DO PAYROLL TAX REDUCTIONS ENHANCE EMPLOYMENT? POLICY LESSONS FROM COLOMBIA

In order to reduce the large informal sector, the Colombian government has cut payroll taxes on two occasions in two years, with the Acts of Formalization and Employment Generation, and Tax Reform. In the first case the Act was estimated to generate 500.000 new formal jobs and in the second one between 400.000 and a million. This paper contextualizes the measures implemented, evaluates their theoretical consistency and comments the first available data after enactment of the two acts. The analysis does not lead to ratify optimistic governmental forecast, in line with recent international experience. Policy implications are discussed