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

M. Kugler A. Kugler ()
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M. Kugler A. Kugler: Wilfird Laurier University

Authors registered in the RePEc Author Service: Adriana Kugler and Maurice Kugler ()

Working Papers from Wilfrid Laurier University, Department of Economics

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.

Keywords: Payroll Taxes; Shifting; Wage Rigidities; Minimum Wages (search for similar items in EconPapers)
JEL-codes: J31 J32 H23 (search for similar items in EconPapers)
Pages: 34
Date: 2008, Revised 2008
New Economics Papers: this item is included in nep-dev and nep-lab
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Related works:
Journal Article: Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia (2009) Downloads
Working Paper: Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia (2008) Downloads
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