The aim of this paper is to analyze and calculate the resource allocation effects of a substitution of social security payments by a value added tax in the Chilean economy. The framework chosen is a multisectorial general equilibrium model. This allows us to measure the sectoral employment and production changes that stem from this policy as well as its impact on welfare. In the evaluation it is shown how the presence of non-rigid supplies of productive factors implies that the increase in the value added tax has a negative effect on employment and welfare. This fact, together with the use of actual social security payments rates instead of the legal ones, and the general equilibrium framework chosen, result in less optimistic effects on employment, as compared to previous studies. Nevertheless, the total change in employment is still quite significant. Another interesting result is that sectoral changes in production and employment are not in the same direction as those generated by the trade liberalization that is taking place in the Chilean economy. As a byproduct of this study, an implicit general equilibrium elasticity of urban demand for labor is calculated.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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