention mechanism, coordinated with the labor inspection agency, to catch misuse.
What remained to be seen was whether the incentive would work. The government had diagnosed the problem correctly: fear was keeping formal hiring suppressed. Whether 350,000 workers would actually move from unemployment or informality into subsidized payroll positions depended on whether companies believed the recovery was real, and whether the subsidy was large enough to overcome their doubt.
Citas Notables
The subsidy to the payroll is a powerful incentive to return to formal employment hiring much more rapidly— Javier Palacios Gallegos, labor minister
La Conversación del Hearth Otra perspectiva de la historia
Why did the government choose to subsidize wages rather than, say, give tax breaks or direct grants to companies?
Because they wanted to tie the incentive directly to hiring. A tax break doesn't guarantee a single new job. A wage subsidy means the company only gets paid if it actually brings someone onto the payroll.
And why the different rates for young people versus other workers?
Youth unemployment was catastrophic during the pandemic. The government was trying to make hiring young people more attractive than hiring experienced workers. The subsidy was steeper for permanent youth contracts—55 percent—because those are the hardest sells in uncertain times.
What about the companies that didn't lose 20 percent of their revenue? Why exclude them?
The decree was framed as emergency relief for pandemic-affected businesses. If you didn't suffer significant losses, the logic went, you didn't need the subsidy. It was a way to target limited resources.
The monthly verification checks—what was the government actually trying to prevent?
Job substitution. A company could theoretically fire someone and hire someone else, pocket the subsidy, and claim they'd created a new job. The checks were meant to ensure the total headcount actually grew.
Two months to receive reimbursement seems slow. Why not faster?
Processing 350,000 claims takes time. And the government probably wanted to verify the hiring was real before paying out. A faster system might have invited fraud.
If this works, what does success look like by mid-2021?
3.7 million workers back on formal payrolls. That's the pre-pandemic baseline. Anything less means the recovery is incomplete.