Revista Ensayos Sobre Política Económica (ESPE) - New Evidence on Labor and Firm Informality in Colombia

Number:

108

DOI:

https://doi.org/10.32468/espe108

Published:

Wednesday, 19 February 2025

Coordinator(s):

Andrea Sofía Otero-Cortés^a

Coauthors:

Karina Acosta^a,

Luis E. Arango^a,

Danilo Aristizábal^e,

Oscar Iván Ávila-Montealegre^a,

Oscar Becerra^e,

Cristina Fernández^e,

Luz Adriana Flórez^a,

Luis Armando Galvis-Aponte^a,

Anderson Grajales^a,

Catalina Granda^a,

Franz Alonso Hamann-Salcedo^a,

Juliana Jaramillo-Echeverri^a,

Carlos Alberto Medina-Durango^a,

Jesús Enrique Morales-Piñero^a,

Alejandra Morales^e,

Leonardo Fabio Morales^a,

Juan José Ospina-Tejeiro^a,

Christian Manuel Posso-Suárez^a,

José Pulido^a,

Mario Andrés Ramos-Veloza^a,

Alejandro Sarasti-Sierra^e

Classification JEL:

J21, J23, J46, J48, O17

Keywords:

Informality, public policies, Labor market

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Abstract

This ESPE examines the causes and consequences of labor and firm informality in Colombia. Notable differences in the informality rate are highlighted, varying by region, education level, and demographic factors. Among firms, size influences access to formalization mechanisms. Additionally, the report analyzes structural factors affecting labor informality, such as the minimum wage, payroll taxes, rigidities in labor legislation, and business registration costs. The macroeconomic effects of informality are explored using general equilibrium models, emphasizing that informality exacerbates volatility in GDP and its components, reduces aggregate productivity, and limits the effectiveness of monetary policy. The aggregate effect of a reduction in payroll taxes is also evaluated, finding that such a measure would promote the creation of formal employment and lead to higher long-term economic growth. Finally, key policy recommendations are presented to reduce informality, contributing to the debate on its causes and effects in the Colombian economy.