The labor market effects of payroll taxes in a middle-income country: evidence from Colombia

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980’s and 1990’s 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. Keywords; payroll taxes, shifting, wage rigidity, minimum wages

The labor market effects of payroll taxes in a middle-income country: Evidence from Colombia

We use a panel of manufacturing plants from Colombia to analyze how the rise in payroll tax rates over the 1980’s and 1990’s 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

Spillovers from Foreign Direct Investment: Within or between Industries?

This paper contributes an estimation framework to measure both technological and linkage externalities from foreign direct investment (FDI). Empirical research dealt mainly with intra-industry spillovers from FDI with restrictive treatment of inter-industry effects until recently. However, as optimal organization of the multinational corporation (MNC) involves minimization of profit losses due to leakage of technical information to competitors, host country firms within the MNC’s sector experience limited productivity gains ensuing FDI. Host-country producers in other sectors may benefit. For example, MNCs transfer knowledge to local downstream clients, or outsource to local upstream suppliers. Hence, FDI substitutes within-sector domestic investment but complements it across sectors. The net impact on aggregate capital formation by host-country producers hinges on the interaction between linkages and spillovers. Estimations based on the Colombian Manufacturing Census yield the sectoral pattern of FDI spillovers displaying knowledge propagation between but not within industries. The findings reveal outsourcing relationships of MNCs with local upstream suppliers as a channel of diffusion.Foreign direct investment, inter-industry spillovers; generic technology; vertical linkages; absorptive capacity.

The diffusion of externalities from foreign direct investment: theory ahead of measurement

In this paper a structural estimation framework is developed to assess whether inward foreign direct investment (FDI) generates technological externalities. The econometric model is implemented in an empirical investigation with data from Colombia’s Manufacturing Census. So far, evidence of new technological opportunities for host-country firms arising from the operations of multinational corporations (MNCs) has been rather scarce. This is due to serious limitations in the way in which spillovers have been measured. In particular, empirical research has focused almost exclusively on intra-industry externalities while no allowance has been made for inter-industry technological externalities. But, in theory, the optimal location and organizational strategies by a MNC are chosen to minimize the risk of losing profits due to the leakage of technical information to potential competitors. Therefore, the host-country firms within the MNC subsidiary’s sector will tend to experience limited technological gains ensuing FDI, whereas producers in other sectors may benefit, especially if the MNC outsources to local upstream suppliers. While FDI may substitute investment by domestic plants within the MNC subsidiary’s sector, it can complement investment in other sectors. Hence, spillovers from FDI should be primarily inter-industry and not intra-industry. This conjecture is corroborated by testing of the mutisectoral model of FDI spillover diffusion on Colombian manufacturing data. Furthermore, both generic knowhow spillovers and linkage externalities are sizable Keywords; generic technology, inter-industry spillovers, absorptive capacity JEL codes: F21, F23, F43, O41, O34

Migrant Remittances, Human Capital Formation and Job Creation Externalities in Colombia

In this paper we model the effect of migrant remittances on job creation and human capital formation, given migration prospects. Model calibration of deep parameters was performed with data from the AMCO survey on migration and remittances. The simulations based on the model show that remittances can have offsetting effects on equilibrium human capital and labor market out- comes in the country of origin of migrants. First, remittances enhance school- ing opportunities for recipient households, and human capital formation can be augmented. Second, an increase in human capital supply by recipient house- holds induces job creation as labor demand increases in the origin country. If a sufficiently large share of remittance recipients do not migrate, then the net effect is brain gain rather than brain drain ensuing remittances. The job cre- ation spillover in local labor markets increases the rate of return to schooling for nonrecipient households, whose members are less likely to migrate. As a result, there are more incentives to substitute consumption for human capital investment. At the same time, the rise in expected income due to the spillover induces higher desired consumption. If the “substitution effect” outweighs the “income effect”, then remittances will increase overall human capital and re- duce the unemployment rate. The calibration and simulation analyses suggest that he net effect of remittances depends upon the accessibility of education and the degree and labor market frictions in the origin country as well as the immigration policy in the destination country of migrants.Migrant remittances, education, brain gain, job creation

Checks and balances: an assessment of the institutional separation of political powers in Colombia

