OECD Reviews of Labour Market and Social Policies Chile 2009 by OECD

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This report analyses in detail the implications of recent developments in Chile's labour market and social policy and considers the available policy options from the perspective of OECD countries’ experience.

The report finds that Chile has enjoyed rising living standards over two decades of strong economic growth. The incidence of poverty is now much lower and there is better access to adequate housing, education and healthcare. Nevertheless, Chile’s income distribution remains disturbingly unequal by OECD standards. This is partly due to Chile’s a relatively low employment rate, especially for women, but it also reflects a segmented labour market, where much of the recent job creation has occurred in relatively low-productive sectors. Moreover, despite the existence of an internationally renowned pension programme, Chile’s social protection system as a whole has still a relatively long way to go before reaching the standards of developed countries in terms of effective coverage and capacity to assist needy households.  Chilean policy makers have begun to develop and implement a series of ambitious reforms, intended to promote the twin goals of work and equity.

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									                                                         OECD Reviews of Labour Market
                                                         and Social Policies

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OECD Reviews of Labour Market and Social Policies




                  Chile
         ORGANISATION FOR ECONOMIC CO-OPERATION
                    AND DEVELOPMENT

     The OECD is a unique forum where the governments of 30 democracies work
together to address the economic, social and environmental challenges of globalisation.
The OECD is also at the forefront of efforts to understand and to help governments
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provides a setting where governments can compare policy experiences, seek answers to
common problems, identify good practice and work to co-ordinate domestic and
international policies.
    The OECD member countries are: Australia, Austria, Belgium, Canada, the
Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand,
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the United Kingdom and the United States. The Commission of the European
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               This work is published on the responsibility of the Secretary-General of
            the OECD. The opinions expressed and arguments employed herein do not
            necessarily reflect the official views of the Organisation or of the governments
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© OECD 2009

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                                                                                                 FOREWORD – 3




                                                Foreword


           The OECD Council decided to open accession discussions with Chile
       on 16 May 2007 and an Accession Roadmap, setting out the terms,
       conditions and process for accession, was adopted on 30 November 2007.
       In the Roadmap, the OECD Council requested a number of OECD
       Committees to provide it with a formal opinion. Accession discussions are
       currently ongoing.
           The Employment, Labour and Social Affairs Committee (ELSAC) was
       requested to review Chile’s labour market and social policies in order to
       provide a formal opinion on the degree of coherence of Chile’s policies with
       those of OECD member countries. In light of the formal opinions received
       from OECD Committees and other relevant information, the OECD Council
       will decide whether to invite Chile to become a member of the Organisation.
           This report, prepared as part of ELSAC’s accession review, highlights
       some of the key labour market and social policy challenges facing Chile.
       The formal opinion of ELSAC mentioned above will be sent separately to
       the OECD Council and the findings set out in the present report are without
       prejudice to the subsequent discussions and decision of the Council
       concerning the accession of Chile to the Organisation.
           Chile has made impressive progress in recent years: two decades ago
       Chile’s GDP per capita was 18% that of the United States; by 2006, it had
       reached 29%, above the level in Mexico and close to that of Poland.
       Furthermore, the national poverty rate has fallen dramatically from almost
       39% of the total population in 1990 to less than 14% in 2006.
            But there is still some way to go as the jobs that are created in Chile are
       often characterised by low productivity, low pay and poor working
       conditions, and compared with OECD countries informal employment and
       income inequality remains high. Female labour force participation, albeit
       increasing, is still well below the OECD average, and access to jobs for low-
       skilled youth and certain other groups remains difficult.
           Chile’s pension system is widely regarded as a good practice in
       international comparisons, and recent reform has further widened its appeal

OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
4 – FOREWORD

     as the introduction of a minimum pension addresses the issue of insufficient
     pension contribution among a large group of Chilean workers. Chile’s social
     policy approach is innovative, as exemplified by the Chile Solidario
     programme, but the time has now come to further invest in active social
     policies for the working-age population.
         The review was prepared by Willem Adema, Anders Reutersward and
     Veerle Slootmaekers, assisted by Katherine Latour, and under the overall
     supervision of the Head of the Social Policy Division, Mark Pearson and the
     Head of the Employment Analysis and Policy Division, Stefano Scarpetta.
     The report was prepared over Summer 2008 (the most recent data concern
     that period), and was discussed by ELSAC on 4 November 2008. The
     analysis thus concerns the pre-financial crisis environment.




                OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                                                                                     TABLE OF CONTENTS – 5




                                      TABLE OF CONTENTS


List of Abbreviations .....................................................................................................11
Assessment and Recommendations ..............................................................................15

CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH
BUT INSUFFICIENT JOB CREATION .....................................................................33
1.     A favourable macroeconomic environment ...........................................................34
2.     Chile has large human resources that are not well utilised ....................................35
       Women and youth face difficulties in entering the labour market ........................39
3.     Job creation in low-productivity sectors ................................................................42
4.     The quality of jobs .................................................................................................44
       Sub-contracting and worker dispatching ..............................................................44
       The role of informal employment .........................................................................44
5.     Significant improvements in health, education and housing .................................49
6.     Poverty has been much reduced, but the income distribution remains
       very unequal...........................................................................................................53
7.     Income inequality in Chile is closely linked with wage inequality .......................57
8.     Regional diversity ..................................................................................................59
9.     Conclusions............................................................................................................60
Annex 1.A1. Measurement Issues on Income Distribution ...........................................61
Bibliography ..................................................................................................................63

CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES ..........................65
1.     Introduction............................................................................................................66
2.     Important issues of labour legislation have yet to be resolved ..............................67
       Employment protection legislation (EPL) ............................................................67
       Sub-contracting and temporary-work agencies (TWAs) ......................................71
       Working time ........................................................................................................74
3.     Industrial relations and collective bargaining ........................................................75
       The minimum wage is relatively high ..................................................................78
4.     Labour taxation and informal employment............................................................80
5.     The Labour Inspectorate (Direccion del Trabajo, DT) and labour courts .............82
6.     An atypical unemployment insurance programme (UI) ........................................84
7.     The public employment service .............................................................................90
       Active labour market programmes (ALMPs) are relatively insignificant ............91


