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Regional Labour Informality in Colombia and a Proposal for a Differential Minimum Wage

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  • Luis E. Arango
  • Luz A. Flórez

Abstract

The very high level of informal labour in Colombia is a symptom of the labour market is not functioning properly. Moreover, this undesirable outcome is highly heterogeneous across the country: the differences in the labour informality rate between cities can be higher than 20 percentage points. We provide evidence that the abnormal level of the minimum wage is a major factor behind such outcomes. By using a generalised method of moments (GMM) panel approach for data between 2007 and 2016, our results show that the high minimum wage (relative to the 70th percentile of the wage distribution) has a positive and significant effect on the labour informality rate, and that such an effect is disparate across regions. This is explained by the mismatch between local labour productivity of less–skilled workers and the level of the national minimum wage. These should be compelling reasons to introduce a regionally differentiated minimum wage instead of the current national one that Colombia has. We suggest how to introduce the regional minimum wage.

Suggested Citation

  • Luis E. Arango & Luz A. Flórez, 2021. "Regional Labour Informality in Colombia and a Proposal for a Differential Minimum Wage," Journal of Development Studies, Taylor & Francis Journals, vol. 57(6), pages 1016-1037, June.
    • Handle: RePEc:taf:jdevst:v:57:y:2021:i:6:p:1016-1037
    DOI: 10.1080/00220388.2020.1841170
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    Cited by:

    1. Patricio Goldstein & Timothy Freeman & Alejandro Rueda-Sanz & Shreyas Gadgin Matha & Sarah Bui & Nidhi Rao & Timothy Cheston & Sebastian Bustos, 2023. "The Connectivity Trap: Stuck Between the Forest and Shared Prosperity in the Colombian Amazon," Growth Lab Working Papers 210, Harvard's Growth Lab.
    2. Andrés Álvarez & Juan Camilo Chaparro & Carolina González & Santiago Levy & Darío Maldonado & Marcela Meléndez & Natalia Ramírez & Marta Juanita Villaveces, 2022. "Reporte ejecutivo de la Misión de Empleo de Colombia," Documentos de trabajo 20156, Escuela de Gobierno - Universidad de los Andes.
    3. Oscar Iván Ávila-Montealegre & Anderson Grajales-Olarte & Juan J. Ospina-Tejeiro & Mario A. Ramos-Veloza, 2023. "Minimum Wage and Macroeconomic Adjustment: Insights from a Small Open, Emerging, Economy with Formal and Informal Labor," Borradores de Economia 1264, Banco de la Republica de Colombia.
    4. Allen, William L. & Ruiz, Isabel & Vargas-Silva, Carlos, 2024. "Policy preferences in response to large forced migration inflows," World Development, Elsevier, vol. 174(C).
    5. Mantilla, Cesar & Rincón, Ferley, 2022. "Mobility and productivity in a dual labor market: an experiment," OSF Preprints 5as84, Center for Open Science.
    6. Andrea Otero-Cortés & Alexander Villegas Mendoza & Oriana Álvarez Vos & Karina Acosta, 2023. "Caracterización de la oferta y demanda de trabajo en la Región Caribe," Documentos de trabajo sobre Economía Regional y Urbana 318, Banco de la Republica de Colombia.
    7. Karina Acosta & Juliana Jaramillo-Echeverri & Daniel Lasso & Alejandro Sarasti-Sierra, 2024. "Informalidad municipal en Colombia," Documentos de trabajo sobre Economía Regional y Urbana 327, Banco de la Republica de Colombia.

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