## 1. Migrant Characteristics and Labor Market Outcomes

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### A. The Magnitude and Composition of Venezuelan Migration
- Over 2 million migrants have crossed the border from Venezuela and continue to join Colombia’s labor market.
- Official estimates suggest around 1.8 million Venezuelans were permanently residing in Colombia by end-2019.
- Including another 500,000 returning Colombians, the total migrant population is only slightly lower than assumed at the time of 2019 Article IV.
- Staff projections to 2025: staff envisage up to 10 million Venezuelans living abroad by 2025, with around 35 percent of the total settling in Colombia.
- Demographic and education composition:
  - Share of migrants with at least a high school degree increased from 30 to 45 percent between 2016 and 2018 and has remained broadly unchanged since.
  - As of 2019 the percent share of migrants with a high school degree is 46 vs 42 percent for locals.
  - Share with some tertiary education: 18 vs 20 percent for locals.
  - Average age: migrants 28 vs Colombians 32.

### B. Informal Job Opportunities but with Misallocation
- Labor force participation and employment outcomes:
  - About 74 percent of Venezuelans (vs 63 percent of locals) are actively seeking a job and thus form part of the economically active labor force.
  - Of these, around 16 percent have not found jobs and remain unemployed, compared with a 10 percent unemployment rate for Colombians.
  - Of migrants who find jobs, 67 percent (vs 56 percent of locals) do so in the informal sector (mostly small informal firms or self-employment).
  - A similar percentage of Venezuelans do not have access to the social security system, while the great majority of Colombians do.
  - Summary: out of every 100 Venezuelans, about 74 are seeking employment, around 62 find a job, and over two-thirds of those jobs are in the informal sector.
- Wage gaps and misallocation:
  - The average wage gap between migrants and locals is around 35 percent.
  - When controlling for demographics and location, the average wage gap is reduced to 28 percent.
  - Migrants with tertiary education earn over 50 percent less than comparable locals.
  - A Venezuelan migrant with tertiary education is 20 percent more likely to work at a small informal firm, under DANE’s informality definition, than a similarly educated local worker.
  - Differences in informality rates between Colombian and Venezuelan workers account, on average, for about a third of the overall wage gap observed.
  - Gaps affect migrants holding both Colombian and Venezuelan citizenship, suggestive of bottlenecks in validation of Venezuelan degrees and integration channels.

### C. The Role of Migrants in Explaining Aggregate Labor Market Dynamics
- Aggregate labor market context (2018–2019):
  - Nationwide unemployment rose from 9.8 to 10.5 percent in 2019.
  - Labor force participation fell from 64.0 to 63.3 percent.
  - Recent worsening trends were largely driven by underperforming sectors—especially in agriculture—in regions where migrant inflows were relatively minor.
- Mechanical contribution of migrants to aggregate outcomes:
  - Migrants have higher unemployment rates than locals (16 vs 10 percent) but represent less than five percent of the population.
  - They account for less than 0.2 percent of the unemployment increase observed in aggregate statistics.
  - Because migrants have relatively greater participation rates, they did not contribute to the fall in aggregate labor force participation between 2018 and 2019.
- Regional and regression evidence on displacement and equilibrium effects:
  - Cross-sectional regional analysis and difference-in-difference regressions (with an instrument based on driving distance between each region and Caracas) do not indicate systematic declines in male or female participation rates nor increases in unemployment in regions with greater migration inflows.
  - The driving-distance instrument explains over 80 percent of variation in migration flows during this period.
  - Departments with the greatest migrant inflows such as Norte de Santander and Magdalena did not experience above average unemployment increases.
  - Regression results summarized in Table 1 and Figure 3: evidence of causal adverse effects on participation and unemployment is mixed and not statistically significant across specifications.
- Informality and wages:
  - Migration appears to increase informality levels, particularly when measured as those not covered by social security.
  - Regions with greater migrant inflows experienced a slower improvement in formalization; the relationship is stronger when measuring informality as the share of employed who are not covered by social security.
  - There is some evidence migration placed downward pressure on wages, particularly in the lower-paying informal sector: negative (non-significant) correlation between mean wages and migration inflows, with stronger negative association in informal sector wages.
  - No discernible significant effects on the informality rates of Colombians were found.

