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

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Listed:
  • Kugler, Adriana

    (Georgetown University)

  • Kugler, Maurice

    (Impaq International)

Abstract

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.

Suggested Citation

  • Kugler, Adriana & Kugler, Maurice, 2003. "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," IZA Discussion Papers 852, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp852
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    References listed on IDEAS

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    More about this item

    Keywords

    minimum wages; payroll taxes; shifting; wage rigidity;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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