An evaluation of a mandatory profit-sharing reform in Peru, using quasi-experimental methods

Abstract

This study identifies a causal effect of the labour reform given by Peruvian Legislative Decree N 892 on firm performance. The labour reform states that firms must share profits with their employees when they have more than 20 fixed employees at the end of the year. This discontinuity provides an exogenous source of variation below and above the threshold and allows to implement a quasi-experimental method. At firm level, the National Institute of Statistics and Informatics (INEI) provided the data called the Annual Economic Survey (AES). The main findings of this study were that this law reduces the return on investment of a firm due to rent sharing, which implies that they make less investment and hire more non-permanent employees (not mandatory rent sharing), which decreases the level of productivity across firms. Therefore, according to regression discontinuity and difference in difference approaches, it is estimated that the labour reform policy reduced investment by 16.4% and 15.6%, respectively, given the cut-off threshold of 20 employees. Moreover, the magnitude of the effect on temporary employees induces firms to hire an average differential of temporary employees ranging from 14 to 40% among firms with more than 20 employees instead of less than 20 employees.