PENSION DESIGN WITH A LARGE INFORMAL LABOR MARKET: EVIDENCE FROM CHILE. (May 2015)

• Record Type: Journal Article
• Authors: Joubert, Clement
• Is Part Of: International economic review. Volume 56:Number 2(2015:May)
• Page Start: 673
• Page End: 694
• Publication Date: 2015-05
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1111/iere.12118
• Languages: English
• ISSNs: 0020-6598

Abstract

<abstract abstract-type="main"> <title> <x xml:space="preserve">Abstract</x> </title> <p>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%.</p> </abstract>