Financial disincentives for formal work in Ecuador and Colombia

High and persistent labour informality has been a major problem for Latin American economies where most workers are excluded from social protectionandhave low and variable incomes.In the case of Ecuador and Colombia, despite recent formalisationpolicies, there is...

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Autores Principales: Rodríguez, David, Jara, Xavier
Otros Autores: The Economics of Informality Conference 2018
Formato: Objeto de conferencia (Conference Object)
Lenguaje:Inglés (English)
Publicado: Universidad del Rosario. Facultad de Economía 2018
Materias:
Acceso en línea:http://repository.urosario.edu.co/handle/10336/18256
id ir-10336-18256
recordtype dspace
spelling ir-10336-182562019-09-19T12:37:54Z Financial disincentives for formal work in Ecuador and Colombia Rodríguez, David Jara, Xavier The Economics of Informality Conference 2018 Informalidad Microsimulación Tasa de impuesto de formalización Economía laboral Economía informal Empleo Informality Microsimulation Formalisation tax rate High and persistent labour informality has been a major problem for Latin American economies where most workers are excluded from social protectionandhave low and variable incomes.In the case of Ecuador and Colombia, despite recent formalisationpolicies, there is still a long way aheadto reduce informality which affects near half of the workforce.This paper seeks to quantifythe role of tax and benefit systems on financial incentives to enter formal work.In order to do so, weassess the formalisationcosts for Ecuadorian and Colombian informal workers using multi-country tax-benefit microsimulation techniques. In particular, we make use of representative microdata and simulate transitions from the informal into the formal sector to calculate the proportion of earnings that will be taxed away in the form of increased taxes andsocial insurance contributionsor reduced cash transfers, when a worker enters formality. We test the sensitivity of our results to different assumptions about the wage level individualswouldface when entering the formal sectorwith several imputation strategies.Our findingsshow that financial costs of formalisation are almost equaltopossible labour income gainsafter a transition to the formal sector. In other words, despite counterfactual formal income is in most of the cases higher than in the informal sector,the design of the tax system, and particularly, of social insurance contributions, erase mostpotential monetary gains of such a transition. This is espe-ciallytrue for self-employment workers.Furthermore, assuming workers self-select into the sector offering a comparative advantage we find even higher formalisations costs.Lastly, taking into account compliance with minimum wage legislation labour income gainsare muchhigher than using only counterfactual estimates, however,formalisation costs do not decrease substantially. 2018-03-28 2018-08-03T16:04:57Z info:eu-repo/semantics/conferenceObject info:eu-repo/semantics/publishedVersion http://repository.urosario.edu.co/handle/10336/18256 eng Atribución-NoComercial-CompartirIgual 2.5 Colombia http://creativecommons.org/licenses/by-nc-sa/2.5/co/ info:eu-repo/semantics/openAccess application/pdf Universidad del Rosario. Facultad de Economía instname:Universidad del Rosario reponame:Repositorio Institucional EdocUR
institution EdocUR - Universidad del Rosario
collection DSpace
language Inglés (English)
topic Informalidad
Microsimulación
Tasa de impuesto de formalización
Economía laboral
Economía informal
Empleo
Informality
Microsimulation
Formalisation tax rate
spellingShingle Informalidad
Microsimulación
Tasa de impuesto de formalización
Economía laboral
Economía informal
Empleo
Informality
Microsimulation
Formalisation tax rate
Rodríguez, David
Jara, Xavier
Financial disincentives for formal work in Ecuador and Colombia
description High and persistent labour informality has been a major problem for Latin American economies where most workers are excluded from social protectionandhave low and variable incomes.In the case of Ecuador and Colombia, despite recent formalisationpolicies, there is still a long way aheadto reduce informality which affects near half of the workforce.This paper seeks to quantifythe role of tax and benefit systems on financial incentives to enter formal work.In order to do so, weassess the formalisationcosts for Ecuadorian and Colombian informal workers using multi-country tax-benefit microsimulation techniques. In particular, we make use of representative microdata and simulate transitions from the informal into the formal sector to calculate the proportion of earnings that will be taxed away in the form of increased taxes andsocial insurance contributionsor reduced cash transfers, when a worker enters formality. We test the sensitivity of our results to different assumptions about the wage level individualswouldface when entering the formal sectorwith several imputation strategies.Our findingsshow that financial costs of formalisation are almost equaltopossible labour income gainsafter a transition to the formal sector. In other words, despite counterfactual formal income is in most of the cases higher than in the informal sector,the design of the tax system, and particularly, of social insurance contributions, erase mostpotential monetary gains of such a transition. This is espe-ciallytrue for self-employment workers.Furthermore, assuming workers self-select into the sector offering a comparative advantage we find even higher formalisations costs.Lastly, taking into account compliance with minimum wage legislation labour income gainsare muchhigher than using only counterfactual estimates, however,formalisation costs do not decrease substantially.
author2 The Economics of Informality Conference 2018
author_facet The Economics of Informality Conference 2018
Rodríguez, David
Jara, Xavier
format Objeto de conferencia (Conference Object)
author Rodríguez, David
Jara, Xavier
author_sort Rodríguez, David
title Financial disincentives for formal work in Ecuador and Colombia
title_short Financial disincentives for formal work in Ecuador and Colombia
title_full Financial disincentives for formal work in Ecuador and Colombia
title_fullStr Financial disincentives for formal work in Ecuador and Colombia
title_full_unstemmed Financial disincentives for formal work in Ecuador and Colombia
title_sort financial disincentives for formal work in ecuador and colombia
publisher Universidad del Rosario. Facultad de Economía
publishDate 2018
url http://repository.urosario.edu.co/handle/10336/18256
_version_ 1645141842691358720
score 11,150874