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

Adriana Kugler and Maurice Kugler ()

No 13855, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H2 J3 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-dev and nep-lab
Note: LS PE
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Published as Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia ," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, 01.

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Journal Article: Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia (2009) Downloads
Working Paper: Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia (2008) Downloads
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