Research Papers

Pension Incentives and Formal-Sector Labor Supply: Evidence from Colombia (Job Market Paper)

This paper describes how future pension benefits affect labor supply in economies that have an informal sector. From the perspective of the worker, a formal-sector job offers long-run gains, as it increases his likelihood of gaining pension benefits in the future. If workers take those gains into account when they search for formal-sector jobs, the pension system affects formal-sector labor supply. I estimate the causal link between pension incentives and formal-sector labor supply using a cohort-based reform undertaken in Colombia. I demonstrate that a change in future pension benefits generates a large shift between the formal-sector and informal-sector labor supply, and that this change does not affect labor force participation. The average effect of pension incentives on formal-sector labor supply is heterogeneous, and is consistent with the predictions of a theoretical model combining a pension system and informal job opportunities. The effect is concentrated among workers for whom the minimum qualifying conditions are binding, and among workers with higher expected pension wealth. The results presented here suggest that pension reforms have the potential to create large efficiency costs, an effect that should be taken into account when designing pension programs.

Costs of Regulation and Creation of Formal-Sector Jobs: Evidence from Colombia’s First Job Act

In this paper, I study the effects of the costs of regulation on the creation of formal-sector jobs. To analyze the extent of the costs of regulation on determining both formal employment and wages, I use the variation induced by the Colombian First Job Act. The Act granted tax exemptions for new registered firms with 50 workers or less, and granted tax credits for existing firms hiring workers under 28. Since the Act generated variation between groups of firms and workers over time, I carried out a Differences-in-Differences research design to obtain reduced-form estimates of the causal effect of regulation costs on the formal-sector employment and wages. The results indicate that changes in the regulation costs for small firms has a positive and significant impact on employment and wages, and this effect is especially large for small employers. Similarly, changes in payroll-taxes have positive and significant effects on both employment and wages. In both cases, the estimated effect on employment is larger than the estimated effect on wages, which may be explained by the binding effects of the minimum wage and an integrated labor market, opposite to a segregated labor market in which informal workers cannot get jobs in the formal sector.

Peer-Reviewed Articles

Where is the Money? Post-Disaster Foreign Aid Flows” with E. Cavallo and I. Noy, Environment and Development Economics, 20 (5), pp.561-586, 2015 (Go to paper)

“Foreign Aid in the Aftermath of Large Natural Disasters” with E. Cavallo and I. Noy, Review of Development Economics, 18 (3), 445–460, 2014 (Go to paper)

“The Politics of Financial Development: The Role of Interest Groups and Government Capabilities,” with E. Cavallo and C. Scartascini, Journal of Banking and Finance, 36 (3), 626-643, 2012. (Go to paper)

“Estimating the Direct Economic Damage of the Earthquake in Haiti,” with E. Cavallo and A. Powell, The Economic Journal, 120 (546), F298-F312, 2010. (Go to paper)