Summary

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This paper is aimed to identify the main determinants of the structural unemployment rate (SUR) in Colombia. To this end, we initially look up theoretical determinants of structural unemployment as defined by a basic search and matching model. Then, we estimate different measures of the SUR including the one that emerges from the search-theoretic. Next, we test empirically each of the determinants in the Colombian case. We find that the main explanations of structural unemployment rate (SUR) in Colombia are; the real minimum wage, the real interest rate, a hiring cost indicator, sectoral shifts, non-wage labour costs, and some demographic factors such as the proportion of male, workers between 46 and 56 years old, and workers with no college education in the labour force. Finally, we use these variables to estimate the structural unemployment rate. Given the time series properties of the variables we applied a cointegrating approach with the Fully Modified Ordinary Least Squares (FMOLS) method which allows us to take into account the endogeneity of the vacancy rate.

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Using the Colombian Annual Manufacturing Survey between 2000 and 2013, we investigate the heterogeneity in labour demand within the industrial sector based on the elasticities. We find that long-run own-price, output, and TFP elasticities vary across a variety of dimensions such as regions, sectors, and plant sizes depending on workers' skills and contract modalities (open-ended and temporary). The determinants of industrial labour demand are quantitatively different, mainly, across regions and, to some extent, subsectors when we focus on demand for unskilled workers. It is possible that, given the importance of apparel in the manufacturing sector in Pereira, labour demand for permanent skilled workers in that city is different from that of Bogotá, Cali, and Medellín. Thus, labour demand heterogeneity is just a symptom of the underlying differences in the production processes and produced goods, technologies, labour force qualification and productivity, preferences of workers, rigidities and wage-setting procedures, and peculiarities of goods' markets, etc. Suggestions to induce more wage flexibility and decrease labour segmentation emerge from this paper.