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Pension design with a large informal labor market: evidence from Chile

  • Clement Joubert

    (UNC Chapel Hill)

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    Pension design in developing countries must take into account that both contributory and non-contributory pension schemes can affect incentives to work informally, with important fiscal consequences. The extent of this problem depends on the nature of the informal labor market: residual or competitive? Linked administrative and self-reported data from Chile on employment histories, earnings and savings are used to estimate a dynamic behavioral model in which a couple faces a labor market composed of a covered sector, that is subject to mandatory pension contributions, and an uncovered sector of self-employed and informal jobs. The estimated model is used to determine the extent of labor market segmentation, and whether mandatory pension contributions and minimum pension benefits could reduce the pension system's coverage rate and crowd out private savings. Then, an expanded safety net, recently implemented in Chile as a response to low pension coverage rates, is introduced into the model to quantify its effects on labor supply, savings and the government budget.

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    File URL: https://economicdynamics.org/meetpapers/2011/paper_1136.pdf
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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1136.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:1136
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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    1. 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.
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    5. 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.
    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.
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    8. 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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