In this paper, we evaluate the institutional and legal structure of the Colombian government. In particular, we want to assess how a system of institutional checks and balances can be structured to promote the rule of law, preserve property rights, and stimulate economic growth. The 1991 Constitution indeed makes commendable commitments to these objectives. Yet, due to its institutional structure, Colombia is governed in a manner that is both unchecked and unbalanced. The Colombian Constitution is an enormously long document that attempts to reassure all parties that the future will be to their liking. For example, Article 58, which permits uncompensated expropriation for reasons of “equity”, might be a substantial deterrent to investment. The nation’s long run economic health may be seriously impaired if peace is bought at the price of widespread concessions with regard to either the process of decision-making about the economy or to the specific content of future government economic policies. One may buy transitory tranquility, which may not translate in to lasting peace, at the price of long-term instability and turmoil. We make recommendations for institutional reform, which aim to mitigate clientelist and populist trends in Colombian politics. To enhance policymaking by reducing the scope for gridlock, we propose measures such as long-term appointments and ballot accountability that eliminate distortions to the voting incentives of both judges and lawmakers. Also, procedures are set forth to limit undue deliberations by the judiciary and to induce institutional status-quo bias. While we support constitutional provisions for the stability of a political process endowed with representativeness, we reject constitutional provisions that attempt to entrench one particular policy outcome. Stationary policy is likely to be both suboptimal and unsustainable in a stochastic and dynamic environment

Skilled emigration, business networks and foreign direct investment

In a global context foreign direct investment (FDI) and migration substitute one another in the matching process between workers and firms. However, as labor flows can lead to the formation of business networks, migration can actually facilitate FDI in the long-run. We first present a stylized model for a small open economy illustrating these offsetting effects. We then use U.S. data on bilateral labor inflows and capital outflows to measure the extent of contemporaneous substitutability and dynamic complementarity between migration and FDI. We find that brain drain and FDI inflows are negatively correlated contemporaneously but that skilled migration is associated with future increases in FDI inflows. We also find suggestive evidence of substitutability between current migration and FDI for migrants with secondary education, and of complementarity between past migration and FDI for unskilled migrants

Collateral and risk sharing in group lending: evidence from an urban microcredit program

Empirical research on group lending is extensive, but without allowance for collateral to mitigate strategic default. Indeed, lack of credit access has motivated microcredit in rural areas of developing countries, where agents with collateral are very rare. As rural communities have tight-knit hierarchical structures information about borrowers is accessible and enforcement of social sanctions makes collateral superfluous. First, we illustrate in a model how collateral mitigates group default. Second, we study a group lending program in Cotonou, the largest city in Benin with 1.1 million inhabitants. Results show diversification within groups facilitating risk pooling but also increasing expected default costs for safe borrowers. Risky borrowers offset group-default negative spillovers default with collateral, and facilitate credit access to safe borrowers. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing

Checks and balances: an assessment of the institutional separation of political powers in Colombia

In this paper, we evaluate the institutional and legal structure of the Colombian government. In particular, we want to assess how a system of institutional checks and balances can be structured to promote the rule of law, preserve property rights, and stimulate economic growth. The 1991 Constitution indeed makes commendable commitments to these objectives. Yet, due to its institutional structure, Colombia is governed in a manner that is both unchecked and unbalanced. The Colombian Constitution is an enormously long document that attempts to reassure all parties that the future will be to their liking. For example, Article 58, which permits uncompensated expropriation for reasons of “equityâ€, might be a substantial deterrent to investment. The nation’s long run economic health may be seriously impaired if peace is bought at the price of widespread concessions with regard to either the process of decision-making about the economy or to the specific content of future government economic policies. One may buy transitory tranquility, which may not translate in to lasting peace, at the price of long-term instability and turmoil. We make recommendations for institutional reform, which aim to mitigate clientelist and populist trends in Colombian politics. To enhance policymaking by reducing the scope for gridlock, we propose measures such as long-term appointments and ballot accountability that eliminate distortions to the voting incentives of both judges and lawmakers. Also, procedures are set forth to limit undue deliberations by the judiciary and to induce institutional status-quo bias. While we support constitutional provisions for the stability of a political process endowed with representativeness, we reject constitutional provisions that attempt to entrench one particular policy outcome. Stationary policy is likely to be both suboptimal and unsustainable in a stochastic and dynamic environment. Keywords; separation of powers, political representativeness, clientelism and gridlock JEL Classification: E61, H11, H77

The Effect of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia

In the U.S., some sectoral evidence suggests that growth is driven mainly by productivity enhancing reallocation. In countries with greater barriers to entry and imperfect competition, the reallocation process may be inefficient. Therefore, for developing countries, an open question is whether reallocation is productivity enhancing. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998 we examine the interaction between market allocation, productivity and profitability. Given the important trade, labor and financial market oriented reforms in Colombia in 1990, we explore whether and how the contribution of reallocation changed. Our data include plant-level quantities and prices. Using plant prices, we propose a sequential methodology to estimate productivity and demand shocks. First, with plant-level physical output data, we estimate total factor productivity (TFP) using downstream demand to instrument for inputs. Then, with plant-level price data, we estimate demand shocks and mark-ups in the inverse-demand equation, using TFP to instrument for output. We characterize the evolution of TFP and demand shock distributions. Market reforms are associated with rising overall productivity that is driven by reallocation away from low- and towards high-productivity businesses; and, the allocation of activity across businesses is less driven by demand factors.