Nothing! But, there is a lot wrong with the labor laws in Panama. Like workers everywhere, Panamanians want the opportunity to make a decent living and provide the basics of life for their families. It is the state and its antiquated labor laws that are hurting the workers and keeping them in a position of limited potential.
When people ask about the cost per hour of an employee in Panama, they are shocked to hear how low it is relative to the U.S.. Although the payment per hour may be relatively low, the real cost of labor is relatively high. When all of the costs are taken into consideration the burden on labor is over 51% and getting higher each year. Even so, the cost of labor is not so high until you take into consideration the low productivity levels.
I honestly don’t know how most of the people of Panama can survive on the income they receive. For example, our housekeepers at the resort make $275 a month and many are the sole parent of several children. Of course they have Social Security, which provides “free, but poor ” health care and “free, but poor” public education, but just the costs of food, transport and housing mean they have to live in what we would consider to be poverty. Most people in the interior still live at home with their parents or other family members, which reduces the housing costs significantly, but try to have a decent diet and put cloths on you and your children’s backs for $275 a month before taxes. Many look at this and blame the employer for not paying more, but the blame lies with the labor laws which keep people from advancing and becoming more productive and competitive in order to earn higher wages.
A recent study by the IMF about labor and unemployment in Latin America shows that the high cost of termination of employees contribute directly to the high unemployment rates in Latin countries. This is only a part of the problem.
Panama fits into their category of badly needed labor reform. The restrictive labor laws hurt the employee rather than help them to stay employed. We have a full time human resources department who deals only with labor issue. They have learned over the years how to structure contracts that help minimize the direct cost to the employer. The system keeps the opportunities for long-term employment to a minimum and eliminates the opportunity for an employee to learn higher-level skills and corresponding incomes. The longer a worker works for you the more it costs and harder it gets to terminate. Even if termination is for good reason the employee will almost always win the battle in the labor ministry dispute hearings, costing the company money in legal fees, compensation and wasted time. We have had dozens of hearings and have rarely won a case.
Keeping contracts short-term is how most companies operate and these short-term contracts hurt the employee because it robs him of the opportunity for advancement through acquiring better skills. It hurts us too, because we need skilled labor and Panama has very few, especially in the interior. Of the over 200 people we currently employ directly in construction, we have only about 5% who are long-term employees. They have been with us over 5 years. To terminate them now would be very expensive and for them to leave for another job would cost them dearly too. If they quit they lose a lot of benefits accumulated over this time. There is not much incentive for us to pay higher wages even to these dedicated long-term employees, as they know to the penny what it would cost him to leave and our human resources department knows to the penny what it costs us to keep him at a lowest possible wage. There is little incentive to improve productivity and improve skill level by the employee and there is little incentive to provide additional training and higher wages by the employer. We are in a state of limbo where both parties are married to one another whether they really like it or not.
Because of this no-win situation imposed by the state everyone loses especially the people of Panama. The one bright spot in this dismal situation is entrepreneurs. For example, we have begun to use more private contractors who were previously employees. Several have taken the opportunity to provide services to us and run their own business. We pay about 20-25% more than an hourly employee, but we get significantly more production from the contractor. It is amazing to see the difference in the speed a private contractor will lay tile as opposed to an employed counterpart. The contractor will work extra hours and even on holidays as he is paid per square meter rather than by the hour. There is not much incentive for us to have labor work holidays because it costs us 2 ½ times the normal pay and there is no increase in productivity. Normal overtime pay is at 1.25 times regular pay.
But, the detrimental labor laws infect the subcontractor too. If he hires additional labor, he has the same problems as any other employer, so most keep it small and in the family where they can apply more personal pressure if production is low. This, of course keeps the incentive to teach others higher skills to a minimum, so as not to lose business to competition. This makes all construction take longer, because you have to wait for that contractor to finish the first job before he can start another with his small crew. We need more entrepreneurs to get to be bigger contractors, but the labor laws make it just as burdensome on them as it does us.
Another productivity issue is the number of holidays and sick days in Panama. An employer has to pay for a 13th month even though there are only 12 months in a year. But, it gets worse because you only get 10 months of work. How is that? Every employee gets a month long holiday after a year, no matter how long they have worked for you. In addition the employee gets 16 paid holidays and 18 paid sick days. He can accumulate up to two years worth of sick days and if they are unused in two years the employer must pay him for those days. Now we have cut productivity down by nearly 25% with the time away from the job or time paid for not working.
Now we must add Social Security at 11%, Education Insurance at 1.5%, Workers compensation at 5.6%, Liquidation at 6% and longevity payment of 1.92%. The actual burden gets to be over 50% when coupled with the vacations, sick leave and paid holidays.
Now the worker also must pay into the system, starting with 7.25% to Social Security, 1.25% to education insurance and income tax starting with incomes over $801 a month of about 7.5%.
There are a few more nuances to be aware of such as the four-month maternity leave, which is paid by Social Security. Upon return from maternity leave the employer must provide employment for at least one year. This is one of the reasons a pregnancy test is usually implemented for female employees before offering them a job. I have heard it said that you never want to employ someone longer than 2 years because on that anniversary they become one of your children for the rest of their lives. The truth is that it gets significantly more difficult and expensive to dismiss an employee after two years. You must document any infringement in writing and the cause for dismissal must fall into the following categories; Three Mondays in one month not showing up for work are grounds for dismissal. Six Mondays in a year also qualify. This is because fiestas on weekends regularly carry over to Monday. Disrespect and rudeness to employer, theft, fighting and unauthorized use of material and or equipment are all grounds for termination if witnesses and documentation are provided. It is important to note that the Labor Ministry puts all proof on the employer and to fight a claim nearly always goes in favor of the employee. Attorneys usually work pro bono for workers claims because they get about 50% of what is collected and rarely lose a case.
You can see from the situation I have described that it is not the fault of the employee for taking advantage of a legal system that provides him with the opportunity to suppress productivity. Human nature will always take the path of least resistance. It is unfortunate that Panamanians are being fooled into believing that the laws protect them from unscrupulous employers and minimum wage laws help them to have better incomes. Nothing could be further from the truth. Panama is a country where incomes are at low levels commensurate with productivity levels and the demand for skilled labor is on the rise.
