Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia
AbstractWe 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 InfoPaper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number eg0056.
Date of creation: 2008
Date of revision: 2008
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Web page: http://www.wlu.ca/sbe/economics/
More information through EDIRC
Payroll Taxes; Shifting; Wage Rigidities; Minimum Wages;
Other versions of this item:
- Adriana Kugler & Maurice Kugler, 2008. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," NBER Working Papers 13855, National Bureau of Economic Research, Inc.
- 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
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-23 (All new papers)
- NEP-DEV-2008-02-23 (Development)
- NEP-LAB-2008-02-23 (Labour Economics)
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