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8.  Job-related training and life-long learning .............................................................92
    Strengthen SENCE’s controls and speed up the development
    of skill certifications .............................................................................................94
9. Special issues concerning employment of women ................................................95
10. Conclusions............................................................................................................97
Annex 2.A1. The Presidential Advisory Commission “Work and Equity” ...................99
Annex 2.A2. Measuring Employment Protection Legislation (EPL)
   by the OECD scoring method.................................................................................100
Bibliography ................................................................................................................102

CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION ...105
1.     Introduction..........................................................................................................106
2.     Social policy ........................................................................................................109
       Overall spending and redistributive effect ..........................................................109
       Education, health and housing policies ...............................................................114
       An integrated approach towards supporting the poor: Chile Solidario ...............121
3.     Conclusions..........................................................................................................136
Bibliography ................................................................................................................138

CHAPTER 4. THE NORMALISATION OF CHILE’S PENSION SYSTEM ...........143
1.     Introduction..........................................................................................................144
2.     The Chilean pension system ................................................................................145
       Poverty among elderly and redistribution of pension spending ..........................150
       The basic solidarity fund .....................................................................................151
       The mandatory private pension system ...............................................................154
       Disability and survivor coverage: reduce cost-shifting
       while maintaining efficiency ..............................................................................164
3.     Conclusions..........................................................................................................169
Annex 4.A1. Background Data to Chile’s Private Pension System .............................171
Annex 4.A2. The Chilean Pension Market: Competition, Individual Choice
   and Financial Risk Management ............................................................................173
Bibliography ................................................................................................................180




                         OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                                                                                     TABLE OF CONTENTS – 7



List of Tables
Table 1.1. Employment/population ratios by gender for selected working-age
   groups in OECD and accession countries in 2006....................................................37
Table 1.2. Labour force status of the Chilean population, 1996-2007 ..........................38
Table 1.3. Youths in 2006: unemployment, labour force participation
   and the proportion who neither study nor work........................................................40
Table 1.4. Profile of women between 25-64 years old by per capita
   income quintiles, 2006 .............................................................................................41
Table 1.5. Employed persons by economic sector in 1996-2007 .................................42
Table 1.6. Employment by economic sector in Chile and OECD countries, 2007 .......43
Table 1.7. Relative wages in selected economic sectors ...............................................43
Table 1.8. Activity rate, informality and earnings in the 25-64 population
   by education, 2006 ...................................................................................................47
Table 1.9. Housing conditions in 1990 and 2006 .........................................................52
Table 1.10. Poverty trends ............................................................................................54
Table 1.11. Poverty and inequality indicators, mid-2000s ............................................55
Table 1.12. Distribution of household market income ..................................................57
Table 1.13. Distribution indices for wages and other household market income, 2006 ..59
Table 1.14. Regional differences, 2006 ........................................................................60
Table 1.A.1. Comparing data on income distribution ...................................................62
Table 2.1. Incidence of fixed-term and other temporary labour contracts in 2006 .......71
Table 2.2. Employed persons by effective working time ..............................................74
Table 2.3. Trade union membership in 2007 ................................................................76
Table 2.4. Wage adjustments resulting from collective agreements .............................77
Table 2.5. Labour inspections .......................................................................................82
Table 2.6. UI benefits in June 2008 ..............................................................................89
Table 3.1. Poverty and its severity has fallen since 1990 ...........................................106
Table 3.2. Public spending on education and health is the most important
   in redistributing resources towards the poor in Chile ............................................113
Table 4.1. The Basic Solidarity Pension (PBS): evolution of payment rates
   and expected coverage ...........................................................................................152
Table 4.2. Distribution of pensioners by payment methods ........................................157
Table 4.A1.1. Most outlays on pension payments are through annuities
   rather than programmed withdrawals ....................................................................171
Table 4.A1.2. AFP portfolio characteristics and yields and default age rules
   for clients ...............................................................................................................171
List of Figures
Figure 1.1. Chile’s annual GDP growth compared with OECD and selected
   Latin American countries ........................................................................................34
Figure 1.2. Chile's exports ............................................................................................35
Figure 1.3. Population by age class ..............................................................................36


OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
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Figure 1.4. Evolution of employment/population ratios by gender and age groups,
   1996-2007 ................................................................................................................39
Figure 1.5. Reasons for inactivity among women, 2006 ...............................................41
Figure 1.6. Employed persons in Latin America not contributing
   to social insurance ...................................................................................................45
Figure 1.7. Informality among employees by age ........................................................48
Figure 1.8. Health indicators .........................................................................................50
Figure 1.9. Education outcomes ....................................................................................51
Figure 1.10. Households owning their main dwellings ................................................52
Figure 1.11. Change in the Lorenz curve: a measure of declining income inequality ..58
Figure 2.1. Measuring employment protection legislation (EPL) .................................68
Figure 2.2. Minimum wage as a percentage of the average wage
   in OECD countries and Chile ..................................................................................79
Figure 3.1. Public social and education spending has increased in Chile,
   but remains low in international comparison ........................................................110
Figure 3.2. Public investment in health and education in Chile is limited
   compared with OECD countries ............................................................................115
Figure 4.1. Publicly-mandated pension spending in Chile is close
   to the OECD average .............................................................................................147
Figure 4.2. The income position of the elderly is relatively good in Chile .................150
Figure 4.3. Replacement rates in Chile are relatively close to
   the OECD average .................................................................................................155
Figure 4.4. Pension coverage is increasing but remains low
   in international comparison ...................................................................................160
Figure 4.5. The contribution density among female workers is relatively low ...........162
Figure 4.6. Disability benefit replacement rates in Chile are on par
   with other OECD countries ...................................................................................165
Figure 4.A1.1. Evolution of the minimum wage, average wage of contributors
   to the mandatory pension system (AFP), and minimum pension payments ..........172
Figure 4.A2.1. Administrative charges declined until 2001 .......................................174
Figure 4.A2.2. AFP profits seem to be at a higher level than in the 1990s .................175
Figure 4.A2.3. Most AFP members have investment portfolios
   with intermediate risks ..........................................................................................176
Figure 4.A2.4. Foreign investment by AFPs has grown rapidly
   over the last decade ...............................................................................................177
Figure 4.A2.5. Real rate of investment returns have trended up
   since the late 1990s ................................................................................................178
List of Boxes
Box 1.1. Labour market and social policy recommendations for Chile ........................31
Box 1.2. Alternative measures of labour informality in Chile ......................................46
Box 1.3. Poverty line in Chile .......................................................................................56
Box 2.1. Severance pay and unemployment insurance in Austria ................................70

