Labor Market Rigidities and Informality in Colombia

Camilo Mondragón-Vélez (), Ximena Peña and Daniel Wills ()

No 6717, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: Informality is at the center of the economic debate in Colombia, fueled by the high level prevalent in the country and its substantial increase during the 1990s. We study the effect of labor market rigidities, namely the increase in non-wage costs and the minimum wage on the size of the informal sector, the transition into and out of informality, and wages. Our results indicate that rises in non-wage costs and the minimum wage, increase the probability of transition into informality as well as the size of the informal sector. The analysis of these effects along the income distribution points towards strong exclusion motives for low skilled informal workers, mainly driven by labor demand adjustments in response to increasing hiring costs; and argues somehow in favor of exit motives for workers at the top of the wage distribution. Furthermore, there is strong indexation of salaries to the minimum wage, except for low skilled informal workers. In addition, firms adjust salaries in response to increasing non-wage costs for all workers within the labor force.

Keywords: Informality; non-wage costs; minimum wage; transition probability (search for similar items in EconPapers)
JEL-codes: J31 J32 J38 (search for similar items in EconPapers)
Pages: 33
Date: 2010-01-31
New Economics Papers: this item is included in nep-dev and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (57)

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Related works:
Journal Article: Labor Market Rigidities and Informality in Colombia (2010)
Working Paper: Labor market rigidities and informality in Colombia (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:006717

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