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Labor Markets Core Course 2013: Social insurance & Labor Markets

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  • 1. How to Protect Workers while Creating Good JobsSocial Insurance and Labor MarketsDavid A. Robalino (World Bank and IZA)
  • 2. Social Insurance andLabor Markets: how toProtect Workers whileCreating Good JobsMarkus FrolichDavid KaplanCarmen PagesJamele RigoliniDavid RobalinoOxfor Univesity Press
  • 3. Old-age pensionsHealth InsuranceUnemploymentinsuranceDisability pensionsLife insuranceWorking conditionsMinimum wages
  • 4. Why do we care?
  • 5. Why do we care?• Myopia:Lack or biased informationLimited cognitive skillsPsychological problems• Imperfections in labor markets• Imperfections in capital markets• Imperfection in insurance markets (adverse selection)
  • 6. What are the problems?• Low coverage• Design problems that distort labor markets:Lower participation ratesLower employment levelsHigher informality
  • 7. COVERAGE
  • 8. Coverage is discontinuousArgentinaChileUruguayContribution Density (% of Active Life)0 22.5 45 67.5 90Lowest quintile Highest quintile
  • 9. Why ?
  • 10. Why ?• Many are self-employed• Unemployment• Labor mobility• Low income individuals cant afford contributions• Low productivity firms cant afford pay-roll taxes• Evasion ?
  • 11. Unemployment is an issueVENURUPERPARPANNICHONGUASLVECUDOMCRCCOLCHIBRABOLARG02468101214160 1 2 3 4 5 6 7Inflow rates (% employed)Unemploymentduration(months)Combinationsconsistent with a5% unemploymentrate.
  • 12. Unemployment risks arehigher in the informal sector...01234567Apr-02Aug-02Dec-02Apr-03Aug-03Dec-03Apr-04Aug-04Dec-04Apr-05Aug-05Dec-05Apr-06Aug-06Dec-06Apr-07ProbabilityofUnemployment(%).Informal W (3.8%)Informal SE (2.85%)Informal E (1.05%)Formal W (1.11%)Brazil
  • 13. There is also considerablemobility between jobsAnnualTransition RatesSelf-employed Informal FormalSelf-employed -- 0.53 0.35Informal 0.29 -- 0.47Formal 0.25 0.43 --Mexico
  • 14. Value added per workerFirms rankingMinimum cost of laborExcludedMOROCCOTax-wedge reduces formal employment(0.1-0.5 elasticity).... low productivity firms self-select in theinformal sector
  • 15. What has been thesolution?
  • 16. What has been thesolution?• Creating specific programs for groups whichare not covered...• ... often, non-contributory
  • 17. Programs have been effective in expandingcoverage, but bring other problems...0255075100Q1 Q2 Q3 Q4 Q5Contributory Non-contributoryPension Coverage in Bolivia
  • 18. LABOR MARKETDISTORTIONS
  • 19. How the SI systemaffects outcomesTAXESSUBSIDIESExplicitImplicitExplicitPay-rollNon-contributoryinsuranceContributions notlinked to benefitsBehaviorsof employers andworkersHow do SI programs affect labor markets ?Workers do not valuebenefits "in full"
  • 20. Example of implicitredistribution in UB programsBalanceintheindividualaccount(%ofwage)-150-112.5-75-37.5037.575Months1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 164% contribution rate50% replacementrate during 3months
  • 21. Imagine...PLAN MEMBERSLOW RISKHIGH RISKUnemployment rate = 3%Duration = 3 monthsREPLACEMENT RATE = 60%CONTRIBUTION RATE = 4%Unemployment rate = 10%
  • 22. 4 mesesde salario1.8 meses1.8 meses1 mes desalario100 months of contributionsThree monthsof benefitsLOW RISKHIGH RISK
  • 23. Implicit taxes can besignificant...
  • 24. What is the evidence?Employmentlevel90100110120Tax wedge0.1 0.2 0.3
  • 25. Tax-wedgeThe difference between the total cost of labor and take-home payTax Wedge = W . (1+taxE) - W. (1-taxW) - Value SS benefitsW: wagetaxE: taxes paid by employer (social security contributions)taxW: taxes paid by workers
  • 26. What is the evidence?Non-contributory programs provideincentives for informal work (Mexico andColombia)8-20% of netformalemploymentcreationWorkers valuation of mandatorybenefits (health care) affects the choicebetween formal and informal jobs(Uruguay)Transfers (social pensions) canreduce formal employment andparticipation (Chile)- 4.1% formal participationof workers older than 40Higher propensity of womenwith children to drop out oflabor market-5 % amongplan memberswith nochildren
  • 27. Mandatory savings rates and default portfolios do not account fordifferent “preferences” and observable characteristics that matter(e.g., labor income).ChileDefaultAverage
  • 28. Unemployment insurance can affect unemployment rates and theshare of formal, informal and self-employment (Brazil)DesempleoEmpleo FomalEmpleo InformalCuenta Propia-0.05 -0.038 -0.025 -0.013 0 0.013
  • 29. Policy Framework toGuide Reforms
  • 30. Recommendations atfive levels• Integration of SI programs• Bundle and level of SI benefits• Redistribution• Financing and tax-wedges• Incentives for enrollment
  • 31. Integrate programs• Have one SI system open to all workers• This can be done by "shutting-down" schemesand re-enrolling workers ...• ... or closing schemes to new entrants, whowould enroll in a national scheme
  • 32. Review the bundle of SIbenefits• Focus on pensions (old-age, disability,survivorship) health insurance, andunemployment insurance• Give more choice to individuals in defining thelevel of benefits:Define a basic bundle of benefits as a default"Nudge" individuals to update their defaults and provideinformation/guidance
  • 33. Make redistributionexplicit and well targeted• Link contributions (including from employers) to benefits• Identify the share of the cost of the bundle of SI benefitsthat will be subsidized at each level of income (could beuniversal):Subsidies can match the contributions or top-up thebenefits of plan members...... there has to be a "smooth" decline in the subsidybased on incomeIncome can be inferred through proxy means tests (PMT)
  • 34. Income LevelBenefitSubsidiesVoluntary contributions
  • 35. Income LevelBenefitSubsidiesContributionsVoluntary contributions
  • 36. Income LevelBenefitSubsidiesVoluntary contributions
  • 37. Reduce tax-wedges• Having more individual choice in defining the bundleof SI benefits can help...• Also linking contributions to benefits and financingredistribution through general revenues:Reallocate expenditures (e.g., subsidy reform)And/or increase other taxes (e.g., consumption, property, wealth)• Consider exemptions for firms below a given level ofproductivity
  • 38. Incentives to enroll• With large informal sectors it is not possible to enforce enrollment... ithas to be voluntary• Administrative processes must be simple• Rely on "aggregators" that operate in small villages and markets, aswell as through cooperatives• Rely on mobile technology• Run information campaigns• Provide financial incentives:Those who enroll are eligible for a minimum level of benefits and/or matchingcontributions
  • 39. Final remarks• There are important problemswith coverage, labor markets,and equity• Part of the solution is tointegrate programs, have morechoice, and rethinkredistributive arrangements• The political economy of reformis not easy• But making redistributivearrangements explicit can help