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Do payroll tax cuts boost formal jobs in developing countries?

Author

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  • Carmen Pagés

    (Inter-American Development Bank, USA, and IZA, Germany)

Abstract

Informal employment accounts for more than half of total employment in Latin America and the Caribbean, and an even higher percentage in Africa and South Asia. It is associated with lack of social insurance, low tax collection, and low productivity jobs. Lowering payroll taxes is a potential lever to increase formal employment and extend social insurance coverage among the labor force. However, the effects of tax cuts vary across countries, often resulting in large wage shifts but relatively small employment effects. Cutting payroll taxes requires levying other taxes to compensate for lost revenue, which may be difficult in developing economies.

Suggested Citation

  • Carmen Pagés, 2017. "Do payroll tax cuts boost formal jobs in developing countries?," IZA World of Labor, Institute for the Study of Labor (IZA), pages 345-345, March.
  • Handle: RePEc:iza:izawol:journl:2017:n:345
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    More about this item

    Keywords

    payroll taxes; formal employment; wage shifts; developing countries;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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