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Employment and Deadweight Loss Effects of Observed Non-Wage Labor Costs

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Author Info

  • Silvio Rendon

    ()
    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Giovanna Aguilar

    ()
    (Universidad Catolica del Peru)

Abstract

To assess the employment effects of labor costs it is crucial to have reliable estimates of the labor cost elasticity of labor demand. Using a matched firm-worker dataset, we estimate a long run unconditional labor demand function, exploiting information on workers to correct for endogeneity in the determination of wages. We evaluate the employment and deadweight loss effects of observed employers' contributions imposed by labor laws (health insurance, training, and taxes) as well as of observed workers' deductions (social security, and income tax). We find that non-wage labor costs reduce employment by 17% for white-collars and by 53% for blue-collars, with associated deadweight losses of 10% and 35% of total contributions, respectively. Since most firms undercomply with mandated employers' and workers contributions, we find that full compliance would imply employment losses of 4% for white-collars and 12% for blue-collars, with respective associated deadweight losses of 2% and 6%.

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File URL: http://ftp.itam.mx/pub/academico/inves/rendon/07-04.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0704.

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Length: 33 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:cie:wpaper:0704

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Keywords: Employment; Deadweight Loss; Job Creation; Labor Costs; Labor Law;

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  1. Richard B. Freeman, 2000. "Single Peaked Vs. Diversified Capitalism: The Relation Between Economic Institutions and Outcomes," NBER Working Papers 7556, National Bureau of Economic Research, Inc.
  2. Daniel S. Hamermesh, 1987. "The Demand for Labor in the Long Run," NBER Working Papers 1297, National Bureau of Economic Research, Inc.
  3. Kim B. Clark & Richard B. Freeman, 1979. "How Elastic is The Demand for Labor?," NBER Working Papers 0309, National Bureau of Economic Research, Inc.
  4. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  5. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421 Elsevier.
  6. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  7. Jaime Saavedra-Chanduví & Máximo Torero, 2000. "Labor Market Reforms and Their Impact on Formal Labor Demand and Job Market Turnover: The Case of Peru," Research Department Publications 3095, Inter-American Development Bank, Research Department.
  8. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  9. Daniel S. Hamermesh, 1988. "Labor Demand and the Structure of Adjustment Costs," NBER Working Papers 2572, National Bureau of Economic Research, Inc.
  10. Nickell, S.J., 1987. "Dynamic models of labour demand," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 9, pages 473-522 Elsevier.
  11. Sílvio Rendon, 2004. "Job Creation and Investment in Imperfect Capital and Labor Markets," Economic Working Papers at Centro de Estudios Andaluces E2004/35, Centro de Estudios Andaluces.
  12. Carmen Pagés-Serra & Gustavo Márquez, 1998. "Ties That Bind: Employment Protection and Labor Market Outcomes in Latin America," Research Department Publications 4118, Inter-American Development Bank, Research Department.
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Cited by:
  1. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2014. "The Own-Wage Elasticity of Labor Demand: A Meta-Regression Analysis," IZA Discussion Papers 7958, Institute for the Study of Labor (IZA).
  2. Christian Westermeier & Anika Rasner & Markus M. Grabka, 2012. "The Prospects of the Baby Boomers: Methodological Challenges in Projecting the Lives of an Aging Cohort," SOEPpapers on Multidisciplinary Panel Data Research 440, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Aguilar, Giovanna & Rendon, Silvio, 2007. "Matching Bias in Labor Demand Estimation," IZA Discussion Papers 3076, Institute for the Study of Labor (IZA).

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