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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 analysis of these effects along the income distribution 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 at the top of the wage distribution. Furthermore, there is strong indexation of salaries to the minimum wage, except for low skilled informal workers. In addition, firms adjust salaries in response to increasing non-wage costs for all workers within the labor force.

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Bibliographic Info

Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 006717.

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Length: 33
Date of creation: 31 Jan 2010
Date of revision:
Handle: RePEc:col:000089:006717

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

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  1. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  2. Bernal Raquel, 2009. "The Informal Labor Market in Colombia: identification and characterization," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2, May.
  8. Daniel Mejía & carlos Esteban Posada, . "Informalidad: teoría e implicaciones de política," Borradores de Economia 455, Banco de la Republica de Colombia.
  9. Ximena Peña Parga & Camilo Mondragón-Vélez, 2008. "Business Ownership and Self-Employment in Developing Economies: The Colombian Case," DOCUMENTOS CEDE 004672, UNIVERSIDAD DE LOS ANDES-CEDE.
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