### D. Policy Discussion: The Case for Deepening Integration Efforts
- Overall assessment:
  - Migration has had broadly a positive effect on the Colombian economy: a majority of migrants have quickly entered the workforce and found employment in the informal sector.
  - The flexibility of the informal sector limited adverse unemployment and participation effects for local workers, though migration may have moderately dampened wages in low-paying informal jobs in high-inflow regions.
  - Migrants provide a significant positive labor supply shock and likely contribute to the boom in domestic demand through consumption; increased labor supply may raise returns on domestic investment via higher aggregate demand.
- Rationale for deeper integration:
  - High wage gaps and informality rates for migrants, especially the highly-educated, highlight underutilized human capital and limit productivity gains.
  - Integrating migrants into the formal sector could produce larger future productivity growth effects from current and future migrants.
- Recommended and implemented measures in Colombia:
  - Extend temporal work permit programs and speed accreditation of Venezuelan degrees to reduce human capital misallocation and enable formal employment.
  - Past and current measures:
    - During 2017, 2018 and the first half of 2019, the government issued temporary permits (PEP), which allowed migrants to acquire formal jobs and access services. Authorities have recently re-started this program in January 2020, to cover the estimated 58 percent (over a million) migrants who are in the country irregularly (without formal legal status).
    - In 2020, the government added a new work permit (PEPFF) that allows similar access to formal employment and services for other migrants; this will be accessible to workers under irregular migratory status and will require sponsorship from a formal employer.
    - The government is conducting efforts to accelerate the validation of Venezuelan degrees for easing integration of professional migrants and high-school educated migrants seeking to continue university studies in Colombia.
  - These initiatives should be promptly implemented to obtain the economic benefits of migration and may serve as a model for other countries in the region.

