ing interest payments) instead of paying severance at the time employment terminated.<sup>8</sup> The social security reform of 1993, implemented in 1994, introduced major changes to the health and pension systems, monopolized by the government until then. The reform increased pension and health contributions and thereby non-wage labor (hereafter NWL) costs with the main goal of expanding social security coverage. Aiming to reach universal health coverage, the reform also created two coexisting health regimes: a contributive regime (CR) and a subsidized regime (SR).

In the CR, employers must provide health insurance by law, regardless of occupation,<sup>9</sup> and the cost is shared between employers and employees. In the SR, ‘poor’ individuals who meet certain poverty criteria have access to subsidized health, where ‘poor’ is determined by a poverty index score based on the Census of the Poor (SISBEN).<sup>10</sup> This system is financed with transfers from the contributive regime.

The labor reform of 2002 created a system of social protection, aimed to protect unemployed workers and to promote employment in recessionary periods but had limited impact on job creation, since most of the measures applied to a very limited group of workers and NWL costs were unaffected. The pension reform of 2003 increased the age requirements for retirement, the length of service required for pension, and the pension contribution rate (gradually until 2008), thus increasing employer and employee NWL costs. The health reform of 2007 increased employer health contributions, raising employer NWL costs.

After three decades of rising NWL costs,<sup>11</sup> the more recent labor reform of 2012 reduced employer NWL costs substantially by 8.96 percent through the elimination<sup>12</sup> of para-statal contributions,<sup>13</sup> with the main goal of stimulating employment.

Changes in social security contributions caused sizable changes in employer and employee NWL costs, potentially affecting job creation and job destruction in the formal and the informal sectors.

Figures 9 and 10 show the evolution of employer and employee NWL costs in the period 19842013.<sup>14</sup> In the period 1985-1990, employer NWL costs were 47.08 percent of the wage. The reduction in severance payments introduced by the reform of 1990 caused a reduction in the average NWL cost paid by the employer from 1991 to 1993, distributing this payment linearly over time. The implementation of this change has been gradual, as discussed before. As a result, NWL costs were reduced to 45.98 percent in 1993. In the period 1994-1996, these costs began to rise to reach a level of 53.41 percent in 1996, since the increasing pension and health contributions implemented

> 8However, the law applies only to workers hired after 1991, which means that the reduction in severance payments depends on the turnover rate, and the number of workers who voluntarily switch to the new regime. Hence the reduction in severance payments was gradual rather than immediate.

> 9According to the law, self-employees must also contribute to the system.

> 10 Individuals may qualify for fully subsidized health if they meet the following criteria: being part of a SISBEN level 1 or 2 household, not being affiliated to the CR, not having an employment relationship, not being a retiree and not being a beneficiary of the CR.

> 11The reduction in severance payments introduced by the Reform of 1990 is the exception.

> 12This reduction only applies to workers earning less than 10 times the minimum wage.

> 13 In addition to social security, paid vacation and mandatory bonuses, employers must pay taxes to finance social programs. These para-statal contributions include training programs, family allowances and in-kind transfers for low income households.

> 14For a detailed disaggregation of these costs see Tables 12 and 13.

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