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Pension Design with a Large Informal Labor Market: Evidence from Chile

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  • Joubert, Clement

    () (University of North Carolina, Chapel Hill)

Abstract

This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guaranteeing the same level of income in retirement, by increasing the rate at which the benefits taper off.

Suggested Citation

  • Joubert, Clement, 2014. "Pension Design with a Large Informal Labor Market: Evidence from Chile," IZA Discussion Papers 8211, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8211
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    References listed on IDEAS

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    1. 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.
    2. 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.
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    More about this item

    Keywords

    informality; pensions;

    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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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