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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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    1. Gong, Xiaodong & Van Soest, Arthur & Villagomez, Elizabeth, 2004. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," Economic Development and Cultural Change, University of Chicago Press, vol. 53(1), pages 1-36, October.
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    4. Sergi Jiménez-Martín & Alfonso R. Sánchez Martín, 2007. "An evaluation of the life cycle effects of minimum pensions on retirement behavior," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 923-950.
    5. Christopher Taber & Rune Vejlin, 2012. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," 2012 Meeting Papers 566, Society for Economic Dynamics.
    6. Dickens, William T & Lang, Kevin, 1985. "A Test of Dual Labor Market Theory," American Economic Review, American Economic Association, vol. 75(4), pages 792-805, September.
    7. Gindling, T H, 1991. "Labor Market Segmentation and the Determination of Wages in the Public, Private-Formal, and Informal Sectors in San Jose, Costa Rica," Economic Development and Cultural Change, University of Chicago Press, vol. 39(3), pages 584-605, April.
    8. Gomes, Francisco J & Michaelides, Alexander & Polkovnichenko, Valery, 2005. "Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts," CEPR Discussion Papers 4852, C.E.P.R. Discussion Papers.
    9. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
    10. Robalino, David A. & Zylberstajn, Eduardo & Zylberstajn, Helio & Afonso, Luis Eduardo, 2008. "An ex-ante evaluation of the impact of social insurance policies on labor supply in Brazil : the case for explicit over implicit redistribution," Social Protection and Labor Policy and Technical Notes 90342, The World Bank.
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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. 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.
    3. Oscar Becerra, 2018. "Effects of Future Pension Benefits on Pre-retirement Labor Supply: Evidence from Chile," Documentos CEDE 016965, Universidad de los Andes - CEDE.
    4. Kathleen McKiernan, 2018. "Welfare Impact of Social Security Reform: The Case of Chile in 1981," 2018 Meeting Papers 253, Society for Economic Dynamics.
    5. 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.
    6. 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 for the Study of Labor (IZA).
    7. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0085-1 is not listed on IDEAS

    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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