IDEAS home Printed from https://ideas.repec.org/p/wlu/wpaper/eg0056.html
   My bibliography  Save this paper

Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia

Author

Abstract

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980s and 1990s 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 in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment also falls. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find some evidence of less shifting and larger disemployment effects for production than for non-production workers. These results suggest that policies aimed at boosting the relative demand of less-skill workers by reducing social security taxes may be effective in Latin American countries, where minimum wages bind and benefits are often not directly linked to contributions.

Suggested Citation

  • A. Kugler, M. Kugler, 2008. "Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Working Papers eg0056, Wilfrid Laurier University, Department of Economics, revised 2008.
  • Handle: RePEc:wlu:wpaper:eg0056
    as

    Download full text from publisher

    File URL: http://www.wlu.ca/documents/29176/2008-01.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series 4375, The World Bank.
    2. Indermit S. Gill & Truman G. Packard & Juan Yermo, 2005. "Keeping the Promise of Social Security in Latin America," IDB Publications (Books), Inter-American Development Bank, number 59998, February.
    3. repec:idb:idbbks:346 is not listed on IDEAS
    4. Fajnzylber, Pablo & Maloney, William F., 2005. "Labor demand and trade reform in Latin America," Journal of International Economics, Elsevier, vol. 66(2), pages 423-446, July.
    5. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, April.
    6. repec:idb:brikps:59998 is not listed on IDEAS
    7. 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.
    8. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    9. Robert Kaestner, 1996. "The Effect of Government-Mandated Benefits on Youth Employment," ILR Review, Cornell University, ILR School, vol. 50(1), pages 122-142, October.
    10. 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;International Institute of Public Finance, vol. 6(3), pages 389-410, August.
    11. repec:bin:bpeajo:v:3:y:1972:i:1972-2:p:385-421 is not listed on IDEAS
    12. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    13. Edwards, Sebastian & Edwards, Alejandra Cox, 2002. "Social Security Privatization and Labor Markets: The Case of Chile," Economic Development and Cultural Change, University of Chicago Press, vol. 50(3), pages 465-489, April.
    14. Indermit S. Gill & Truman Packard & Juan Yermo, 2005. "Keeping the Promise of Social Security in Latin America," World Bank Publications, The World Bank, number 7391.
    15. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    16. Kugler, Adriana D., 2005. "Wage-shifting effects of severance payments savings accounts in Colombia," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 487-500, February.
    17. Daniel S. Hamermesh, 2004. "Labor Demand in Latin America and the Caribbean. What Does It Tell Us?," NBER Chapters,in: Law and Employment: Lessons from Latin America and the Caribbean, pages 553-562 National Bureau of Economic Research, Inc.
    18. Andalón, Mabel & Pagés, Carmen, 2008. "Minimum Wages in Kenya," IZA Discussion Papers 3390, Institute for the Study of Labor (IZA).
    19. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
    20. Kugler, Adriana & Kugler, Maurice, 2003. "The labor market effects of payroll taxes in a middle-income country: evidence from Colombia," Discussion Paper Series In Economics And Econometrics 0306, Economics Division, School of Social Sciences, University of Southampton.
    21. Adriana D. Kugler, 2004. "The Effect of Job Security Regulations on Labor Market Flexibility. Evidence from the Colombian Labor Market Reform," NBER Chapters,in: Law and Employment: Lessons from Latin America and the Caribbean, pages 183-228 National Bureau of Economic Research, Inc.
    22. Carlos Arango & Angélica Pachón, 2004. "Minimum Wages in Colombia: Holding the Middle with a Bite," BORRADORES DE ECONOMIA 003224, BANCO DE LA REPÚBLICA.
    23. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    24. Robert J. Gordon, 1972. "Wage-Price Controls and the Shifting Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 385-430.
    25. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
    26. MacIsaac, Donna & Rama, Martin, 1997. "Determinants of Hourly Earnings in Ecuador: The Role of Labor Market Regulations," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 136-165, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Payroll Taxes; Shifting; Wage Rigidities; Minimum Wages;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wlu:wpaper:eg0056. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andrei Kovacsik). General contact details of provider: http://edirc.repec.org/data/sbwluca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.