benefits associated with informality. Instead, when the value of a net peso transferred equates across worker’s groups (scenario 2), there are significant changes in “social” distortions, which either double up or are halved as a result of the new valuations. Also, the “occupational” distortion suffers a substantive change, as now the elimination of differences in preferences shows that the true differentials in worker’s contributions are still quite substantial, although not sufficient to revert the labor incomes gap between formal salaried and formal self-employed.

In scenario 3, getting rid of differentials in contributions to social security by occupation (by equating self-employed contributions to those by salaried workers) reduces markedly only the “social” distortion calculated for formal self-employed, whose contribution rates are now slashed. Smaller changes take place in the remaining distortions, where the effects of valuation and labor income differentials remain strong. Likewise, the elimination of _parafiscales_ as a cost for employers of formal salaried workers would reduce about 40% of the original “social” distortion of formal salaried workers. Interestingly, it will have no other effect in the rest of distortions.

Finally, the elimination of social assistance programs providing noncontributive pension and health care as well as those programs financed by _parafiscales_ would have a sizeable impact on “informal” distortions. The move would make informality less attractive from a (free) benefit point of view – about 15% of the baseline informal distortion–, which adds to the substantive labor income gaps to further increase “informal” distortions.

# **5. Conclusions**

This article takes advantage of extensions to the Colombian labor and social protection household survey, ELS, that incorporate questions for _all_ workers about their valuation and willingness to pay for the complete legal package (whether or not they receive it). This information is used to calculate labor distortions associated with the fact that salaried and self-employed formal workers must contribute differently to a fairly comparable social protection public good, while informal workers do receive noncontributive social protection and other social assistance programs that they also fairly value for free. Although workers certainly appreciate these transfers, each category of worker in Colombia value below par the net transfer received in the form of social security. Workers reportedly regard highly social security and social assistance programs in Colombia (regardless of their knowledge or actual participation in the program) but are willing to pay for them below 20% of their labor incomes. Those earning more are also willing to pay more for social security, but when factored in the discussion the differences between what workers receive and what they have to contribute, the valuation of a net peso transferred as social security (contributive or subsidized) does not vary much across formal and informal workers. In fact, their _betas_ are around 0.5, which means that each peso received as benefit is discounted to about 50 cents. Critically, the resulting mix of formality tax and informality subsidies is substantive (between 2 and 27 percent of different representative workers’ earnings), these distortions are typically insufficient to cancel out the observed labor income differentials among each category of worker. When wage differentials are removed, the picture changes: in fact, the value of the package of noncontributive social security and social assistance for informal workers is about 10% higher than the value of the social security package of formal self-employed workers evaluated at the minimum wage.

The key public policy question is how both to reduce those multiple labor distortions and improve the large discounts on net benefits from social protection observed in Colombia. The calculations in this paper substantiate that there is not a single factor likely to reduce significantly all these 18