Social security privatization reform and labor markets: The case of Chile

The purpose of this article is to analyze the way in which a social security reform of the Chilean type affects labor-market outcomes in an economy characterized by a segmented labor market. Our main interest is to evaluate the way in which Chile's social security reform affected the country's level of employment, its rate of unemployment, and wages. To do this, we develop a model of the labor market in an emerging economy, and we simulate it using parameter values for Chile. We also use microsurvey data to investigate some key features, such as coverage, of Chile's privatized social security system. The article is organized as follows: Section I is the introduction. In Section II, we provide a brief evaluation of Chile's social security reform. Section III deals with the effects of social security reform on wages, income distribution, employment, and unemployment. The section begins with a general discussion of Chile's labor-market reforms. We next develop a model of a segmented labor market to analyze the way in which policies aimed at reducing the tax component of social security contributions affect the key labor-market variables. In Section IV, we use microsurvey data to obtain an estimate of the "tax component" of social security contributions under Chile's privately managed social security system.5 We then use, in Section V, the results from this empirical analysis to simulate our model and compute the effects of Chile's social security reform on employment, unemployment, and wages. The results from our simulation exercise suggest that the effect of the reform on Chile's aggregate employment was rather modest. The results also suggest that the reforms resulted in a small increase in average wages. Finally, in Section VI, we provide some concluding remarks.