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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13855.
Length: Date of creation: Mar 2008 Date of revision: Handle: RePEc:nbr:nberwo:13855
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Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
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JOHN HALTIWANGER & ADRIANA KUGLER & MAURICE KUGLER & ALEJANDRO MICCO & CARMEN PAGÉS, 2004.
"Introduction,"
Journal of Policy Reform,
Taylor and Francis Journals, vol. 7(4), pages 189-190, December.
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