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UBC Theses and Dissertations

Effects of labor regulation on informal labor markets Becerra-Camargo, Oscar


This thesis examines the effects of labor regulation on formal (regulated) labor markets in Latin America. It is divided in three chapters, in which I analyze the effects of pension programs on formal-sector labor supply and the effects of payroll taxes on formal-sector labor demand. The first two chapters analyze how future pension benefits affect formal-sector labor supply. Since formal-sector jobs comply with labor regulation, including contributions to pension plans, formal-sector workers receive long-run benefits in the form of pensions. If workers account for such benefits when they search for formal-sector jobs, the pension system affects formal-sector labor supply before the retirement age. In Chapter 1, I estimate the causal link between future pension benefits and formal-sector labor supply by using a cohort-based reform undertaken in Colombia. I demonstrate that workers with higher pension gains are more willing to work in formal-sector jobs, rather than working in unregulated businesses or by themselves. The result is consistent with a life-cycle model of formal-sector labor supply presented in Chapter 2, where pension benefits are an amenity of working in the formal sector. The results suggest that pension reforms may have large effects on the labor market that should be taken into account in the design of pension programs. Chapter 3 analyzes the effect of payroll taxes on formal-sector labor demand in the presence of wage rigidity. In particular, I study the impact of a reduction of payroll taxes on the creation of formal-sector jobs in Colombia, where about 40 percent of formal-sector workers earn the minimum wage. Using a reform that granted tax credits to firms hiring workers younger than 28 years of age, I obtain estimates of the effect of payroll taxes on formal-sector employment and wages. I show that payroll tax incidence is borne by formal-sector employers. The reduction in payroll taxes increased formal-sector employment and had no effects on wages. Using the estimation results, I recover an estimate of the elasticity of the formal-sector labor demand of -0.44. This result implies that a 10 percent increase in the minimum wage reduces formal-sector employment by 4.4 percent.

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