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The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia

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Author Info
Kugler, Adriana D.
Kugler, Maurice

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Abstract

We use a panel of manufacturing plants from Colombia to analyse how the rise in payroll tax rates over the 1980s and 1990s affected the labour 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 induced by a binding minimum wage in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment should also fall. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find less shifting and larger disemployment effects for production than non-production workers. These results suggest that policies aimed at boosting the relative demand of low-skill workers by reducing social security taxes on those with low earnings may be effective in a country like Colombia, especially if tax cuts are targeted to indirect benefits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4046.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4046

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Related research
Keywords: minimum wages payroll taxes shifting wage rigidity

Other versions of this item:

Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Adriana D. Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," Economics Working Papers 388, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
    Other versions:
  3. Fajnzylber, Pablo & Maloney, William F., 2000. "Labor demand and trade reform in Latin America," Policy Research Working Paper Series 2491, The World Bank. [Downloadable!]
    Other versions:
  4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  5. Angrist, Joshua D, 1996. "Short-Run Demand for Palestinian Labor," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 425-53, July. [Downloadable!] (restricted)
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  6. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July. [Downloadable!] (restricted)
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  7. Adriana Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," International Tax and Public Finance, Springer, vol. 6(3), pages 389-410, August. [Downloadable!] (restricted)
  8. Robert J. Gordon, 1972. "Wage-Price Controls and the Shifting Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(1972-2), pages 385-430. [Downloadable!]
  9. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA. [Downloadable!]
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  10. Holmlund, Bertil, 1983. " Payroll Taxes and Wage Inflation: The Swedish Experience," Scandinavian Journal of Economics, Blackwell Publishing, vol. 85(1), pages 1-15.
  11. Kugler, M. & Rosenthal, H., 2000. "Checks and Balances: An Assessment of the Institutional Separation of Political Powers in Colombia," Discussion Paper Series In Economics And Econometrics 0018, Economics Division, School of Social Sciences, University of Southampton.
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  12. Beach, Charles M & Balfour, Frederick S, 1983. "Estimated Payroll Tax Incidence and Aggregate Demand for Labour in the United Kingdom," Economica, London School of Economics and Political Science, vol. 50(197), pages 35-48, February. [Downloadable!] (restricted)
  13. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June. [Downloadable!] (restricted)
  14. Kevin Lang, 2003. "The Effect of the Payroll Tax on Earnings: A Test of Competing Models of Wage Determination," NBER Working Papers 9537, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Tullio, Giuseppe, 1987. "Long run implications of the increase in taxation and public debt for employment and economic growth in Europe," European Economic Review, Elsevier, vol. 31(3), pages 741-774, April. [Downloadable!] (restricted)
  16. Jonathan Gruber & Alan B. Krueger, 1990. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Working Papers 3557, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and in the long run?," Public Economics 0411004, EconWPA. [Downloadable!]
  2. Rita Almeida & Pedro Carneiro, 2005. "Enforcement of Regulation, Informal Labor and Firm Performance," IZA Discussion Papers 1759, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Wagstaff, Adam, 2007. "Social health insurance reexamined," Policy Research Working Paper Series 4111, The World Bank. [Downloadable!]
  4. James Albrecht & Lucas Navarro & Susan Vroman, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Jyunya Hamaaki & Yasushi Iwamoto, 2008. "A reappraisal of the incidence of employer contributions to social security in Japan," CIRJE F-Series CIRJE-F-569, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  6. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The Effect of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia," NBER Working Papers 10367, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2005. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," IZA Discussion Papers 1751, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Almeida, Rita & Carneiro, Pedro, 2005. "Enforcement of labor regulation, informal labor, and firm performance," Policy Research Working Paper Series 3756, The World Bank. [Downloadable!]
  9. Joshua D. Angrist & Adriana D. Kugler, 2007. "Rural Windfall or a New Resource Curse? Coca, Income, and Civil Conflict in Colombia," IZA Discussion Papers 2790, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Almeida, Rita & Carneiro, Pedro, 2006. "Enforcement of Regulation, Informal Labour, Firm Size and Firm Performance," CEPR Discussion Papers 5976, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Ignacio Zubriri, 2006. "Social Protection and Social Security Contributions in Spain," International Studies Program Working Paper Series, at AYSPS, GSU paper0608, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
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