                         OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                                                                                TABLE OF CONTENTS – 9


Box 2.2. Labour taxation and mandatory contributions ................................................80
Box 2.3. Chile’s unemployment insurance (UI, seguro de cesantía) ...........................85
Box 3.1. Public financing of social support in Chile: budgetary prudence
  and little redistribution in taxation .........................................................................107
Box 3.2. Anti-poverty policy development and coherence in Chile ...........................122
Box 3.3. Conditional family support in Mexico and holistic service
  delivery in some other OECD countries ................................................................124
Box 4.1. Reforming the pre-1981 PAYG scheme into a private-funded
  pension system ......................................................................................................148




OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                                                                     LIST OF ABBREVIATIONS – 11




                              LIST OF ABBREVIATIONS


AFP                       Administradora de Fondo de Pensiones
                          (Pension Fund Management Companies)
ALMPs                     Active Labour Market Programmes
APS                       Aporte Previsional Solidario (Pension Solidarity Complement)
AUGE                      Acceso Universal con Garantías Explícitas en Salud
                          (Regime of Explicit Health Guarantees)
CAN                       National Accreditation Commission
CASEN                     Encuesta de Caracterización Socioeconómica Nacional
                          (National Characterisation Socio-economic Survey)
CCT                       Conditional Cash Transfers
CEPAL                     Comisión Económica para América Latina y el Caribe
                          (Economic Commission for Latin America and the Caribbean)
CLP                       Chilean Pesos
DIPRECA                   Dirección de Previsión de Carabineros de Chile
                          (Social Security for the Police)
DT                        Dirección del Trabajo
                          (Labour Inspectorate of the Ministry of Labour
                          and Social Welfare)
EITC                      Earned Income Tax Credit
ENCLA                     Encuesta Laboral (National Labour Survey)
EPL                       Employment Protection Legislation
FONASA                    Fondo Nacional de Salud (National Health Fund)
FOSIS                     Fund for Solidarity and Social Investment
GDP                       Gross Domestic Product
ICT                       Information and Communication Technologies
INE                        ... Instituto Nacional de Estadisticas (National Statistics Institute)



OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
12 – LIST OF ABBREVIATIONS

INP                  Instituto de Normalización Previsional
                     (Chilean Social Insurance Agency)
INSP                 Instituto Nacional de la Salud Pública
                     (National Institute of Public Health)
ISAPRE               Instituciones de Salud Previsional (Private Health Providers)
IUSA                 Individual Unemployment Savings Accounts
JUNJI                Junta Nacional de Jardines Infantiles
                     (National Childcare Authority, part of the Ministry of Education)
MdH                  Ministerio de Hacienda (Ministry of Finance)
Mideplan             Ministerio de Planificación (Ministry of Budget and Planning)
MINVU                Ministerio de Vivienda y Urbanismo
                     (Ministry of Housing and Urbanism)
MPG                  Minima Pensión Garantía (Minimum Pension Guarantee)
NEET                 Neither in Employment nor in Education or Training
OMIL                 Oficinas Municipales de Intermediación Laboral
                     (Municipal Employment Intermediation Offices)
OTEC                 Organismo Técnico de Capacitación
                     (Technical Training Organisation)
PASIS                Pensiones Asistenciales (Social Assistance Pension)
PAYG                 Pay As You Go
PBS                  Pensión Básica Solidaria (Basic Solidarity Pension)
PISA                 OECD Programme for International Student Assessment
PW                   Programmed withdrawals (Regular pension payments)
SENCE                Servicio Nacional de Capacitación y Empleo
                     (National Employment and Training Service)
SAFP                 Superintendencia de Administradoras de Fondos de Pensiones
                     (Supervisory body of Pension Fund Management Companies,
                     see above)
SENAME               Servicio Nacional de Menores
                     (National Service for Young People)
SIMCE                Sistema de Medición de la Calidad de la Educación
                     (System for the assessment of quality in education)
SMEs                 Small and Medium-sized Enterprises

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SNED                      National Education Evaluation Service
SOFOFA                    Sociedad de Fomento Fabril (Chilean Federation of Industry)
SPR                       Ficha de Protección Social (Social Protection Record)
TWA                       Temporary work agencies
UF                        Unidad de Fomento (Unit of account which adjusts the value of
                          the Chilean Peso on a daily basis)
UI                        Unemployment insurance
UTM                       Unidades tributarias mensuales (Unit for monthly tax payments)
VAT                       Value-added Tax




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                                                                     ASSESSMENT AND RECOMMENDATIONS – 15




