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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%.

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  • 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(2), pages 673-694, May.
    • Handle: RePEc:wly:iecrev:v:56:y:2015:i:2:p:673-694
    DOI: 10.1111/iere.12118
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    6. Oscar Becerra, 2023. "Effects of future pension benefits on pre‐retirement labor supply: Evidence from Chile," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 198-219, February.
    7. Ozturk Goktuna, Bilge & Dayangac, Renginar, 2024. "Informality: Family ties and retirement income," Research in Economics, Elsevier, vol. 78(1), pages 73-82.
    8. Finamor, Lucas, 2024. "Labor Market Informality, Risk, and Insurance," MPRA Paper 121662, University Library of Munich, Germany.
    9. Madeira, Carlos, 2021. "The long term impact of Chilean policy reforms on savings and pensions," The Journal of the Economics of Ageing, Elsevier, vol. 19(C).
    10. Knapp, David & Lopez Garcia, Italo & Kumar, Krishna & Lee, Jinkook & Won, Jongwook, 2021. "A dynamic behavioral model of Korean saving, work, and benefit claiming decisions," The Journal of the Economics of Ageing, Elsevier, vol. 20(C).

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