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Pension Design With A Large Informal Labor Market: Evidence From Chile

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  • Clement Joubert

Abstract

This article investigates the fiscal and welfare trade‐offs involved in designing a pension system when workers can avoid contributing by working informally. Using a life‐cycle model of labor supply and saving decisions, I structurally estimate preferences and earnings opportunities in the formal and informal sectors using data on Chilean households. I find limited support for formal jobs rationing. Instead, mandatory pension contributions significantly encourage informality. Policy experiments show that Chile could lower minimum pension spending by 23%—while guaranteeing the same income to retirees—if the minimum pension's implicit tax rate was increased to 60%.

Suggested Citation

  • Clement Joubert, 2015. "Pension Design With A Large Informal Labor Market: Evidence From Chile," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 673-694, May.
  • Handle: RePEc:wly:iecrev:v:56:y:2015:i::p:673-694
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    File URL: http://hdl.handle.net/10.1111/iere.12118
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    Citations

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    Cited by:

    1. Javier Olivera, 2014. "The effects of a multi-pillar pension reform: The case of Peru," Working Papers 2014-21, Peruvian Economic Association.
    2. Rodrigo Ceni, 2014. "Informality and government enforcement in Latin America," Documentos de Trabajo (working papers) 14-21, Instituto de Economia - IECON.
    3. Alessandro Di Nola & Georgi Kocharkov & Aleksandar Vasilev, 2017. "Productivity, Taxation and Evasion: An Analysis of the Determinants of the Informal Economy," Bulgarian Economic Papers (www.bep.bg) bep-2017-04, St Kliment Ohridski University of Sofia, Faculty of Economics and Business Administration / Center for Economic Theories and Policies, revised Apr 2017.
    4. Rodrigo Ceni, 2014. "Social security schemes and labor supply in the formal and informal sectors," Documentos de Trabajo (working papers) 14-12, Instituto de Economia - IECON.
    5. Brian Clark & Clément Joubert & Arnaud Maurel, 2017. "The career prospects of overeducated Americans," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-29, December.
    6. Agustín Arias & Juan Guerra-Salas, 2019. "Immigration in Emerging Countries: A Macroeconomic Perspective," Working Papers Central Bank of Chile 857, Central Bank of Chile.
    7. Kathleen McKiernan, 2019. "Social Security Reform in the Presence of Informality," 2019 Meeting Papers 389, Society for Economic Dynamics.
    8. Oscar Becerra, 2018. "Effects of Future Pension Benefits on Pre-retirement Labor Supply: Evidence from Chile," Documentos CEDE 016965, Universidad de los Andes - CEDE.
    9. Marcela Parada-Contzen, 2020. "Crowding-out in savings decisions, portfolio default adoption and home ownership: evidence from the Chilean retirement system," Review of Economics of the Household, Springer, vol. 18(2), pages 543-569, June.
    10. Kathleen McKiernan, 2018. "Welfare Impact of Social Security Reform: The Case of Chile in 1981," 2018 Meeting Papers 253, Society for Economic Dynamics.
    11. Di Nola Alessandro & Kocharkov Georgi & Vasilev Aleksandar, 2019. "Envelope wages, hidden production and labor productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-30, June.
    12. Italo López García & Andrés Otero, 2017. "The Effects of Means-tested, Noncontributory Pensions on Poverty and Well-being: Evidence from the Chilean Pension Reforms," Working Papers wp358, University of Michigan, Michigan Retirement Research Center.
    13. Sergi Jiménez-Martín, 2014. "The incentive effects of minimum pensions," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-84, August.
    14. Damilola Olajide & Maria Laura Alzua & Ana Dammert & Olusegun Sotola & Thompson Ayodele, 2016. "Randomized Evaluation of the Unconditional Cash Transfer Scheme for the Elderly in Ekiti State Nigeria," Working Papers PIERI 2016-21, PEP-PIERI.
    15. Shiferaw, Admasu & Bedi, Arjun S. & Söderbom, Mans & Alemu, Getnet, 2017. "Social Insurance Reform and Labor Market Outcomes in Sub-Saharan Africa: Evidence from Ethiopia," IZA Discussion Papers 10903, Institute of Labor Economics (IZA).
    16. Iain W. Long & Vito Polito, 2017. "Job Search, Unemployment Protection and Informal Work in Advanced Economies," CESifo Working Paper Series 6763, CESifo.
    17. Maria Laura Alzua & Natalia Cantet & Ana Dammert & Damilola Olajide, 2019. "Welfare Effects of a Non-Contributory Old Age Pension: Experimental Evidence for Ekiti State, Nigeria," Working Papers PIERI 2019-15, PEP-PIERI.
    18. Rodrigo Ceni, 2017. "Pension schemes and labor supply in the formal and informal sector," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-29, December.

    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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