                         Assessment and Recommendations

Towards more inclusive growth in Chile

Chile has started to catch up to
OECD standards of living…

            Chile has enjoyed an impressive economic performance over the past
       two decades. Apart from a cyclical slowdown during 1998-2003, real GDP
       increased by nearly 6 % per year over the period 1985-2007. Despite
       relatively strong population growth – up from 12.1 million in 1985 to
       16.6 million in 2007 –, real GDP per capita rose by 4.3% per year over the
       past two decades. This impressive performance has resulted in a significant
       catching up with the OECD countries: two decades ago Chile’s GDP per
       capita was 18% that of the United States; by 2006, it had reached 29%, above
       the level in Mexico and close to that of Poland. The national poverty rate has
       also been reduced dramatically, from almost 39% of the total population in
       1990 to less than 14% in 2006, with the share of individuals living in extreme
       poverty down to close to 3% in 2006, from about 10% in 1990.
… but labour utilisation remains
low and inefficient in a
segmented labour market…

            Despite this significant progress, Chile still has a long way to go in
       catching up with average OECD living standards and in reducing
       inequalities. One of the main requirements to sustain economic growth, and
       to ensure that all benefit from it, is to foster the creation of more and better
       jobs. Labour utilisation is still relatively low with few job opportunities for
       certain groups. Although female labour force participation has risen steadily
       over the past two decades, at 39% the female employment rate is
       33 percentage points below the male employment rate and well below the
       OECD average of 57%. At the same time, youth participation rates have
       declined, and only about a quarter of youth (15-24) is in employment,
       compared with 44% on average in the OECD. As elsewhere, this in part
       reflects efforts to promote further education. But for many youth with low
       skills, access to jobs remains difficult in Chile.


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          The jobs being created in Chile are often characterised by low
      productivity, low pay and poor working conditions. International comparisons
      are difficult, but indicators suggest that informal employment remains
      significant (albeit receding and lower than in most of Latin America). About
      one-fifth of all Chilean employees either did not have a formal labour contract
      or did not contribute to social security in 2006.
           In addition, many self-employed workers, who account for one-fifth of
      total employment, should probably be included in any broad count of informal
      employment as only 22% of them make social insurance contributions on a
      voluntary basis. Informality is most common in the low-productivity segment
      of the labour market, where low-skilled employees are often hired without a
      contract by small firms that are themselves informal. These workers generally
      lack old-age, unemployment or health insurance and are not covered by the
      labour law provisions (minimum wage, employment protection or occupation
      health and safety standards). They are often poorly paid, with limited access to
      training and career advancements.

….leading to high levels of inequality
           Persistent segmentation in the labour market is one of the key factors
      behind the marked inequalities in earnings and income in Chile. Measured
      against the standard OECD relative poverty benchmark (equivalised disposable
      income less than 50% of the median income), Chile’s poverty rate – at 16.4%
      of the population – would put it at the bottom of the OECD ranking, similar to
      the relative poverty rates observed in Mexico, Turkey and the United States. In
      terms of income inequality, Chile also fares worse than all OECD countries,
      with a Gini coefficient of 0.53 compared with an OECD average of 0.31. To a
      large extent, income disparities in Chile are closely linked to wage inequalities
      that are not sufficiently smoothed by the tax and benefit system.

The macroeconomic policy framework
is sound and is serving the economy
well, but structural barriers to job
creation persist

          The macroeconomic policy setting in Chile, combining rules-based fiscal
      management, inflation targeting and a flexible exchange rate, has played a
      major role in promoting strong and sustained economic growth. In particular,
      a sound fiscal framework – enhanced in 2006 with the fiscal responsibility
      law – has allowed the authorities to avoid a pro-cyclical stance in a context of
      booming world prices for Chile’s main export, copper. Chile has managed to
      reduce public indebtedness, and has become a net external creditor. Recently,
      world copper prices have started to fall and a significant slowdown in the


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       world economy unfolding from the financial crisis could potentially put
       further downward pressure on copper prices in the near future. However, it is
       too early to assess the extent of the correction in copper prices and the impact
       on Chile’s fiscal and macroeconomic position.
           Sound macro-economic policy has helped Chile to avoid the “raw
       material curse” that affects many developing countries whose economies are
       heavily dependent on primary commodities. Despite being the world’s biggest
       producer and exporter of copper, Chile has succeeded in diversifying its
       economy, with significant increases in the export shares of other than for
       copper products, especially in the agro-food sector. But a number of structural
       barriers persist that limit the creation of productive jobs.
           Over the past two decades, economic growth in Chile has been largely
       driven by physical capital accumulation and productivity growth.
       Employment growth has barely matched the increase in the working-age
       population and thus labour utilisation has not improved significantly. And
       while employment has remained fairly stable in the productive manufacturing
       sector, its share in total employment is well below what could be expected
       given Chile’s GDP per capita. Job creation has largely taken place in generally
       low-productivity areas and sectors dominated by SMEs – such as retail trade,
       hotel and restaurant and personal services.
            Promoting the creation of more productive jobs requires a comprehensive
       strategy that focuses on increasing the creation of new firms, fostering the
       expansion of successful ones, and improving the productivity performance of
       existing businesses. Much can also be done to improve human capital.
       Together with a judicious expansion of social programmes, this will also
       generate a more equitable distribution of the benefits of growth.

The OECD Reassessed Jobs Strategy provides a good framework to
promote more and better jobs in Chile

           The 2006 Reassessed OECD Jobs Strategy1 provides a comprehensive
       policy framework for boosting jobs and income in OECD countries. The

1.      The OECD Jobs Strategy was originally formulated in 1994 and was aimed at reducing high
        and persistent unemployment. While the key recommendations have been found to be useful in
        this respect, the policy focus has broadened and the 2006 Reassessed OECD Jobs Strategy
        (RJS) puts more weight to the objective of promoting labour market participation and
        employment, and taking into account concerns about low incomes of certain groups. The RJS
        has four main pillars: i) set appropriate macroeconomic policy; ii) remove impediments to
        labour market participation as well as job search; iii) tackle labour- and product-market
        obstacles to labour demand; and iv) facilitate the development of labour force skills and
        competencies. Within each of these pillars, the Reassessed Jobs Strategy contains specific
        on-binding recommendations for the OECD countries. All countries need to ensure that each of

