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Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia

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  • Adriana Kugler
  • Maurice Kugler

Abstract

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980s and 1990s affected the labor market. Our estimates indicate that formal wages fall by between 1.4% and 2.3% as a result of a 10% rise in payroll taxes. This "less-than-full shifting" is likely to be the result of weak linkages between benefits and taxes and the presence of downward wage rigidities in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment also falls. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find some evidence of less shifting and larger disemployment effects for production than for nonproduction workers. These results suggest that policies aimed at boosting the relative demand of less skilled workers by reducing social security taxes may be effective in Latin American countries, where minimum wages bind and benefits are often not directly linked to contributions. (c) 2009 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 57 (2009)
Issue (Month): 2 (01)
Pages: 335-358

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Handle: RePEc:ucp:ecdecc:v:57:y:2009:i:2:p:335-358

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Web page: http://www.journals.uchicago.edu/EDCC/

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Cited by:
  1. Gustavo Hernández, 2012. "Payroll Taxes and the Labor Market: A Computable General Equilibrium Analysis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 49(1), pages 99-123, May.
  2. Maurice Kugler & John Haltiwanger & Adriana Kugler & Marcela Eslava, 2011. "Trade, Technical Change and Market Selection: Evidence from Manufacturing Plants in Colombia," 2011 Meeting Papers 1039, Society for Economic Dynamics.
  3. Marcela Eslava & John C. Haltiwanger & Adriana D. Kugler & Maurice Kugler, 2009. "Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia," NBER Working Papers 14935, National Bureau of Economic Research, Inc.
  4. Eduardo Lora & Johanna Fajardo, 2012. "Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes," IDB Publications 76958, Inter-American Development Bank.
  5. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Lehmann, Etienne & Marical, François & Rioux, Laurence, 2013. "Labor income responds differently to income-tax and payroll-tax reforms," Journal of Public Economics, Elsevier, vol. 99(C), pages 66-84.
  7. Gustavo Adolfo HERNANDEZ DIAZ, 2011. "Impuestos parafiscales y mercado laboral: Un análisis de Equilibrio General Computable," ARCHIVOS DE ECONOMÍA 008954, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  8. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2014. "The Effects of Regulations and Business Cycles on Temporary Contracts, the Organization of Firms and Productivity," CEDLAS, Working Papers 0154, CEDLAS, Universidad Nacional de La Plata.
  9. Adriana Kugler, 2011. "Is there an Anti-labor Bias of Taxes? A Survey of the Evidence from Latin America and Around the World," Research Department Publications 4746, Inter-American Development Bank, Research Department.

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