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

Asymmetric effects of payroll taxes on employment and wages: evidence from Colombia
Asymmetric effects of payroll taxes on employment and wages: 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 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.
payroll taxes, shifting, wage rigidity, minimum wages
Mimeo
Kugler, Adriana
9ef17e0d-78e2-43ba-b68f-8ef2a526943b
Kugler, Maurice
4c79c98c-1810-4351-bf16-faeec2227e45
Kugler, Adriana
9ef17e0d-78e2-43ba-b68f-8ef2a526943b
Kugler, Maurice
4c79c98c-1810-4351-bf16-faeec2227e45

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

Record type: Monograph (Project Report)

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.

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More information

Published date: 2003
Related URLs:
Keywords: payroll taxes, shifting, wage rigidity, minimum wages

Identifiers

Local EPrints ID: 34583
URI: http://eprints.soton.ac.uk/id/eprint/34583
PURE UUID: d8028f72-7a2b-4194-9be8-85f703cdea61

Catalogue record

Date deposited: 17 May 2006
Last modified: 22 Jul 2022 20:42

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Contributors

Author: Adriana Kugler
Author: Maurice Kugler

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