The labor market impacts of social security contributions: lessons from Colombia

This dissertation contributes to the literature on social security by estimating the effects of this payroll tax on several labor market outcomes in Colombia, and by evaluating how these effects vary according to the workers’ valuation of the benefits. Colombia provides an interesting case study because the country implemented a social security reform in 1993 that increased the payroll tax rate by over 10 percentage points and improved both quantity and quality of benefits. To identify the effects of this reform I use cross-sectional data from the Colombian National Household Survey for the years 1984 to 1996. In the first chapter, I analyze the relationship between social security taxes and the employment sector choice of workers. I find that the reform increases the proportion of females employed in the formal sector of the economy, defined as the sector that complies with social security regulations, by 6 percentage points while it increases males’ formal employment probability by only 3 percentage points. In the second chapter, I estimate what fraction of social security contributions employers pass on to workers in the form of lower hourly wages. My results show that the wages of females (males) in the formal sector decrease (increase) by 5% (2%) relative to the wages of those in the informal sector. In the third chapter, I examine the effect of social security contributions on weekly hours worked. My findings indicate that the reform reduces the work of women in the formal sector by 2 hours relative to the hours worked by those in the informal sector, whereas it does not have a significant impact on the hours worked by men. The effects of the reform on wages and hours are particularly important among married mothers and single head-of-household women, whereas for married women without children, single dependent women, and men in any family structure group the effects are insignificant. The patterns of how the effects vary across demographic groups are theoretically consistent, within a model of employment sector choice, with the link between the magnitude of the effects and the workers’ valuation of the social security benefits.