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

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  • Kugler, Adriana

    ()
    (Georgetown University)

  • Kugler, Maurice

    ()
    (United Nations Development Programme (UNDP))

Abstract

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980’s and 1990’s 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 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 852.

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Length: 34 pages
Date of creation: Aug 2003
Date of revision:
Publication status: published in: Economic Development and Cultural Change, 2009, 57(2), 335-358.
Handle: RePEc:iza:izadps:dp852

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Keywords: minimum wages; payroll taxes; shifting; wage rigidity;

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References

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  1. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  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.
  3. B Bell & Stephen Nickell, 1996. "Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?," CEP Discussion Papers dp0276, Centre for Economic Performance, LSE.
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  5. Kugler, Maurice & Rosenthal, Howard, 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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