Labor Market Transitions and Social Security in Colombia

This paper quantifies the magnitude of transitions across occupational categories in Colombia, a country with high unemployment and informality but quickly increasing its social security coverage in healthcare. The analysis makes use of a panel of households between 2008 and 2009 and representative of the main metropolitan areas in the country. Results confirm that transitions are large and asymmetric (twice as likely to happen from formal to informal occupations as vice versa). These results, however, conceal an additional asymmetry typically overlooked: salaried formal workers are more likely to transition first into salaried informal occupations than self-employment and unemployment; instead, informal self-employed are more likely to transition into unemployment or out of the labor force than formal occupations. Furthermore, better education (better chances) and lower earnings (more need) increase the probability of labor transitions. Those already affiliated to health insurance are less likely to transition but affiliation to old-age pension insurance does not affect transitioning decisions. Females transition more than males. In the presence of these high-volume asymmetric transitions (and other factors such as workers’ preferences and risk perceptions) the expansion of non-contributive social security schemes may seriously de-incentivize formality.