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Pension Incentives and Formal-Sector Labor Supply: Evidence from Colombia

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  • Oscar Becerra

Abstract

This paper describes how future pension benefits affect labor supply in economies that have an informal sector. From the perspective of the worker, a formal-sector job offers long-run gains, as it increases his likelihood of gaining pension benefits in the future. If workers take those gains into account when they search for formal-sector jobs, the pension system affects formal-sector labor supply. I estimate the causal link between pension incentives and formal-sector labor supply using a cohort-based reform undertaken in Colombia. I demonstrate that a change in future pension benefits generates a large shift between the formal-sector and informal-sector labor supply, and that this change does not affect labor force participation. The average effect of pension incentives on formal-sector labor supply is heterogeneous, and is consistent with the predictions of a theoretical model combining a pension system and informal job opportunities. The effect is concentrated among workers for whom the minimum qualifying conditions are binding, and among workers with higher expected pension wealth. The results presented here suggest that pension reforms have the potential to create large efficiency costs, an effect that should be taken into account when designing pension programs.

Suggested Citation

  • Oscar Becerra, 2017. "Pension Incentives and Formal-Sector Labor Supply: Evidence from Colombia," Documentos CEDE 15375, Universidad de los Andes, Facultad de Economía, CEDE.
  • Handle: RePEc:col:000089:015375
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    References listed on IDEAS

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    Cited by:

    1. Leonardo Villar & David Forrero, 2018. "Elementos para una propuesta de reforma del sistema de protección económica para la vejez en Colombia," Cuadernos de Fedesarrollo 16253, Fedesarrollo.
    2. Oscar Becerra, 2018. "Effects of Future Pension Benefits on Pre-retirement Labor Supply: Evidence from Chile," Documentos CEDE 16965, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Vitalijs Jascisens & Anna Zasova, 2021. "Million Dollar Baby: Should Parental Benefits Depend on Wages When the Payroll Tax Evasion is Present?," SSE Riga/BICEPS Research Papers 9, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).

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    More about this item

    Keywords

    Labor supply; informal economy; pension benefits.;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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