The Incidence of Job Security Regulations on Labor Market Flexibility and Compliance in Colombia: Evidence from the 1990 Reform

Utilizing differences-in-differences estimates, this paper reviews the impact of reduced firing costs on the dynamism of the Colombian labor market. The effects include raising exit rates into and out of unemployment, increasing compliance with labor legislation by lowering the costs of formal production, and reducing unemployment from the late 1980s to the early 1990s. On the other hand, labor market reform appeared to explain in part increasing unemployment during the late 1990s. In general, greater flexibility in hiring and firing is likely to translate into increased hiring relative to firing during expansions, but increased firing relative to hiring during recessions.