### Colombia’s exchange rate depreciated sharply following a large shock to oil prices
- Exchange rate and oil price dynamics:
  - The Colombian peso is a commodity currency with a strong negative correlation with its terms of trade (Casas and others, 2017).
  - The peso "mirrored the oil price historically", with a sharp depreciation against the U.S. dollar following the collapse of the oil price in 2014-5.
  - In real effective terms, the peso depreciated by approximately 25 percent between 2014 and 2019.
  - Trading partners’ imports decreased over the same period.
  - Early 2020 repeat dynamics:
    - In the week following the surprise breakup of the OPEC+ alliance in early March, crude oil prices fell sharply by close to 50 percent.
    - The peso depreciated by 11 percent against the dollar in that week, bringing the cumulative depreciation above 20 percent for 2020.
- Export and import volume and value responses (2014–2019 and earlier episodes):
  - Export volumes:
    - Export volumes grew by 7 percent since 2016, indicating a lagged response to the 2014-16 depreciation.
    - No acceleration relative to earlier in the decade; export performance was "disappointing".
    - The estimated decline in cumulative contributions from trading partner growth between 2010-2014 and 2015-2019 is approximately equal to the contribution from exchange rate changes in the latter period.
    - Export volumes underperformed model fitted values in 2016-18.
  - Non-traditional exports:
    - Between 2008 and 2015, non-traditional goods exports declined by about 3 percent per year.
    - Export growth in these goods has subsequently averaged 3 percent per year.
    - Real depreciation may have helped reverse the decline in non-traditional exports, albeit modestly and with a lag; weak regional demand held them back.
  - Imports:
    - Following strong growth, import volumes contracted in 2015, 2016, and 2017 by a cumulative 12 percent before rebounding in 2018.
    - In nominal US dollar terms, imports declined by one-third cumulatively in 2015-6 as prices also declined.
    - Depreciation likely reduced imports through expenditure switching and income effects, but declining aggregate demand (slower GDP growth) also contributed.
- Export and import values (currency effects):
  - Goods and services export values measured in dollars fell by 19 percent between 2014 and 2019 owing to the fall in commodity prices.
  - In pesos, exports rose by 33 percent since 2014 — illustrating the shock-absorber role of a flexible exchange rate in cushioning negative shocks to domestic profitability and fiscal receipts in domestic currency terms.
- Elasticity framework and Colombia-specific estimates:
  - Elasticity formulation (trade balance semi-elasticity to exchange rate) is presented in the standard elasticity model; the expression accounts for volume elasticities (휂_q) and price pass-through elasticities (휂_p) for traditional exports (T), non-traditional exports (N), and imports (M).
  - Colombia: Volume and Price Elasticities with Respect to the Exchange Rate (as reported)
    - Traditional exports: 휂்௩ =0 , 휂்௣ =1
    - Non-traditional exports: 휂ே௩ = 0.1 , 휂ே௣ = 0.5
    - Imports: 휂ெ௩ = −0.6 , 휂ெ௣ =0.6
  - Interpretation and implications:
    - Traditional exports (oil and other commodities) are priced in foreign currency; depreciation raises commodity exports in pesos but has no effect in volumes or dollar terms (휂்௩ =0 and 휂்௣ =1).
    - For non-traditional exports, Colombian firms tend to allow prices in pesos to rise by about half the amount of depreciation (휂ே௣ = 0.5) after about 2 years; incomplete pass-through contributes to low volume responses (휂ே௩ = 0.1).
    - Import volumes are relatively responsive (휂ெ௩ = −0.6) while pass-through to peso prices is similar (휂ெ௣ =0.6), so value of imports in pesos tends not to decrease after depreciation (and may rise immediately), but the dollar import bill partially declines.
    - Invoicing in dollars (almost all of Colombia’s exports, including manufacturing) creates a dominant currency pricing environment with sticky US dollar prices, reducing short-run export volume responsiveness.
    - Trade costs (non-tariff barriers, high transportation costs, slow customs) blunt export volume responses by encouraging exporters to raise prices/margins rather than quantities.
    - Foreign content in manufacturing exports is about one fifth, placing Colombia below Mexico and in line with Brazil, Chile, and Peru.
- Quantitative trade-balance response and channels:
  - A depreciation of 10 percent would improve the trade balance by 1.3 percentage points of GDP (i.e., a semi-elasticity of 0.13), with limited contributions from export volumes.
  - The estimated parameters imply rises attributable mainly to peso export prices; measured in dollars, most trade balance gains come through import compression:
    - In pesos: improvement related to 푆் plus 0.6푆ே with rises attributable mainly to peso export prices, and no contribution from peso import bills.
    - In dollars: improvement roughly equals −0.4푆ே + 푆ெ, with dollar export values contracting because dollar price reductions outweigh volume increases.
- Implications for 2020 and policy recommendations:
  - Near-term implications (Covid-19 and 2020 outlook):
    - Global commodity prices and trading-partner growth are forecast to be substantially lower; the peso weakened alongside commodity prices in early 2020.
    - A weaker peso would not substantially raise export volumes but should cushion export receipts through higher prices measured in pesos.
    - Import volume growth is expected to moderate as a result of the depreciation and slower domestic GDP growth.
  - Structural reforms to increase resilience and external adjustment:
    - Lower transport costs.
    - Streamline non-tariff barriers.
    - Shift product mix away from commodities toward goods with more elastic demand (e.g., manufactures) to raise export volume responsiveness.
    - These reforms would increase the relative role of export volumes and reduce reliance on import compression and domestic demand contraction for adjustment to negative external shocks, and would help reduce Colombia’s structural current account deficit over the medium term.

