The Labor Reform Law of 2002 and the Dynamics of Industrial Employment in Colombia

Abstract

 This paper analyzes the effect of the labor reform contained in Law 789 of 2002 on the dynamics of industrial employment in Colombia. The effect is estimated using a job-product equation. This involves parts of a time series structural model. Its main feature is the adoption of the Kalman filter algorithm that allows decomposing the evolution of industrial employment shocks that are usually observable (and sometimes not) and that change over time. The method used is different from traditional approaches, which focus more on the long run. The results show that Law 789 had little or no effect on employment generation, and that employment has been influenced mainly by the dynamics of production at the firm level and the level of employment in the immediate past.