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Labor Market Rigidities and Informality in Colombia

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  • Camilo Mondragón-Vélez

    ()

  • Juan D. Prada

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: 28
Date of creation: 31 Jan 2010
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Handle: RePEc:col:000089:006717

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

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References

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  1. Daniel Mejía & carlos Esteban Posada, . "Informalidad: teoría e implicaciones de política," Borradores de Economia 455, Banco de la Republica de Colombia.
  2. 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.
  3. 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.
  4. 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.
  5. Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2, October.
  6. 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.
  7. Bernal Raquel, 2009. "The Informal Labor Market in Colombia: identification and characterization," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  8. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  9. William F. Maloney & Jairo Nunez Mendez, 2003. "Measuring the Impact of Minimum Wages: Evidence from Latin America," NBER Working Papers 9800, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Paula Herrera & Enrique López-Bazo & Elisabet Motellón, 2013. "“Informality and Overeducation in the Labor Market of a Developing Country”," IREA Working Papers 201305, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.
  2. Guataquí R., Juan Carlos & García S., Andrés Felipe & Rodríguez A., Mauricio, 2010. "El Perfil de la Informalidad Laboral en Colombia," PERFIL DE COYUNTURA ECONÓMICA, UNIVERSIDAD DE ANTIOQUIA - CIE.
  3. 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.
  4. A. Kerem Cosar & Nezih Guner & James Tybout, 2013. "Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy," Working Papers 732, Barcelona Graduate School of Economics.
  5. Edgar Vicente Marcillo Yépez, 2011. "¿Existe Alguna Relación Entre La Informalidad Laboral Y La," DOCUMENTOS DE TRABAJO-CIDSE 007931, UNIVERSIDAD DEL VALLE - CIDSE.
  6. Paula Herrera & Enrique López-Bazo & Elisabet Motellón, 2013. "“Double Penalty in Returns to Education: Informality and Educational Mismatch in the Colombian Labour market”," IREA Working Papers 201307, University of Barcelona, Research Institute of Applied Economics, revised May 2013.
  7. Bernal Raquel, 2009. "The Informal Labor Market in Colombia: identification and characterization," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  8. Luis Armando Galvis, 2012. "Informalidad laboral en las áreas urbanas de Colombia," DOCUMENTOS DE TRABAJO SOBRE ECONOMÍA REGIONAL 009364, BANCO DE LA REPÚBLICA - ECONOMÍA REGIONAL.
  9. Isabelle Joumard & Juliana Londoño Vélez, 2013. "Income Inequality and Poverty in Colombia - Part 1. The Role of the Labour Market," OECD Economics Department Working Papers 1036, OECD Publishing.
  10. Eduardo Lora & Deisy 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," Research Department Publications 4791, Inter-American Development Bank, Research Department.
  11. 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.
  12. Diego Amador & Raquel Bernal & Ximena Peña, 2013. "The Rise in Female Participation in Colombia: Fertility, Marital Status or Education?," DOCUMENTOS CEDE 010551, UNIVERSIDAD DE LOS ANDES-CEDE.
  13. Gustavo Adolfo HERNANDEZ DIAZ, 2011. "Impuestos parafiscales y mercado laboral: Un análisis de Equilibrio General Computable," ARCHIVOS DE ECONOMÍA 008954, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  14. Peña, Ximena, 2013. "The formal and informal sectors in Colombia : country case study on labour market segmentation," ILO Working Papers 482088, International Labour Organization.

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