IDEAS home Printed from https://ideas.repec.org/a/col/000425/015827.html
   My bibliography  Save this article

Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform

Author

Listed:
  • Adriana D. Kugler

    ()

  • Maurice D. Kugler

    ()

  • Luis O. Herrera-Prada

    ()

Abstract

Alternative work arrangements have grown rapidly around the world. In Latin America, these alternative work arrangements have long been part of the labor market and have continued to grow. The informal sector grew rapidly in Latin America over the past few decades comprising up to half of the working population in many countries. Some attribute the growth in alternative work arrangements and informality to regulations and taxes, while others argue that it is precisely the lack of enforcement of regulations that allows unprotected employment arrangements to flourish. We examine whether reducing taxes associated with employment stimulates formal sector employment. We exploit the fact that the tax reform introduced in Colombia in 2012 affected only certain types of workers and not others. In particular, workers earning less than ten times the minimum wage and self-employed workers with more than two employees experienced a reduction of payroll taxes of 13.5 percent between 2013 and 2014. We use the Colombian household surveys, social security records and the monthly manufacturing sample to conduct difference-in-differences analyses of the reform. We find evidence of increased formal employment for the affected groups after the reform using all three data sets. We find that the probability of formal employment and the likelihood of transitioning into registered employment increased for the affected groups after the reform. We also nd that the level and share of permanent employment relative to temporary employment grew after the reform for those earnings less than ten times the minimum wage. The results are greatest for those in smaller firms and for those earnings close to the minimum wage.

Suggested Citation

  • Adriana D. Kugler & Maurice D. Kugler & Luis O. Herrera-Prada, 2017. "Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 3-40, November.
  • Handle: RePEc:col:000425:015827
    as

    Download full text from publisher

    File URL: http://economia.lacea.org/contents.htm
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. repec:adr:anecst:y:1996:i:41-42 is not listed on IDEAS
    3. 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.
    4. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    5. Herrera Prada, Luis Omar & Kugler, Adriana D. & Kugler, Maurice & Saavedra, Juan Esteban, 2015. "Long-Term Direct and Spillover Effects of Job Training: Experimental Evidence from Colombia," CEPR Discussion Papers 10859, C.E.P.R. Discussion Papers.
    6. Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 102-135, July.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fox,Louise & Kaul,Upaasna, 2018. "The evidence is in : how should youth employment programs in low-income countries be designed ?," Policy Research Working Paper Series 8500, The World Bank.
    2. Jessen, Jonas & Kluve, Jochen, 2019. "The effectiveness of interventions to reduce informality in low- and middle income countries," Ruhr Economic Papers 814, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Gaurav Khanna & Carlos Medina & Anant Nyshadham & Jorge Tamayo, 2018. "Formal Employment and Organized Crime: Regression Discontinuity Evidence from Colombia," Borradores de Economia 1054, Banco de la Republica de Colombia.
    4. Gaurav Khanna & Carlos Medina & Anant Nyshadham & Jorge Tamayo, 2018. "Formal Employment and Organized Crime: Regression Discontinuity Evidence from Colombia," Borradores de Economia 1054, Banco de la Republica de Colombia.
    5. McKay Andy & Pirttilä Jukka & Schimanski Caroline, 2018. "The Elasticity of Formal Work in African Countries," Working Papers 1820, University of Tampere, School of Management, Economics.

    More about this item

    Keywords

    Payroll taxes; informality; tax reform; permanent employment;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000425:015827. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LACEA). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.