by the social security reform of 1993 more than compensated for the gradual reduction of severance payments. In the period 1996-2003, they remained constant. Finally, in the period 2004-2012, these costs continued to climb primarily because of increasing social security contributions, until they reached a peak of 55.78 percent in 2012. The reform of 2012 counteracted the trend by reducing them significantly to 50.78 percent.<sup>15</sup> The employee NWL costs were constant at 4.5 percent during the period 1990-1993, since they were not affected by the labor reform of 1990. From 1994 to 1996 they started to increase, driven primarily by increasing pension contributions introduced by the social security reform. During the period 1996-2003 they were stable, and after 2004 they begun to climb until reaching a level of 9 percent in 2013.

Colombia also started a dramatic process of trade liberalization and financial openness in 1991.<sup>16</sup> This may have caused important changes in the real exchange rate, defined as the price of tradables relative to non-tradables. Since the informal sector is mainly comprised of non-tradables,<sup>17</sup> the real exchange rate is a key relative price in this small open economy, and can be quite relevant when it comes to explaining movement of labor across sectors. A sharp increase is observed before 2003, followed by a real appreciation afterwards (see Figure 11).

In recent years, investment in social assistance programs (cash transfers, in-kind transfers and subsidized health) has been growing in Colombia. In particular, since 1993, there has been an expansion of subsidized health (Subsidized Regime) to workers who are not part of the contributive regime (informal under the SP definition). The government is expanding access to health with the main goal of achieving universal health care in the near future. Figure 12 shows the growing percentage of informal-sector workers who are affiliated to the subsidized regime. While in the second quarter of 2001 approximately 19.42 percent of informal-sector workers were affiliated to the SR, in the second quarter of 2013 this was 47.65 percent.<sup>18</sup> Higher payroll taxes, changes in relative prices affecting the relative profitability of the two sectors, and expanding social assistance programs to informal workers<sup>19</sup> may explain some of the stylized facts observed in the labor markets in recent years.

> 15These payroll taxes are high when compared to the US, where contributions range between 15 and 20 percent of the gross wage, and similar to the levels observed in some EU countries (i.e. Sweden, Belgium, France), where contributions are close to 50 percent.

> 16Interest rate ceilings, exchange rate controls and restrictions on foreign direct investment were eliminated, as well as requirements to invest in government securities. International trade was largely liberalized, due to significant reductions in import tariffs.

> 17According to a recent Informality survey by Batini, Kim, Levine and Lotti (2010), 87 percent of self-employed and informal workers in Colombia are concentrated in non-tradables (i.e commerce and services).

> 18Author’s calculations based on Colombian Household Survey. No data are available before 2001.

> 19An inflexible wage structure in the formal sector may also be a factor since previous literature (Maloney, Nunez, 2001) suggests that minimum wages in Colombia are high and binding. Here I don’t consider any source of wage rigidity.

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