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The labor market effects of payroll taxes in a middle-income country: Evidence from Colombia

  • Adriana Kugler
  • Maurice Kugler

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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 721.

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Date of creation: Jul 2003
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Handle: RePEc:upf:upfgen:721
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Jonathan Gruber & Alan B. Krueger, 1990. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Working Papers 3557, National Bureau of Economic Research, Inc.
  2. Holmlund, Bertil, 1983. " Payroll Taxes and Wage Inflation: The Swedish Experience," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(1), pages 1-15.
  3. Adriana D. Kugler, 1999. "The impact of firing costs on turnover and unemployment: Evidence from the Colombian labour market reform," Economics Working Papers 388, Department of Economics and Business, Universitat Pompeu Fabra.
  4. 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.
  5. Fajnzylber, Pablo & Maloney, William F., 2000. "Labor demand andtrade reform in Latin America," Policy Research Working Paper Series 2491, The World Bank.
  6. 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.
  7. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  8. 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.
  9. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , vol. 29(2), pages 184-200.
  10. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  11. 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.
  12. 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.
  13. Angrist, Joshua D, 1996. "Short-Run Demand for Palestinian Labor," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 425-53, July.
  14. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, 2002. "Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms," Economics Working Papers 651, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  16. repec:cup:cbooks:9780521481625 is not listed on IDEAS
  17. repec:cup:cbooks:9780521484718 is not listed on IDEAS
  18. B Bell & Stephen Nickell, 1996. "Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?," CEP Discussion Papers dp0276, Centre for Economic Performance, LSE.
  19. 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.
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