Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia
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.
We are grateful to Josh Angrist, Samuel Bentolila, Paul Gertler, Jon Gruber, Ricardo Hausmann, Larry Lau, Bill Maloney, Barry McCormick, David McKenzie, Ernesto May, John Pencavel, Luigi Pistaferri, John Strauss, an associate editor and two anonymous referees, and seminar participants at Southampton, Stanford and the Latin American and Caribbean Economic Association meetings in Madrid for very useful comments, as well as to the World Bank for providing financial support fo the study. Zheng Wang provided valuable research assistance. The econometric analysis of plant-level data from the Manufacturing Census was made possible by the hospitality from Departamento Administrativo Nacional de Estadistica (Colombian Bureau of National Statistics), Banco de la Republica de Colombia, and Stanford University while the second author was visiting. Please address correspondence to: email@example.com and Maurice_Kugler@harvard.edu. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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. citation courtesy of