The Plunge in Oil Prices: Sectoral and Employment Dynamics in Colombia

From the first half of the 2000s until 2012 the Colombian economy was under the influence of an oil and mining production and export boom that triggered the potential for Dutch disease effects and led the government to implement policies for facing them. Concurrently with the phasing in of the policy intervention, an abrupt fall in oil prices ensued and the economy faced an important balance of payments shock. As a consequence it is relevant to ask what the effects of the plunge in oil prices and of policy intervention could be on sectoral and employment dynamics, as the shock essentially reverses the process that the economy was following until 2012 in a typical boom and boost fashion. For this, we use a recursive dynamic computable general equilibrium model, calibrated to a 2011 Social Accounting Matrix of the Colombian economy, in which activities are differentiated in terms of their formal and informal components, and suitable details are included to account for the stream of income the government receives from the oil sector. The model has a rich representation of the labor market as it differentiates between the formal and informal segments, allowing for unemployment in the formal segment and limited migration of labor from the formal to the informal segment. We find that the oil price plunge decreases the economy’s growth rate in a significant manner and lowers demand for labor in general with a bias against formal activities and skilled labor. Furthermore, we find that the policy intervention makes matters worse and suggest that the government should consider temporarily suspending operation of the policy or implementing alternative policies that help prevent the relative informalization of the labor market.