The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia

34 Pages Posted: 24 Oct 2003

See all articles by Adriana D. Kugler

Adriana D. Kugler

McCourt School of Public Policy ; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; National Bureau of Economic Research (NBER)

Maurice Kugler

Wilfrid Laurier University - School of Business & Economics; Harvard University - Center for International Development (CID); Centre for International Governance Innovation (CIGI); National Bureau of Economic Research (NBER)

Date Written: September 2003

Abstract

We use a panel of manufacturing plants from Colombia to analyse how the rise in payroll tax rates over the 1980s and 1990s affected the labour 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 induced by a binding minimum wage in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment should also fall. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find less shifting and larger disemployment effects for production than non-production workers. These results suggest that policies aimed at boosting the relative demand of low-skill workers by reducing social security taxes on those with low earnings may be effective in a country like Colombia, especially if tax cuts are targeted to indirect benefits.

Keywords: Payroll taxes, shifting, wage rigidity, minimum wages

JEL Classification: H23, J31, J32

Suggested Citation

Kugler, Adriana Debora and Kugler, Maurice, The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia (September 2003). Available at SSRN: https://ssrn.com/abstract=461641

Adriana Debora Kugler (Contact Author)

McCourt School of Public Policy ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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IZA Institute of Labor Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Maurice Kugler

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA

Harvard University - Center for International Development (CID) ( email )

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Centre for International Governance Innovation (CIGI) ( email )

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Waterloo, Ontario N2L 6C2
Canada

National Bureau of Economic Research (NBER) ( email )

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