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From severance pay to self-insurance: Effects of severance payments savings accounts in Colombia

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  • Adriana D. Kugler

Abstract

In 1990 Colombia replaced its traditional system of severance payments with a new system of severance payments savings accounts (SPSAs). Although severance payments often are justified on the grounds that they provide insurance against earnings loss, they also increase costs for employers and distort employment decisions. The impact of severance payments depends largely on how much of the costs to employers can be shifted to workers. The theoretical analysis in this paper shows that, in contrast to a traditional system of severance payments, the system of SPSAs facilitates the shifting of severance payments costs to workers in the form of lower wages. Empirical results using the Colombian National Household Surveys indicate that the introduction of SPSAs shifted around 80% of the total severance payments contributions to wages and had a positive effect on weekly hours. Results using the 1997 Colombian Living Standards Measurement Survey suggest that, although SPSAs in part replaced employer insurance with self-insurance, SPSAs continue to play a consumption smoothing role for the non-employed.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 592.

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Date of creation: Dec 2001
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Handle: RePEc:upf:upfgen:592

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Keywords: Distortions; tax shifting; unemployment insurance; consumption smoothing; crowding out;

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Cited by:
  1. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia," Working Papers 134, Barcelona Graduate School of Economics.
  2. Chacaltana, Juan, 2009. "Economic implications of labour and labour-related laws on MSEs : a quick review of the Latin American experience," ILO Working Papers 433276, International Labour Organization.
  3. Nagler, Paula, 2013. "How unemployment insurance savings accounts affect employment duration: Evidence from Chile," MERIT Working Papers 039, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  4. repec:dgr:unumer:2013039 is not listed on IDEAS
  5. Martin Schindler & Mariya Aleksynska, 2011. "Labor Market Regulations in Low-, Middle- and High-Income Countries: A New Panel Database," IMF Working Papers 11/154, International Monetary Fund.
  6. repec:idb:brikps:22058 is not listed on IDEAS

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