Labor Market Rigidities and Informality in Colombia

32 Pages Posted: 8 Mar 2010 Last revised: 30 Jul 2010

See all articles by Camilo Mondragon-Velez

Camilo Mondragon-Velez

International Finance Corporation - World Bank Group

Ximena Pena

Universidad de los Andes, Colombia

Daniel Santiago Wills

Universidad de los Andes, Colombia; Fedesarrollo

Date Written: July 2010

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

JEL Classification: J31, J32, J38

Suggested Citation

Mondragon-Velez, Camilo and Pena, Ximena and Wills, Daniel Santiago, Labor Market Rigidities and Informality in Colombia (July 2010). Documento CEDE No. 2010-07, Available at SSRN: https://ssrn.com/abstract=1565512 or http://dx.doi.org/10.2139/ssrn.1565512

Camilo Mondragon-Velez

International Finance Corporation - World Bank Group ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Ximena Pena (Contact Author)

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

Daniel Santiago Wills

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

Fedesarrollo ( email )

Calle 78 No 9-91
Santafe de Bogota, 75074
Colombia

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