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     Strategy identifies a number of common principles that are also relevant to
     Chile: beyond ensuring stable macroeconomic conditions, where Chile has
     already achieved impressive results, the Reassessed Jobs Strategy stresses
     the need to establish a simple, transparent and not overly cumbersome
     regulatory environment in which firms can find the right incentives to
     invest, hire and train more workers (formally) – and ultimately promote
     productivity and output growth – while workers have incentives to search
     for jobs that match their capabilities and to invest in improving their skills
     and competences. Previous OECD reports (OECD Economic Surveys: Chile,
     2005 and 2007) provide a comprehensive review of the key policy
     challenges to improve the business environment in Chile.
         But much can also be done in the labour market to enhance job
     opportunities for all. First, there is a need to improve the balance between
     employment security and labour market flexibility. Related to this is also the
     need to price the low-skilled back into the formal sector. While further
     investment in education and training is required to boost the level of human
     capital and its distribution, policy should also review existing taxes, social
     security contributions and wage floors that may price some low-skilled
     workers out of jobs. Second, Chile also needs to take additional measures to
     remove existing barriers to labour force participation and access to
     formal-sector jobs of under-represented groups, including women, youth and
     more generally low-skilled workers.
Improve the balance between employment security and flexibility
         The recent report by the Presidential Advisory Commission for Work and
     Equity includes many suggestions for a large reform package of labour market
     and social policies to help generate more and better jobs, which are in line
     with the OECD Reassessed Jobs Strategy and the related international debate
     on “flexicurity”. However, the detailed policy design and implications of an
     appropriate flexicurity strategy for Chile may often be different from that
     required in many OECD countries in view of Chile’s historical development
     and current position. In particular, Chilean policy makers will have to pay
     attention to the development of administrative capacity and quality to make
     reform of employment and training services or in-work benefits for the
     low-income population a success. At the same time, in some cases, the
     regulatory environment should be relaxed in order to permit effective
     enforcement since this is the problem with many existing labour laws.



      the four pillars is solid. However, within each pillar there may be scope for individual countries
      to use different policy combinations to achieve successful outcomes, taking into account policy
      interactions and country circumstances and objectives.

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Employment protection
legislation contributes to the
dualism in the labour market…

            Chile’s employment protection legislation (EPL) for regular contracts is
       not overly strict by OECD standards. Until 2007, however, it was coupled
       with unregulated temporary work agencies (TWAs) and sub-contracting
       employment arrangements. These latter two atypical forms of labour contract
       have grown significantly in Chile: for example, in 2006 over 40% of
       employers reported using sub-contractors, and one-third of them declared that
       their work was part of the “principal activity” of the enterprise. Sub-
       contracting has led to a fragmentation of enterprises: the so-called
       phenomenon of “100 firms within a firm”. For “mother firms” or “sub-
       contractees”, this has given flexibility and has lowered labour costs, although,
       if sub-contracting is widespread, it may lead to an inefficient firm structure,
       and generate relatively high administrative and organisational costs. For the
       workers concerned, typically low-skilled, the result has been precarious jobs
       with no opportunity to organise and bargain collectively and little or no
       investment in training. Taken together, sub-contracting and TWAs have
       contributed to a further element of segmentation in the labour market, not only
       between informal and formal-sector workers but, among the latter, between
       those with a regular and those with an atypical contract.

… the 2007 reform is welcome, but
implementation of new sub-
contracting legislation is difficult.

            The 2007 reform restricted sub-contracting to jobs that are separate from
       the firm’s own work process. In addition, the client firm must give certain
       guarantees, e.g. in the event of a sub-contractor’s failure to pay wages, so that
       the client firm performs a role that in many OECD countries would be
       normally undertaken by the Labour Inspectorate. TWA jobs are now only
       allowed for specific tasks and for limited periods of time (three to six months).
       This new law is welcome as it will reduce uncertainty and inequality among
       workers in the formal sector, but its implementation faces some difficulties.
       While in some sectors it has already had an effect (e.g. banks no longer
       sub-contract to have cashiers at the till), some larger firms have challenged the
       powers of the Labour Inspectorate in complex court cases, and the Supreme
       Court has partly sustained such complaints. Moreover, attempts to enforce the
       new rules in the mining sector faced such strong legal and political opposition
       that the government had to suspend implementation, at least temporarily.
       Despite these setbacks, the Chilean government should continue its efforts to
       introduce and enforce the new sub-contracting regulations.

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Reform of EPL for regular workers
should also be considered,
especially concerning severance
payments …

          Reducing the extent of sub-contracting and use of TWAs may push jobs
     into the informal sector, unless steps are taken to make formal employment
     more attractive. It is therefore important to also reconsider elements of the
     EPL for regular workers. While some aspects of EPL for regular workers are
     relatively loose from an international perspective – notice periods and
     administrative procedures – others are quite costly and subject to abuse,
     e.g. severance pay. Severance payments can be as much as 11 months’
     wages in Chile, compared with three to four months in many OECD
     countries. The high costs associated with severance payments provide
     employers with incentives not to formalise employment relationships.
     Moreover, as an income-support scheme for the unemployed, severance pay
     has a number of drawbacks. With present rules, it concerns only those
     dismissed for economic reasons from indefinite-duration jobs, a group
     representing only a small proportion of those at risk of unemployment.
     Moreover, it offers only limited pooling of unemployment risk: the risk is
     pooled only among workers in a given firm but not across firms. Moreover,
     severance pay does not protect workers against the risk of a long spell of
     unemployment, and firms’ compliance with severance pay rules tends to be
     fairly low, even for formal workers with indefinite contracts. Indeed, there is
     evidence suggesting that in Chile employers often avoid paying the full
     amount of severance payments by reaching an agreement with workers, or
     simply by refusing to pay. Non-compliance also creates a burden on labour
     courts and government budgets.

… which could be phased out while
increasing the importance of both
IUSAs and the Solidarity Fund ...

