Working Paper: NBER ID: w10077
Authors: Raquel Bernal; Mauricio Cardenas
Abstract: Colombia's unemployment rate rose to 20% during the late 1990s from less than 8% in 1994. This paper argues that this has been the result of high non-wage labor costs embodied in the legislation. The estimated own-wage labor demand elasticity is around 0.5, which implies that a reduction in those costs, while politically costly, can have a significant payoff in terms of equity and efficiency. We also find that adjustment costs of changing employment as well as wage elasticities were not affected by changes in the regulations regarding severance payments and dismissal costs. In this sense, structural reforms did have an impact on labor demand through its effect on relative prices alone. Finally, we conclude that the wage elasticity of labor demand increases (in absolute terms) during contractions. Hence, the increase in prices and the beginning of a recession had a significant effect on employment.
Keywords: Labor Demand; Colombia; Non-wage Labor Costs; Labor Legislation; Employment
JEL Codes: J23; O15; O54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High non-wage labor costs (J32) | Labor demand (J23) |
| Reduction in non-wage labor costs (J32) | Employment (J68) |
| Structural reforms (E69) | Labor demand (J23) |
| Economic contractions (E32) | Wage elasticity of labor demand (J39) |
| Rising prices and onset of recession (E31) | Employment levels (J23) |