Effects of Colombia's Social Protection System on Workers' Choice between Formal and Informal Employment

We examine whether the Colombian government, when instituting and expanding social programs in the early nineties, inadvertently created incentives for people to become informal. We use data from repeated cross-sections of the Colombian Household Survey for periods before and after implementation of the reforms. As robustness, we also construct a panel of individuals interviewed for the first and second Census of the Poor. Using the variation in the onset of interviews across municipalities we find robust and consistent estimates of an increase in informal employment between 2 and 4 percentage points. From a policy perspective this implies that the broad expansion of government provided health insurance in Colombia contributed to increasing informal employment.

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