The effect of payroll taxes on employment and wages under high labor informality

IZA Journal of Labor & Development

Table 3 Fiscal reform effects on employment and real earnings (percentage change with respect to the benchmark)

	Reform scenario A	Reform scenario B
Employment
Total employment^(a)	0.3	0.5
Salaried formal	3.7	3.4
Salaried informal	0.9	0.5
Own-account	−4.3	−3.4
Real earnings
Formal gross wage	−4.0	−4.0
Formal net wage^(b)	4.9	4.8
Informal gross wage	2.9	2.8
Informal net wage^(b)	3.0	2.9
After-tax average earnings, own-account	2.8	2.6
After-tax average earnings, employers	4.0	4.6

Notes:
^(a)Salaried plus own-account workers.
^(b)Net of taxes/subsidies.
Reform scenario A assumes a fall of 22.4 percent in labor taxes (equivalent to a decrease of 13.5 percentage points) and a lump-sum transfer to formal workers equivalent to 9 percent of their benchmark wage rate.
Reform scenario B assumes scenario A plus an increase in the corporate income tax rate from 33 to 34 percent.