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Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia

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  • Adriana Kugler
  • Maurice Kugler

Abstract

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980s and 1990s 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 in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment also falls. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find some evidence of less shifting and larger disemployment effects for production than for non-production workers. These results suggest that policies aimed at boosting the relative demand of less-skill workers by reducing social security taxes may be effective in Latin American countries, where minimum wages bind and benefits are often not directly linked to contributions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13855.

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Date of creation: Mar 2008
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Handle: RePEc:nbr:nberwo:13855

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  1. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
  2. 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.
  3. Fajnzylber, Pablo & Maloney, William F., 2005. "Labor demand and trade reform in Latin America," Journal of International Economics, Elsevier, vol. 66(2), pages 423-446, July.
  4. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  5. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  6. Adriana D. Kugler, 2004. "The Effect of Job Security Regulations on Labor Market Flexibility. Evidence from the Colombian Labor Market Reform," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 183-228 National Bureau of Economic Research, Inc.
  7. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  8. Bosch, Mariano & Goni, Edwin & Maloney, William F., 2007. "The Determinants of Rising Informality in Brazil: Evidence from Gross Worker Flows," IZA Discussion Papers 2970, Institute for the Study of Labor (IZA).
  9. 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.
  10. MacIsaac, Donna & Rama, Martin, 1997. "Determinants of Hourly Earnings in Ecuador: The Role of Labor Market Regulations," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S136-65, July.
  11. 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.
  12. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  13. 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(2), pages 385-430.
  14. Daniel S. Hamermesh, 2004. "Labor Demand in Latin America and the Caribbean. What Does It Tell Us?," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 553-562 National Bureau of Economic Research, Inc.
  15. Kugler, Adriana D., 2005. "Wage-shifting effects of severance payments savings accounts in Colombia," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 487-500, February.
  16. Indermit S. Gill & Truman Packard & Juan Yermo, 2005. "Keeping the Promise of Social Security in Latin America," World Bank Publications, The World Bank, number 7391, January.
  17. Carlos Arango & Angélica Pachón, 2004. "Minimum Wages in Colombia: Holding the Middle with a Bite," BORRADORES DE ECONOMIA 003224, BANCO DE LA REPÚBLICA.
  18. Indermit S. Gill & Truman G. Packard & Juan Yermo, . "Keeping the Promise of Social Security in Latin America," IDB Publications 59998, Inter-American Development Bank.
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