Credit, Labor Informality and Firm Performance in Colombia

This paper explores the links between labor formality, access to credit and firm performance in Colombia using Annual Manufacturing Survey data for the period 2000-2009. A significant though small relationship is found between access to credit and informality. The results suggest that a 10 percent increase in the ratio of credit to sectoral output increases labor formality between 0. 76 and 1. 14 percentage points. This effect vanishes as a firm's financial constraint increases. The paper also reports a strong correlation between labor formality and firm performance measured as output and employment growth. A one percentage point increase in labor formality is associated with an 8. 5 percent increase in output and an 11 percent increase in employment growth.