*Source: IMF staff report chapter "1. Migrant Characteristics and Labor Market Outcomes" (April 2, 2020).*

### 1. Migrant Characteristics and Labor Market Outcomes ________________________________ 4

### 1. Migrant Characteristics and Labor Market Outcomes

### A. The Magnitude and Composition of Venezuelan Migration
- Over 2 million migrants have crossed the border from Venezuela and continue to join Colombia’s labor market.
- Official estimates suggest around 1.8 million Venezuelans were permanently residing in Colombia by end-2019.
- Including another 500,000 returning Colombians, the total migrant population is only slightly lower than assumed at the time of 2019 Article IV.
- Staff projections to 2025: staff envisage up to 10 million Venezuelans living abroad by 2025, with around 35 percent of the total settling in Colombia.
- Demographic and education composition:
  - Share of migrants with at least a high school degree increased from 30 to 45 percent between 2016 and 2018 and has remained broadly unchanged since.
  - As of 2019 the percent share of migrants with a high school degree is 46 vs 42 percent for locals.
  - Share with some tertiary education: 18 vs 20 percent for locals.
  - Average age: migrants 28 vs Colombians 32.

### B. Informal Job Opportunities but with Misallocation
- Labor force participation and employment outcomes:
  - About 74 percent of Venezuelans (vs 63 percent of locals) are actively seeking a job and thus form part of the economically active labor force.
  - Of these, around 16 percent have not found jobs and remain unemployed, compared with a 10 percent unemployment rate for Colombians.
  - Of migrants who find jobs, 67 percent (vs 56 percent of locals) do so in the informal sector (mostly small informal firms or self-employment).
  - A similar percentage of Venezuelans do not have access to the social security system, while the great majority of Colombians do.
  - Summary: out of every 100 Venezuelans, about 74 are seeking employment, around 62 find a job, and over two-thirds of those jobs are in the informal sector.
- Wage gaps and misallocation:
  - The average wage gap between migrants and locals is around 35 percent.
  - When controlling for demographics and location, the average wage gap is reduced to 28 percent.
  - Migrants with tertiary education earn over 50 percent less than comparable locals.
  - A Venezuelan migrant with tertiary education is 20 percent more likely to work at a small informal firm, under DANE’s informality definition, than a similarly educated local worker.
  - Differences in informality rates between Colombian and Venezuelan workers account, on average, for about a third of the overall wage gap observed.
  - Gaps affect migrants holding both Colombian and Venezuelan citizenship, suggestive of bottlenecks in validation of Venezuelan degrees and integration channels.

### C. The Role of Migrants in Explaining Aggregate Labor Market Dynamics
- Aggregate labor market context (2018–2019):
  - Nationwide unemployment rose from 9.8 to 10.5 percent in 2019.
  - Labor force participation fell from 64.0 to 63.3 percent.
  - Recent worsening trends were largely driven by underperforming sectors—especially in agriculture—in regions where migrant inflows were relatively minor.
- Mechanical contribution of migrants to aggregate outcomes:
  - Migrants have higher unemployment rates than locals (16 vs 10 percent) but represent less than five percent of the population.
  - They account for less than 0.2 percent of the unemployment increase observed in aggregate statistics.
  - Because migrants have relatively greater participation rates, they did not contribute to the fall in aggregate labor force participation between 2018 and 2019.
- Regional and regression evidence on displacement and equilibrium effects:
  - Cross-sectional regional analysis and difference-in-difference regressions (with an instrument based on driving distance between each region and Caracas) do not indicate systematic declines in male or female participation rates nor increases in unemployment in regions with greater migration inflows.
  - The driving-distance instrument explains over 80 percent of variation in migration flows during this period.
  - Departments with the greatest migrant inflows such as Norte de Santander and Magdalena did not experience above average unemployment increases.
  - Regression results summarized in Table 1 and Figure 3: evidence of causal adverse effects on participation and unemployment is mixed and not statistically significant across specifications.
- Informality and wages:
  - Migration appears to increase informality levels, particularly when measured as those not covered by social security.
  - Regions with greater migrant inflows experienced a slower improvement in formalization; the relationship is stronger when measuring informality as the share of employed who are not covered by social security.
  - There is some evidence migration placed downward pressure on wages, particularly in the lower-paying informal sector: negative (non-significant) correlation between mean wages and migration inflows, with stronger negative association in informal sector wages.
  - No discernible significant effects on the informality rates of Colombians were found.

