The impact of social security reform on the labor market: The case of Colombia

Jose Cuesta and Mauricio Olivera

Journal of Policy Modeling, 2014, vol. 36, issue 6, 1118-1134

Abstract: This paper simulates the effects of three increasingly bolder reforms in the Colombian social protection system: the equalization of salaried and self-employed labor contributions; the removal of payroll taxes, parafiscales; and the complete delinking of social protection benefits from labor status. We collect nationally representative information concerning individual willingness to pay for several packages of social security benefits; identify and quantify – for the first time – three specific distortions caused by existing social security and social assistance systems; and simulate the gains that social protection reforms would bring about in terms of reduced labor distortions. We find that workers in Colombia, regardless of occupation, have a very similar willingness to pay for the full insurance package – below 20% of their labor earnings – and very similar valuation of social protection services – about 50% below par. Labor distortions are large, as expected from very high labor costs, but we quantify an implicit formality tax and informality subsidy ranging between 2 and 27 percent of different representative workers’ earnings. Critically, the long-discussed reforms in Colombia – including the elimination of parafiscales – will not reduce substantially the multiple distortions in its labor market.

Keywords: Distortions; Informality; Social protection; Willingness to pay; Colombia (search for similar items in EconPapers)
JEL-codes: I38 J26 J32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:36:y:2014:i:6:p:1118-1134

DOI: 10.1016/j.jpolmod.2014.10.002

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