The Impact of Colombia's Pension and Health Insurance Systems on Informality

This paper examines how changes in the legislation governing health and pension benefits that took place between 2003 and 2008 in Colombia affected the informal and formal labor markets. In particular, this paper examines two major changes in the legislation. First, it looks at the effects of imposing the requirement to use the same base income to contribute to both health insurance and pensions for independent workers using a difference-in-differences strategy. Second, this document addresses the effects of unifying health and pension system payments, which required employers to make contributions to these two plans through a unified payment system, making it more difficult to contribute differently to the one plan versus the other. The results presented in this paper suggest that this reform increased both full formality and full informality, but with larger positive effects on full formality.