This paper studies the informal labor markets of Colombia and Paraguay. Colombia has been found to show a significant reduction in informal employment due to the reduction in payroll taxes. Conversely, Paraguay shows highly isolated informal/formal labor markets with few factors improving movements between these.Chapter 1 evaluates how the drastic reduction in payroll taxes in 2012 reduced informali-ty in Colombia. By the end of 2012 the Colombian government implemented a tax reform that, among other things, substantially reduced payroll taxes. I evaluate the effect of this reform on informality both theoretically and empirically.Theoretically, I develop a labor market model incorporating the changes introduced by the reform. As the reduction in payroll taxes was accompanied by a change in social trans-fers’ funding, which led to uncertain changes in profits and social benefits, straightforward predictions on informality are not possible.Empirically, I obtain difference-in-difference (DID) estimates from two household sur-veys—one composed by many repeated cross sections across many years and the other a much shorter panel dataset. Estimates from the repeated cross sections data indicate small, short-term effects and large long-term effects. Industry was the first sector to enjoy a reduction in informality, followed by services and agriculture. For workers earning around one minimum wage, I find large point estimates. Estimates from the household survey panel data are in line with these results.Chapter 2 characterizes informal-formal employment transitions in Paraguay. Results in-dicate that some factors, such as education and firms size, improve workers’ movement be-tween informal and formal employment, and wage gains from moving into formality are mod-est. Workers who tend to stay indefinitely informal are more likely to become unemployed or inactive.Estimates, based on a survival model, indicate that education and firm size highly in-crease informal-to-formal transitions, especially if workers have stayed informal for a long time. Older women have lower formal-to-informal transitions and, surprisingly, education plays no significant role. Mincer estimates point to high wages for formal workers, compared with informal, but that individual workers’ wage gains from moving into formality are small.
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