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The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia

  • Kugler, Adriana

    ()

    (Georgetown University)

  • Kugler, Maurice

    ()

    (United Nations Development Programme (UNDP))

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980’s and 1990’s affected the labor market. Our estimates indicate that formal wages fall by between 1.4% and 2.3% as a result of a 10% rise in payroll taxes. This “less-than-full-shifting” is likely to be the result of weak linkages between benefits and taxes and the presence of downward wage rigidities induced by a binding minimum wage in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment should also fall. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find less shifting and larger disemployment effects for production than non-production workers. These results suggest that policies aimed at boosting the relative demand of low-skill workers by reducing social security taxes on those with low earnings may be effective in a country like Colombia, especially if tax cuts are targeted to indirect benefits.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 852.

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Length: 34 pages
Date of creation: Aug 2003
Date of revision:
Publication status: published in: Economic Development and Cultural Change, 2009, 57(2), 335-358.
Handle: RePEc:iza:izadps:dp852
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  1. Jonathan Gruber & Alan B. Krueger, 1991. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 111-144 National Bureau of Economic Research, Inc.
  2. Tullio, Giuseppe, 1987. "Long run implications of the increase in taxation and public debt for employment and economic growth in Europe," European Economic Review, Elsevier, vol. 31(3), pages 741-774, April.
  3. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  4. Holmlund, Bertil, 1983. "Payroll Taxes and Wage Inflation: The Swedish Experiences," Working Paper Series 68, Research Institute of Industrial Economics.
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  8. Kevin Lang, 2004. "The Effect of the Payroll Tax on Earnings: A Test of Competing Models of Wage Determination," Econometric Society 2004 North American Winter Meetings 360, Econometric Society.
  9. Maurice Kugler & Howard Rosental, 2000. "Checks and balances: an assessment of the institutional separtion of political powers in Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO 002117, FEDESARROLLO.
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  11. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , vol. 29(2), pages 184-200.
  12. Hernanz, Virginia & Jimeno, Juan F & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers 3724, C.E.P.R. Discussion Papers.
  13. Robert J. Gordon, 1972. "Wage-Price Controls and the Shifting Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 385-430.
  14. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  15. Adriana Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," International Tax and Public Finance, Springer, vol. 6(3), pages 389-410, August.
  16. repec:cup:cbooks:9780521484718 is not listed on IDEAS
  17. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
  18. Beach, Charles M & Balfour, Frederick S, 1983. "Estimated Payroll Tax Incidence and Aggregate Demand for Labour in the United Kingdom," Economica, London School of Economics and Political Science, vol. 50(197), pages 35-48, February.
  19. repec:cup:cbooks:9780521481625 is not listed on IDEAS
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