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Labor market rigidities and informality in Colombia

Author

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  • Mondragón-Vélez, Camilo
  • Wills, Daniel
  • Peña, Ximena

Abstract

Informality is at the center of the economic debate in Colombia, fueled by the high level prevalent in the country and its substantial increase during the 1990s. We study the effect of labor market rigidities, namely the increase in non-wage costs and the minimum wage on the size of the informal sector, the transition into and out of informality, and wages. Our results indicate that rises in non-wage costs and the minimum wage, increase the probability of transition into informality as well as the size of the informal sector. The analysis of these effects along the income distribution points towards strong exclusion motives for low skilled informal workers, mainly driven by labor demand adjustments in response to increasing hiring costs; and argues somehow in favor of exit motives for workers at the top of the wage distribution. Furthermore, there is strong indexation of salaries to the minimum wage, except for low skilled informal workers. In addition, firms adjust salaries in response to increasing non-wage costs for all workers within the labor force.
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Suggested Citation

  • Mondragón-Vélez, Camilo & Wills, Daniel & Peña, Ximena, 2010. "Labor market rigidities and informality in Colombia," LSE Research Online Documents on Economics 123406, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123406
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    JEL classification:

    • N0 - Economic History - - General
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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