Wage setting in the Colombian manufacturing industry

© 2016 The European Bank for Reconstruction and Development. We show that wage setting in the Colombian manufacturing industry is not fundamentally driven by labour productivity in contrast to the standard theoretical prediction. On the contrary, internal institutional arrangements - payroll taxation, the minimum wage or the price wedge between manufacturing and consumption prices - together with a higher exposure to international trade - connected to the increasing globalization of the Colombian economy - appear as the crucial drivers. These findings lead us to question the political strategy followed to attain cost competitiveness in a context of growing exposure to international trade. Implementation of a true wage bargaining system is suggested as a critical policy target to prevent the disruptive economic consequences of the current wage-setting mechanism and help rebalance the trade deficit.