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Labor Market Rigidities and Informality in Colombia

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  • Camilo Mondragón-Vélez

    ()

  • Ximena Peña

    ()

  • Daniel Wills

    ()

Abstract

Informality is at the center of the economic debate in Colombia, fueled by the high level prevalent in the country and its substantial increase during the 1990s. We study the effect of labor market rigidities, namely the increase in non-wage costs and the minimum wage on the size of the informal sector, the transition into and out of informality, and wages. Our results indicate that rises in non-wage costs and the minimum wage, increase the probability of transition into informality as well as the size of the informal sector. The business cycle has second order effects. The analysis across education groups points towards strong exclusion motives for low skilled informal workers, mainly driven by labor demand adjustments in response to increasing hiring costs; and argues somehow in favor of exit motives for workers with higher educational attainment. In addition, we document facts regarding the evolution and characteristics of the informal sector across alternative definitions of informality.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2010)
Issue (Month): ()
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Handle: RePEc:col:000425:008355

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Keywords: Informality; non-wage costs; minimum wage; transition probability;

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  1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  2. Daniel Mejía & Carlos Esteban Posada, 2007. "Informalidad: teoría e implicaciones de política," BORRADORES DE ECONOMIA 004024, BANCO DE LA REPÚBLICA.
  3. Kristensen, Nicolai & Cunningham, Wendy, 2006. "Do minimum wages in Latin America and the Caribbean matter ? Evidence from 19 countries," Policy Research Working Paper Series 3870, The World Bank.
  4. Maloney, William F. & Nunez, Jairo & Cunningham, Wendy & Fiess, Norbert & Montenegro, Claudio & Murrugarra, Edmundo & Santamaria,Mauricio & Sepulveda, Claudia, 2001. "Measuring the impact of minimum wages : evidence from Latin America," Policy Research Working Paper Series 2597, The World Bank.
  5. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  6. Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2.
  7. Bernal Raquel, 2009. "The Informal Labor Market in Colombia: identification and characterization," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  8. Michael J. Pisani & José A. Pag�n, 2004. "Self-employment in the era of the new economic model in Latin America: a case study from Nicaragua," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 16(4), pages 335-350, July.
  9. Camilo Mondragón-Vélez & Ximena Peña, 2010. "Business Ownership and Self-Employment in Developing Economies: The Colombian Case," NBER Chapters, in: International Differences in Entrepreneurship, pages 89-127 National Bureau of Economic Research, Inc.
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