Working Paper: CEPR ID: DP4046
Authors: Adriana Kugler; Maurice Kugler
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: Minimum wages; Payroll taxes; Shifting; Wage rigidity
JEL Codes: H23; J31; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weak Linkages Between Benefits and Taxes (H29) | Less-than-Full Shifting of Tax Burden (H22) |
| Downward Wage Rigidities (J31) | Complicated Shifting of Tax Burdens (H22) |
| Binding Minimum Wage (J38) | Complicated Shifting of Tax Burdens (H22) |
| Payroll Taxes (H29) | Formal Wages (J31) |
| Payroll Taxes (H29) | Formal Employment (J46) |
| Payroll Taxes (H29) | Disemployment Effects for Production Workers (J65) |
| Payroll Taxes (H29) | Disemployment Effects for Non-Production Workers (J65) |