         Befitting its experience with private individual pension accounts (see
     below), Chile has introduced a unique unemployment compensation system
     based on individual unemployment savings accounts (IUSA), with a
     complementary Solidarity Fund for low-income clients dismissed for
     economic reasons. Employers contribute to both IUSAs and the Solidarity
     Fund, and are partially compensated for the associated increase in labour cost
     by a reduction in severance payments. Benefits are paid from IUSAs
     regardless of the reason for the separation. Because they are pre-paid, IUSAs
     do not increase the direct cost of employment adjustments for employers, as is
     the case with severance payments (even if they are only partially enforced). In

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       addition, since IUSAs are owned by workers, they are unlikely to have a great
       effect on incentives to search actively for a suitable job. Compared with
       traditional unemployment insurance schemes, IUSAs are therefore less
       demanding in terms of job counselling and activation, a particularly important
       factor in Chile given the limited resources available in the labour offices. The
       Chilean government should complete the reform by phasing out severance pay
       and further increasing the role of unemployment benefits. While this may
       seem a bold step, Austria achieved a similar result in 2003 by converting its
       severance-pay system into individual saving accounts, while continuing to
       implement unemployment insurance and unemployment assistance. But if a
       full phasing-out of severance payments proves too controversial in Chile, a
       second-best option would be to lower its level considerably to a maximum of
       three to four months, as observed in many OECD countries.

… and in particular reinforcing the
solidarity component of the dual
unemployment benefit scheme …

           The subsidised Solidarity Fund provides supplementary income
       support to claimants who are unemployed and have exhausted their own
       IUSA funds, thus allowing for some pooling of the unemployment risk.
       Benefits under the Solidarity Fund are paid at fixed replacement rates and
       require registration with the municipal employment service. In theory, this
       dual system of individual saving accounts backed-up by a Solidarity Fund,
       which is similar to a more traditional unemployment insurance
       programme, can combine the benefits of both types of schemes. However,
       overly strict eligibility criteria have effectively curtailed access to the
       Solidarity Fund so far. A recent reform is addressing this issue by making
       the Solidarity Fund’s benefit scale more generous and applying it as a rule
       to all terminations of indefinite-duration contracts for economic reasons.
       Moreover, those terminating fixed-term contracts would also be eligible,
       though with a much less generous benefit scale. Recipients would be
       obliged to seek jobs and register with the public employment service as
       unemployed. It is still too early to assess whether these changes will
       increase access to the Solidarity Fund, but, if they do, stronger efforts by
       the public employment services would be required to enforce the
       job-search requirement in order to offset the adverse effect of more
       generous benefit entitlements on search activity.




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Strengthening the role of the
social partners in setting wages
and working conditions could
also contribute to flexicurity

           Labour relations in Chile are generally confrontational and marred by lack
      of trust, a factor that is becoming increasingly problematic for the
      development of “flexicurity” in Chile. This is partly due to the limited
      coverage of unions and business associations. For example, union
      membership accounts for only 11% of the workforce and is concentrated in
      big firms and certain sectors, particularly mining (42% of employees are
      unionised). At the same time, the weak and unpredictable enforcement of
      labour regulations fosters a confrontational climate. In this context, the
      phasing out of severance payments in favour of a more widespread and
      generous unemployment benefit system could weaken one of the main sources
      of disputes. Promoting less confrontational and more co-operative labour
      relations, while simplifying labour regulations and strengthening their
      enforcement, is essential to reduce costs to both parties and spread benefits to
      a wider group of workers, rather than to a relatively small group of insiders.
           The government intends to develop new legislation to promote collective
      bargaining in enterprises and to make it richer in content. It would thus
      encourage more bargaining over matters other than wages, and it would seek
      to strengthen unions’ representativeness in enterprises. A procedure would be
      established for strengthening union representations on issues related to
      working hours. The government has also offered to support training of trade
      union representatives in enterprises. Moreover, as part of its effort to develop
      more effective industrial relations, the government has begun to implement a
      significant reform aimed at improving the court system for labour cases,
      combined with optional “fast-track” procedures for resolving conflicts in
      meetings with the Labour Inspectorate. These initiatives all go in the right
      direction of promoting collective bargaining and creating a clearer and less
      confrontational environment for social dialogue. But the government has good
      reason to consider which further institutional developments might be needed
      in order to promote dialogue and consultation with employers and unions as
      well as to strengthen trust between the social partners.

The minimum wage is
relatively high …

         Expressed as a proportion of the average wage, the legal minimum
      wage was raised substantially between the mid-1990s and 2003. By
      mid-2008, it was a little over 45% of the average wage while the OECD

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       average is 40%. OECD Economic Surveys of Chile (2003) found evidence
       that the increase until the early 2000s had contributed to a rise in
       unemployment, a result that still appears relevant. Moreover, despite the
       fact that informal work arrangements are sizeable among the low skilled,
       the minimum wage tends to operate as a strong pay signal for the informal
       sector as well. This implies that hikes in the minimum wage can have
       distributional implications that go beyond the formal sector: the wages of
       the low paid might increase in both segments of the economy, but their
       employment prospects might also decline in both sectors. The Chilean
       authorities are aware of this risk so they reimburse half of the cost of the
       minimum wage to employers who have to pay the minimum wage to
       apprentices and participants in the similar Jovenes Chile Solidario
       scheme who are not yet 25 years old. Chile’s minimum wage is lower for
       those aged under 18 (and those over 65, as well as domestic workers).
       However, under-18 youth are often in school, while the minimum wage is
       likely to affect particularly the 18-25-year-olds, whose employment rate
       at 26% is extremely low in Chile today. A weak school-to-work transition
       process is one of the biggest failings in Chilean policy. Reducing youth
       wages would be a price well worth paying if it increased their
       employment rates. The Chilean authorities should consider increasing the
       age for receiving the full minimum wage to 25, and pay lower rates
       (increasing with age) to younger people, as is the case in some OECD
       countries, e.g. the Netherlands.

