Asymmetric effects of payroll taxes on employment and wages: evidence from Colombia


Kugler, Adriana and Kugler, Maurice (2003) Asymmetric effects of payroll taxes on employment and wages: evidence from Colombia. USA, Mimeo, 32pp.

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Description/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 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.

Item Type: Monograph (UNSPECIFIED)
Related URLs:
Keywords: payroll taxes, shifting, wage rigidity, minimum wages
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 34583
Date Deposited: 17 May 2006
Last Modified: 27 Mar 2014 18:21
URI: http://eprints.soton.ac.uk/id/eprint/34583

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