Monetary Incentives to Formality: A Labour Supply Analysis for Colombia

Stefano Farné, David Rodríguez Guerrero, Kelly Johana Silva Aldana and Andrés Ricardo Escobar
Additional contact information
Stefano Farné: Universidad Externado de Colombia
David Rodríguez Guerrero: Pontificia Universidad Javeriana
Kelly Johana Silva Aldana: Pontificia Universidad Javeriana
Andrés Ricardo Escobar: Universidad Externado de Colombia

Revista Desarrollo y Sociedad, 2025, vol. 101, issue 2, 25-46

Abstract: Recent research on informality in Colombia shows that reforms aimed at stimulating the demand for formal employment by reducing corporate taxes have had only modest effects on the relative size of informal employment. Given the apparent limits of demand-side policies and considering that 73 % of informal workers are self-employed this paper examines the incentives that influence the supply of formal labour. Specifically, it quantifies the monetary costs faced by informal work-ers when deciding to become formal. The paper definesthe potential monetary loss associated with formali-sation through the Formalisation Tax Rate (FTR) and calculates it across several simulated scenarios. When the monetary benefits granted by law to formal employ-ees are included (such as family and transport subsidies and mandatory bonuses), some informal employees may have an incentive to formalise. However, self-employed workers—who make up the majority of informal employ-ment—would have no incentive to enter formal work unless their income base were raised to at least the level of the monthly minimum wage.

Keywords: Taxation; cash transfers; microsimulation; formality; tax rates (search for similar items in EconPapers)
JEL-codes: H24 H55 I38 J42 J46 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://revistas.uniandes.edu.co/index.php/dys/article/view/11161/11270
https://revistas.uniandes.edu.co/index.php/dys/article/view/11161/11270

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000090:022175

DOI: 10.13043/DYS.101.2

Access Statistics for this article

More articles in Revista Desarrollo y Sociedad from Universidad de los Andes,Facultad de Economía, CEDE Contact information at EDIRC.
Bibliographic data for series maintained by Universidad De Los Andes-Cede ().