| Abstract: |
One of the most complex social policy issues that developing countries
commonly face is the question of how they can protect the unemployed. However,
the analysis of unemployment insurance (UI) in developing economies with large
informal sectors is in its infancy, with few papers providing solid empirical
evidence. This paper makes several contributions to the development
literature: first, it applies Chetty’s 2008 landmark work on UI to a
developing country (Chile) and shows that the moral hazard effects expected by
policy makers, who designed the system are minimal, while liquidity effects
were entirely neglected. By means of an RDD, it analyses the Chilean UI system
using a large sample of administrative data, which allows for an extremely
precise analysis of how the system is working, thus providing invaluable
empirical lessons for other developing countries. Second, this paper shows
that it is not enough merely to quantify an effect such as moral hazard, but
to understand its causes and implications. An extended unemployment period
stemming from moral hazard has extremely different welfare implications than
one stemming from a liquidity effect and should therefore result in different
policy recommendations. Third, our results also highlight that the Chilean UI
system is regressive overall, as it protects workers with higher income levels
and more stable jobs much more than it protects vulnerable workers, who are
also much more likely to become unemployed. Fourth, this paper shows that it
is essential that developing countries should take into account the specific
labour market and macroeconomic context when designing social policies as the
incentives embedded in such a policy may not be enough to compensate for the
limitations that arise from the structure of a labour market. This research
thus has implications for many developing countries, which may also be
considering the implementation of some form of UI and/or the partial or
complete replacement of existing severance pay legislation with continuous
contributions to individual savings accounts, as recommended by the
international development institutions. Furthermore, even high-income
developing countries, such as Chile, cannot rely on unemployment insurance
alone when it comes to protecting workers from the fallout of an economic
crisis or rapid changes in the labour market that generate unemployment. Any
UI system must also be linked to other social protection mechanisms to provide
complimentary benefits to workers with precarious jobs. |