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The Impact of Colombia's Pension and Health Insurance Systems on Informality

  • Calderón-Mejía, Valentina


    (University of Chicago)

  • Marinescu, Ioana E.


    (Harris School, University of Chicago)

Social protection systems in developing countries are typically composed of a bundle of benefits, the major ones being health insurance and pensions. Benefit bundling may increase informality and decrease welfare. Indeed, if some of the benefits are valued at substantially less than their cost, workers may choose to forego all benefits, even though some other benefits are valued at or above their cost. We examine the impact of benefit bundling using a series of Colombian reforms. The key reform is the unification of the payment systems for health and pension, which made it more difficult to contribute differently to the one plan versus the other. Using the progressive roll-out of the unified payment system by firm size, we show that benefit bundling increases both full formality and full informality by about 1 percentage point. The increase in full formality is concentrated among salaried workers in small to medium firms, while the increase in full informality is concentrated among independent workers.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6439.

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Length: 43 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6439
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  1. Sebastian Galiani & Federico Weinschelbaum, 2007. "Modeling Informality Formally: Households and Firms," CEDLAS, Working Papers 0047, CEDLAS, Universidad Nacional de La Plata.
  2. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  3. Adriana Camacho & Emily Conover & Alejandro Hoyos, 2014. "Effects of Colombia's Social Protection System on Workers' Choice between Formal and Informal Employment," World Bank Economic Review, World Bank Group, vol. 28(3), pages 446-466.
  4. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730.
  5. Adriana Kugler & Maurice Kugler, 2003. "The labor market effects of payroll taxes in a middle-income country: Evidence from Colombia," Economics Working Papers 721, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Carmen Pagés & Lucía Madrigal, 2008. "Is Informality a Good Measure of Job Quality?: Evidence from Job Satisfaction Data," IDB Publications (Working Papers) 4122, Inter-American Development Bank.
  7. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
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