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Labor Demand Responses to Payroll Taxes in an Economy with Wage Rigidity: Evidence from Colombia

Author

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  • Oscar Becerra
  • Leonardo Fabio Morales

Abstract

This paper analyzes the effect of payroll taxes on the formal sector labor demand in the presence of wage rigidity. In particular. We study the impact of a reduction of payroll taxes on the creation of formal jobs in Colombia, where about 40 percent of formal-sector workers earn the minimum wage. Using a reform that granted tax credits to firms hiring workers younger than 28 years of age, we obtain estimates of the effect of payroll taxes on formal-sector employment and wages. We show that payroll tax incidence is borne by formal-sector employers. The reduction in payroll taxes increased Formal-sector employment and did not affect wages. Using the estimation results, we recover an estimate of the elasticity of the formal-sector labor demand between −0.53% and −0.87%. **** RESUMEN: Este artículo analiza el efecto de los impuestos a la nómina sobre la demanda laboral en el sector formal en presencia de rigidez salarial. En particular, estudiamos el impacto de una reducción de los impuestos a la nómina en la creación de empleos formales en Colombia, donde alrededor del 40 por ciento de los trabajadores del sector formal ganan el salario mínimo. Utilizando una reforma que otorgó créditos fiscales a las empresas que contratan trabajadores menores de 28 años, obtenemos estimaciones del efecto de los impuestos a la nómina sobre el empleo y los salarios en el sector formal. Mostramos que la incidencia del impuesto a la nómina es soportada por los empleadores del sector formal. La reducción en los impuestos a la nómina aumentó el empleo en el sector formal y no afectó los salarios. A partir de los resultados de estimación, recuperamos una estimación de la elasticidad de la demanda laboral en el sector formal entre −0.53% y −0.87%.

Suggested Citation

  • Oscar Becerra & Leonardo Fabio Morales, 2025. "Labor Demand Responses to Payroll Taxes in an Economy with Wage Rigidity: Evidence from Colombia," Borradores de Economia 1297, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1297
    DOI: 10.32468/be.1297
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    References listed on IDEAS

    as
    1. Leonardo Fabio Morales & Carlos Medina, 2017. "Assessing the Effect of Payroll Taxes on Formal Employment: The Case of the 2012 Tax Reform in Colombia," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 75-124, November.
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    More about this item

    Keywords

    Payroll taxes; formal employment; formal wages; labor policy; impuestos a la nómina; empleo formal; salarios formales; política laboral;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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