### D. Policy Discussion: The Case for Deepening Integration Efforts
- Overall assessment:
  - Migration has had broadly a positive effect on the Colombian economy: a majority of migrants have quickly entered the workforce and found employment in the informal sector.
  - The flexibility of the informal sector limited adverse unemployment and participation effects for local workers, though migration may have moderately dampened wages in low-paying informal jobs in high-inflow regions.
  - Migrants provide a significant positive labor supply shock and likely contribute to the boom in domestic demand through consumption; increased labor supply may raise returns on domestic investment via higher aggregate demand.
- Rationale for deeper integration:
  - High wage gaps and informality rates for migrants, especially the highly-educated, highlight underutilized human capital and limit productivity gains.
  - Integrating migrants into the formal sector could produce larger future productivity growth effects from current and future migrants.
- Recommended and implemented measures in Colombia:
  - Extend temporal work permit programs and speed accreditation of Venezuelan degrees to reduce human capital misallocation and enable formal employment.
  - Past and current measures:
    - During 2017, 2018 and the first half of 2019, the government issued temporary permits (PEP), which allowed migrants to acquire formal jobs and access services. Authorities have recently re-started this program in January 2020, to cover the estimated 58 percent (over a million) migrants who are in the country irregularly (without formal legal status).
    - In 2020, the government added a new work permit (PEPFF) that allows similar access to formal employment and services for other migrants; this will be accessible to workers under irregular migratory status and will require sponsorship from a formal employer.
    - The government is conducting efforts to accelerate the validation of Venezuelan degrees for easing integration of professional migrants and high-school educated migrants seeking to continue university studies in Colombia.
  - These initiatives should be promptly implemented to obtain the economic benefits of migration and may serve as a model for other countries in the region.

*Source: IMF staff report chapter "1. Migrant Characteristics and Labor Market Outcomes" (April 2, 2020).*

### 1.      Colombia’s exchange rate depreciated sharply following a large shock to oil prices in

### 1colea2020002 - 1.      Colombia’s exchange rate depreciated sharply following a large shock to oil prices in

### Exchange rate and oil price dynamics
- The Colombian peso is a commodity currency with a strong negative correlation with its terms of trade (Casas and others, 2017).
- The peso "mirrored the oil price historically", with a sharp depreciation against the U.S. dollar following the collapse of the oil price in 2014-5.
- In real effective terms, the peso depreciated by approximately 25 percent between 2014 and 2019.
- Trading partners’ imports decreased over the same period.
- Early 2020 repeat dynamics:
  - In the week following the surprise breakup of the OPEC+ alliance in early March, crude oil prices fell sharply by close to 50 percent.
  - The peso depreciated by 11 percent against the dollar in that week, bringing the cumulative depreciation above 20 percent for 2020.

### Export and import volume and value responses (2014–2019 and earlier episodes)
- Export volumes:
  - Export volumes grew by 7 percent since 2016, indicating a lagged response to the 2014-16 depreciation.
  - No acceleration relative to earlier in the decade; export performance was "disappointing".
  - The estimated decline in cumulative contributions from trading partner growth between 2010-2014 and 2015-2019 is approximately equal to the contribution from exchange rate changes in the latter period.
  - Export volumes underperformed model fitted values in 2016-18.
- Non-traditional exports:
  - Between 2008 and 2015, non-traditional goods exports declined by about 3 percent per year.
  - Export growth in these goods has subsequently averaged 3 percent per year.
  - Real depreciation may have helped reverse the decline in non-traditional exports, albeit modestly and with a lag; weak regional demand held them back.
- Imports:
  - Following strong growth, import volumes contracted in 2015, 2016, and 2017 by a cumulative 12 percent before rebounding in 2018.
  - In nominal US dollar terms, imports declined by one-third cumulatively in 2015-6 as prices also declined.
  - Depreciation likely reduced imports through expenditure switching and income effects, but declining aggregate demand (slower GDP growth) also contributed.

