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Firms, Informality and Institutions. The case of Colombia

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  • C Fern√°ndez

Abstract

This paper illustrates how two well indented policies to reduce informality as the income tax waiver for small firms, and the income tax deduction of labor cost, end up generating a large amount of small firms hiring workers without a formal contract. This paper also shows the difficulties to reduce informality amidst the complex regulatory environment of Colombia. Policies oriented to reduce labor informality have a limited impact and are costly from the fiscal point of view, policies oriented to reduce business informality are more effective, but does not necessarily reduce labor informality if they are directed towards low productivity firms, because such firms do not have incentives to hire formally. The methodology used to illustrate these facts was the estimation of Ulyssea (2018) for the case of Colombia with the mentioned institutional constraints and a minimum wage. The data base used compiles most of the firm information available in the country (Fern√°ndez, 2021).

Suggested Citation

  • C Fern√°ndez, 2022. "Firms, Informality and Institutions. The case of Colombia," Documentos de Trabajo 20598, Universidad del Rosario.
    • Handle: RePEc:col:000092:020598
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    References listed on IDEAS

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    1. Carlos Medina & Christian Manuel Posso Su�rez, 2010. "Technical Change and Polarization of the Labor Market: Evidence for Brazil, Colombia and Mexico," Borradores de Economia 7269, Banco de la Republica.
    2. Dominique Paturot & Kirsti Mellbye & Bert Brys, 2013. "Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries," OECD Taxation Working Papers 15, OECD Publishing.
    3. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    4. Verónica Amarante & Ivone Perazzo, 2013. "Trabajo por cuenta propia y monotributo en Uruguay," Documentos de Trabajo (working papers) 13-04, Instituto de Economía - IECON.
    5. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    Cited by:

    1. Cristina Fernández Mejía, 2025. "MSMEs and Informality: A new employer-employee database for Colombia," Documentos de Trabajo 21322, Universidad del Rosario.
    2. Cristina Fernández & Cecilia Suecún, 2023. "Automation of the labor force and informality with focus on the Colombian case," Informes de Investigación 21023, Fedesarrollo.

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    More about this item

    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • 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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