… and in future its level should
be considered in view of the
planned introduction of in-work
benefit payments …

            The income tax burden is not high in Chile. Income tax is charged on
       incomes higher than about 1.4 times the average wage, with an initial marginal
       tax rate of 5% rising to 40% (for those with wages in excess of about 15 times
       the average wage); social security contributions (towards pension, health,
       unemployment and work injury insurance) represent about 26% of the wage.
            The government envisages introducing in-work benefits (in the form of
       cash transfers) in 2009 as a way of supporting those in low-paid jobs. Such
       benefits have proven to be effective in raising labour supply among primary
       earners and adults in sole-parent families in many OECD countries that have
       introduced them, but the evidence also indicates that basing such policies on
       household earnings can reduce the labour supply of second earners in couple
       families. Compared with schemes based on household earnings, in-work
       benefits based on individual earnings are more expensive as they cover more
       workers at a given income threshold. However, given the extremely low rates

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     of female employment in Chile, it would be unfortunate if incentives for
     women (usually the second earner in the family) to work were reduced.
     Despite the extra cost, a system based on individual earnings would likely be
     more efficient in the Chilean situation. Whatever the basis for setting up
     in-work benefits, their introduction argues in favour of avoiding further
     significant hikes in the minimum wages to minimise dis-employment effects
     among the low skilled.

… which, if based on household-
earnings, should be tied in with
childcare supports.

         Low female labour supply has been one of the main reasons why
     discussion of public support for childcare has increased in Chile. Public
     support has been pledged to expand capacity, with 3 000 new facilities
     over the 2006-08 period (compared with 1 000 facilities created over the
     1990-2005 period). Nevertheless, public spending on childcare and
     pre-school education is low at about 0.1% of GDP in 2007, compared with
     an OECD average of about a quarter percent of GDP. A further increase in
     childcare supports would therefore be justified if public finances permit
     this since all the evidence suggests it would lead to rising female
     employment. If Chile opts for introducing a household-earnings-based
     in-work benefit for low-income workers, it would be important to integrate
     the benefit rules of such a scheme with childcare support, for example, by
     paying higher childcare support rates in case where both adults are in
     employment for at least 30 hours per week.

Increased benefits to the
unemployed will require an effort
to enhance employment services
and job-related training.

          An appropriate “flexicurity package” in Chile, which eliminates
     severance pay but includes more generous unemployment benefits,
     childcare supports and in-work benefits, would need to be complemented
     by enhanced employment services and activation measures in order to
     maximise job-search activities and minimise moral hazard. However,
     delivering such programmes effectively would pose a major challenge for
     Chile, especially at the local level. To facilitate this, a merger of the
     municipal employment service offices with the national employment and
     training agency (SENCE) should be considered. Resources devoted to
     public employment services amount to only about 0.1% of GDP, compared
     with 0.4% on average across the OECD countries. With gradually
     improved unemployment compensation, more clients are likely to register

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       with the employment service and there will be scope to introduce at least
       some elements of the “activation strategy” implemented in many OECD
       countries, in particular job counselling, but also referral to training. Steps
       in this direction have been taken in recent years, but the relevant public
       institutions have very modest resources by OECD standards and they have
       limited experience of implementing targeted programmes for job seekers.
       It would be important to monitor the performance of the various labour
       market programmes. Use of private and non-profit organisations to deliver
       employment services on a competitive basis needs to be considered, given
       the lack of administrative capacity in the public sector. Examples of the
       private sector playing such a role in the employment services market can
       be found in Australia, the Netherlands and the United Kingdom.
            Another important challenge is to develop institutions for lifelong
       learning. Most of the SENCE-sponsored training until now has concerned
       employees in enterprises, which are obliged to pay a 1% payroll tax or spend
       the corresponding amount on training, whether in-house or in approved
       training centres. The range of training courses available to job seekers is
       restricted, and the possibilities of expanding them will probably remain
       limited in the near future. But in the longer term, a broad policy package
       called Chilecalifica – co-ordinated by the Ministries of Economy, Education
       and Labour – aims to develop institutions for lifelong learning, covering
       general as well as vocational training for adults. A national certification
       system for job skills, still incomplete, is expected to increase efficiency in the
       labour market and in the markets for training in the future and this effort
       should be speeded up, if possible. Of course, this must be done in the context
       of an education system that gives all youth good-quality education. The
       2004 OECD Review of Education Policy also encouraged the Chilean
       authorities to take further steps to improve the technical/vocational focus in
       education and strengthen linkages between education and enterprises through
       apprenticeships and the extension of vocational secondary education in
       industrial fields. These recommendations are still valid today.
Invest more in active social policies for the working-age population

In its quest for more inclusive growth,
social policy is moving away from
merely alleviating basic needs to
improving the quality of supports

           Chilean social policy has been more active and innovative than in
       many OECD countries. In the recent past, public social policy has focused
       on removing shantytowns and helping low-income households to acquire
       inexpensive accommodation, extending primary and secondary education

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     to all children, and making health care affordable to all. But
     notwithstanding the sizeable decline in poverty, income disparities remain
     enormous, and these outcomes have triggered a search for policy options
     that could generate more inclusive growth. Chilean policy is moving on
     from an emphasis on extending capacity towards an increased focus on
     improving the quality of dwellings, neighbourhoods, healthcare and
     education and social services more generally.

Chile’s innovative approach has
a strong focus on integrated
service delivery …

         Rather than focusing on income support to the working-age
     population, the Chilean social policy response through its innovative Chile
     Solidario framework connects low-income families, of whom many are
     sole-parent families, with support networks. Through “sustained and
     regular psycho-social support”, social workers help clients to assert their
     rights to a range of potentially available services such as healthcare,
     childcare, education and other family support services. The most recent
     Chilean social policy initiative Chile Crece Contigo (Chile Grows with
     You) is aimed at mothers and children until entry in pre-school age, and is
     similarly broad in nature, providing a range of supports touching all
     relevant aspects of the family environment, health, cognitive development
     and education.

