4 shows the evolution of the informality rate based on alternative criteria. The average informality rate based on the health criterion diminished slightly from 49.7 percent in 1984-1999 to 48.7 percent in 2000-2013; informality based on pension decreased from 60.2 percent to 57.5 percent in 2000-2013; informality based on health and pension decreased from 60.9 percent to 58.7 percent.

When looking at the sectoral log-wage distributions, two facts are worth emphasizing.

First, there are substantial differences in mean relative earnings, favoring formal-sector workers. This is evidenced by the size of the log wage premium, which varies between 0.71 and 1.43 over the whole period 1984-2013 (see Figure 5). The formal-informal sector mean log wage gap, although diminishing, is still persistently high: the gap decreased only by 0.04 log points in the period under consideration.<sup>7</sup> Second, overall wage inequality improved even though there were no significant improvements in between-sector inequality. Figure 6 shows the variance of the earning distribution in the overall economy. This change was mostly driven by lower wage dispersion within each sector. While between-sector variance decreased only by 9.4 percent, within-sector variance decreased by 32.3 percent, leading to an overall fall in log-wage variance of 29.3 percent. Figure 7 shows this variance broken down into the between and within-sector components.

Finally, mean real wages rose in both sectors, suggesting an improvement in living standards. Mean hourly wages increased by 0.15 and 0.13 log-wage points in the informal and formal sector respectively (See Figure 8).

In the period under consideration, a sequence of market-oriented structural reforms was implemented: the labor reforms of 1990, 2002 and 2012, the social security reforms of 1993, 2003 and 2007, and the trade liberalization reform that started in 1991.

Prior to the labor reforms, employment protection in Colombia was promoted by labor regulations that imposed high severance payments, early retirement and restrictions on temporary work, affecting labor markets’ flexibility, with potential adverse effects on employment.

In this context, the recent labor and social security reforms were intended to contribute to the flexibility and efficiency of the labor markets, while still maintaining some level of worker protection.

The labor reform of 1990 was primarily aimed at stimulating job creation by instituting a more flexible system of hiring and layoffs. This was achieved by allowing short-term contracts, promoting a more flexible wage regime, and more importantly, decreasing severance payments. The reform required that formal sector firms make an annual contribution to a private severance fund (includ-

> _•_ Firm Size: Works in firms with five or fewer employees

> _• Occupation_ : Works as domestic employee, self-employed, employer or unpaid family worker. This definition is the one used by the Colombian Statistics Department, DANE, and is consistent with the one used by the ILO, but it does not include any criteria related to non-compliance with regulations.

> 7Here I use the social security definition of informality, constructed using only health contributions since there is no information for pensions before 1996. The measure of earnings in the survey not only include monetary wages for workers (including tips, commissions) but also remuneration for self-employed, so there is some measurement error in wages.

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