EMPLOYMENT AND DEADWEIGHT LOSS EFFECTS OF OBSERVED NONWAGE LABOR COSTS |
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| Authors: | GIOVANNA AGUILAR SíLVIO RENDON |
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| Institution: | 1. Aguilar: Associate Professor, Departamento de Economía, Pontificia Universidad Católica del Perú, Av. Universitaria cuadra 18 s/n, Lima 32, Perú. Phone 511‐626‐2000 ‐ Anexo 4952, Fax 511‐ 626‐2874, E‐mail gaguila@pucp.edu.pe;2. Rendon: Assistant Professor, Economics Department, Stony Brook University, Stony Brook, NY 11794‐0001. Phone 1‐631‐632‐1422, Fax 1‐631‐632‐7516, E‐mail srendon@ms.cc.sunysb.edu;3. We thank Juan Chacaltana, Cecilia Garavito, Daniel Hamermesh, Miguel Jaramillo, and participants of the LACEA‐LAMES Meetings in Mexico, the Second Meetings of Labor Economics in Lima, the Seventh IZA/SOLE Transatlantic Meeting of Labor Economists at Buch am Ammersee, and seminars at the Universidad Católica of Perú, GRADE, and ITAM for their comments and suggestions. We also thank Ramón Díaz for outstanding research assistance. Financial support of the Universidad Católica of Peru and of the Asociación Mexicana de Cultura is gratefully acknowledged. All errors and omissions are only ours. |
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| Abstract: | To assess the employment effects of labor costs, it is crucial to have reliable estimates of the labor cost elasticity of labor demand. Using a matched firm‐worker data set, we estimate a long‐run unconditional labor demand function, exploiting information on workers to correct for endogeneity in the determination of wages. We evaluate the employment and deadweight loss effects of observed employers' contributions imposed by labor laws (health insurance, training, and taxes) as well as of observed workers' deductions (social security and income tax). We find that nonwage labor costs reduce employment by 17% for white collars and by 53% for blue collars, with associated deadweight losses of 10% and 35% of total contributions, respectively. Since most firms undercomply with mandated employers' and workers' contributions, we find that full compliance would imply employment losses of 4% for white collars and 12% for blue collars, with respective associated deadweight losses of 2% and 6%. (JEL J23, J32) |
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