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

Keep in mind

En la revista Ensayos sobre Política Económica (ESPE) divulgamos los resultados y las propuestas de política que surgen de investigaciones académicas realizadas en el Banco de la República. Cuando nos lea, tenga siempre presente que el contenido de nuestros artículos, así como los análisis y conclusiones que de ellos se derivan, son exclusiva responsabilidad de sus autores. El material divulgado en nuestra revista ESPE no compromete ni representa la opinión del Banco de la República ni la de su Junta Directiva.

In the journal Ensayos sobre Política Económica - ESPE - we disclose the results and policy proposals that arise from academic research carried out at the Banco de la República. When you read us, always keep in mind that the content of our articles, as well as the analyzes and conclusions derived from them, are the sole responsibility of their authors. The material disclosed in our ESPE magazine does not compromise or represent the opinion of Banco de la República or that of its Board of Directors.

Publication Date:
Wednesday, 19 February 2025

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.