Tax-Transfers Schemes, Informality, and Search Frictions in a Small Open Economy
This paper evaluates the impact of market-oriented structural reforms, in particular labor market policies, social assistance programs, and trade liberalization on long run unemployment, wage inequality, and the distribution of employment across se...
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| Format: | Working Paper |
| Language: | English |
| Published: |
Washington, DC: World Bank
2018
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| Online Access: | http://documents.worldbank.org/curated/en/169221536150970354/Tax-Transfers-Schemes-Informality-and-Search-Frictions-in-a-Small-Open-Economy http://hdl.handle.net/10986/30419 |
| Summary: | This paper evaluates the impact of
market-oriented structural reforms, in particular labor
market policies, social assistance programs, and trade
liberalization on long run unemployment, wage inequality,
and the distribution of employment across sectors in a small
open economy with search frictions and idiosyncratic
productivity shocks. The paper builds a search and matching
model of a labor market with a large informal sector and
estimates the model using Colombian household-level data.
Changes in labor taxes may have sizable aggregate,
compositional, and distributional effects if workers
associate high payroll taxes with more valuable and
efficient social security services. The higher is the
valuation of the services, the higher is the reduction in
the log-wage gap. An expansion of public health insurance to
informal sector workers has minor aggregate and
distributional effects. Changes in relative prices that
negatively affect the relative profitability of the formal
sector have quite sizable aggregate effects, producing more
long-run unemployment and informality, and increasing
unemployment duration. |
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