EconPapers    
Economics at your fingertips  
 

Financial disincentives to formal work: Evidence from Ecuador and Colombia

Jara Xavier and Rodriguez David

No wp-2019-14, WIDER Working Paper Series from World Institute for Development Economic Research (UNU-WIDER)

Abstract: The aim of this paper is to quantify the financial cost that informal workers would incur in the event of entering formality, accounting for potential earnings gains upon entry. To do so, we use representative microdata from Ecuador and Colombia, together with detailed tax–benefit models, and simulate transitions to formal employment for all workers observed in informality in the data, with informality defined as non-affiliation to social security.Our results point to strikingly high formalization costs in the two countries, with on average 52.8 and 78.5 per cent of workers’ additional earnings taxed away due to social security payments in Ecuador and Colombia, respectively. Costs are particularly high for self-employed informal workers at the bottom of the earnings distribution.The results are mainly driven by the requirement that workers contribute to social security at least on the basis of the minimum wage in both countries.

Keywords: formalization; Informal sector; Informality; SOUTHMOD; Tax; Tax-benefit microsimulation (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-iue
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.wider.unu.edu/sites/default/files/Publi ... r/PDF/wp-2019-14.pdf

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:unu:wpaper:wp-2019-14

Access Statistics for this paper

More papers in WIDER Working Paper Series from World Institute for Development Economic Research (UNU-WIDER) Contact information at EDIRC.
Bibliographic data for series maintained by Mauricio Roa Grisales ().

 
Page updated 2019-11-14
Handle: RePEc:unu:wpaper:wp-2019-14