- Export and import values (currency effects):
  - Goods and services export values measured in dollars fell by 19 percent between 2014 and 2019 owing to the fall in commodity prices.
  - In pesos, exports rose by 33 percent since 2014 — illustrating the shock-absorber role of a flexible exchange rate in cushioning negative shocks to domestic profitability and fiscal receipts in domestic currency terms.

### Elasticity framework and Colombia-specific estimates
- Elasticity formulation (trade balance semi-elasticity to exchange rate) is presented in the standard elasticity model; the expression accounts for volume elasticities (휂_q) and price pass-through elasticities (휂_p) for traditional exports (T), non-traditional exports (N), and imports (M).
- Colombia: Volume and Price Elasticities with Respect to the Exchange Rate (as reported)
  - Traditional exports: 휂்௩ =0 , 휂்௣ =1
  - Non-traditional exports: 휂ே௩ = 0.1 , 휂ே௣ = 0.5
  - Imports: 휂ெ௩ = −0.6 , 휂ெ௣ =0.6
- Interpretation and implications:
  - Traditional exports (oil and other commodities) are priced in foreign currency; depreciation raises commodity exports in pesos but has no effect in volumes or dollar terms (휂்௩ =0 and 휂்௣ =1).
  - For non-traditional exports, Colombian firms tend to allow prices in pesos to rise by about half the amount of depreciation (휂ே௣ = 0.5) after about 2 years; incomplete pass-through contributes to low volume responses (휂ே௩ = 0.1).
  - Import volumes are relatively responsive (휂ெ௩ = −0.6) while pass-through to peso prices is similar (휂ெ௣ =0.6), so value of imports in pesos tends not to decrease after depreciation (and may rise immediately), but the dollar import bill partially declines.
  - Invoicing in dollars (almost all of Colombia’s exports, including manufacturing) creates a dominant currency pricing environment with sticky US dollar prices, reducing short-run export volume responsiveness.
  - Trade costs (non-tariff barriers, high transportation costs, slow customs) blunt export volume responses by encouraging exporters to raise prices/margins rather than quantities.
  - Foreign content in manufacturing exports is about one fifth, placing Colombia below Mexico and in line with Brazil, Chile, and Peru.

### Quantitative trade-balance response and channels
- A depreciation of 10 percent would improve the trade balance by 1.3 percentage points of GDP (i.e., a semi-elasticity of 0.13), with limited contributions from export volumes.
- The estimated parameters imply rises attributable mainly to peso export prices; measured in dollars, most trade balance gains come through import compression:
  - In pesos: improvement related to 푆் plus 0.6푆ே with rises attributable mainly to peso export prices, and no contribution from peso import bills.
  - In dollars: improvement roughly equals −0.4푆ே + 푆ெ, with dollar export values contracting because dollar price reductions outweigh volume increases.

### Implications for 2020 and policy recommendations
- Near-term implications (Covid-19 and 2020 outlook):
  - Global commodity prices and trading-partner growth are forecast to be substantially lower; the peso weakened alongside commodity prices in early 2020.
  - A weaker peso would not substantially raise export volumes but should cushion export receipts through higher prices measured in pesos.
  - Import volume growth is expected to moderate as a result of the depreciation and slower domestic GDP growth.
- Structural reforms to increase resilience and external adjustment:
  - Lower transport costs.
  - Streamline non-tariff barriers.
  - Shift product mix away from commodities toward goods with more elastic demand (e.g., manufactures) to raise export volume responsiveness.
  - These reforms would increase the relative role of export volumes and reduce reliance on import compression and domestic demand contraction for adjustment to negative external shocks, and would help reduce Colombia’s structural current account deficit over the medium term.

*Sources: Banco de la República; DANE; IMF staff calculations; Casas and others (2017); Lanau & Toscani (2018); Bussiere and others (2018); Behar and Fouejieu (2018); Consejo Privado de Competitividad (2019).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1colea2020002.pdf_