… and involves a variant of
mutual obligations that helps
clients make use of services …

         From the client perspective, Chile Solidario is to be the gateway to a
     range of networks and services (and some financial support). Client’s
     active participation is key to success. By means of a small participation
     bonus (USD 10 to 24 per month, depending on the length of participation),
     authorities provide clients with a small financial incentive to sign up to
     Chile Solidario, and commit themselves to a wide variety of actions
     including, for example, vaccinations for children, participating in medical
     check-ups and/or training or education. The Chilean variant of mutual
     obligations in benefit receipt ties participation to access to services, not to
     receipt of financial transfers on a comprehensive basis.




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                                                                     ASSESSMENT AND RECOMMENDATIONS – 27



… but capacity constraints have
contributed to limited success in
getting clients in employment.

           With limited spending on income support and little success in raising
       employment, Chile Solidario has not been very effective in reducing poverty
       until now. The emphasis on developing access to services, which supports
       people in helping themselves, is an innovative approach that has borne
       dividends, but which has its limits. The existing service infrastructure in
       Chile has been inadequate to help many of the Chile Solidario clients into
       paid employment, which is a condition for any sharp reduction of poverty.
       Chile needs to continue its investment in the infrastructure of service
       provision, e.g. training of social workers and employment service staff,
       especially at the local level.

Chile has a good track record in
targeting help on those who need
it most, but further extensions
pose new challenges …
           The Chilean system is good at identifying needy clients. The Social
       Protection Record (SPR) – covering about half the population – has
       provided authorities with a good profile of low-income households, and is
       increasingly used to target education, healthcare, housing and social support.
       However, the SPR intends to measure long-term household income capacity.
       The SPR does not focus on current income streams, which only account for
       about 10% of the SPR score, and does not allow for phasing out or gradually
       withdrawing income support. However, as SPR scores are increasingly used
       to assess eligibility for cash transfers, policy has either to adapt the SPR so
       as to accurately measure current income changes, or design a supplementary
       tool alongside it to measure short-term income changes. Clients should also
       be asked to give officials permission to verify such information with the
       relevant tax and/or social insurance authorities.
The introduction of basic pensions has strengthened the retirement
income system
The system of individual accounts
brought much-needed transparency
to Chilean pension saving …

          The famous mandatory private pension system restored confidence in
       pension saving in Chile. Collective pension schemes which no longer
       operated in a fair manner were replaced by a system of individual accounts

OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
28 – ASSESSMENT AND RECOMMENDATIONS

     operated by pension fund management companies (AFPs). This involved
     administrative costs that are relatively high compared with private
     occupational pension systems, but by linking individual contributions to
     benefit payments, the system introduced much-needed transparency.

… and the privately managed
pre-funded system has performed
well overall.

         The pre-funded Chilean system has performed well over the years; it
     has deepened Chilean capital markets, assisted economic development,
     and rates of return on investment have been higher than originally
     envisaged. Furthermore, the pre-funding of the system helps spread the
     costs of dealing with ageing populations. The mandatory private pension
     system has, however, failed to achieve some of its objectives. Competition
     in the pension market is limited, and this has contributed to administrative
     fees being higher than necessary. Pension reform introduced in 2008 aims
     to generate price competition by having AFPs compete for a share of the
     market (new entrants) rather than trying to stimulate competition within
     the market.

Lack of coverage has proven to be
the Achilles heel of the private
pension system requiring the
introduction of a basic pension …

          Arguably the biggest shortcoming of the private pension system is that
     it failed to achieve coverage for the vast majority of Chilean workers.
     There are an increasing number of workers with patchy employment
     profiles, and contribution densities are particularly low among low-income
     workers with low levels of educational attainment, young workers, female
     workers, and the self-employed. The Chilean authorities have responded
     by introducing a basic solidarity pension as of right in 2008. At the same
     time, financial incentives have been introduced to make pension saving
     more attractive for women and young workers, and promote the
     development of a third tier of voluntary pension saving. With the
     development of a basic pension entitlement, mandatory second-tier
     pension saving and fiscally supported voluntary pension saving, Chile’s
     pension system has moved towards the three-pillar pension norm, which is
     often held as an international benchmark.




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                                                                     ASSESSMENT AND RECOMMENDATIONS – 29



… there are plans to extend
coverage to the self-employed,
but success is not guaranteed.

           Mandatory coverage of pension contributions will be extended to
       groups of the self-employed by 2012. While the intention is sensible, there
       are concerns that these initiatives may not be successful. For example, the
       implicit marginal tax rate of 30% on contributions may be a deterrent for
       many low-income workers to save for retirement and some of the
       self-employed may stop reporting income to the tax authorities rather than
       pay contributions towards pension insurance.

The disability system is innovative,
but new measures need to be closely
monitored to see if they achieve their
stated goals.
           The AFP scheme includes provisions for disability insurance, and the
       involvement of private commercial enterprises in the disability assessment
       process seems to have curtailed the inflow into the programme. This
       success, however, is at the expense of the public purse, since unsuccessful
       applicants are likely to seek recourse to publicly-financed minimum
       income benefits. Recent reform is likely to increase the cost of the private
       disability programme as coverage is extended to groups of the
       self-employed, and costs may rise further because of institutional changes,
       with AFPs no longer having incentives to keep costs down. The
       implementation of the disability reform needs to be closely monitored to
       ensure the right people receive the assistance to which they are entitled.

Recent disability reform may be
more effective if experience-
rating for employers were
introduced.

           Recent reform also made employers responsible for disability
       contributions. However, employers are likely to pass on the cost of this
       mandate to their workers in the future. Moreover, the OECD experience
       suggests that shifting responsibility for contributions to employers will not
       per se make them more willing to invest in disability-preventing workplace
       measures. Experience-rating of disability premiums is likely to be more
       effective in terms of encouraging employers to invest in preventive
       measures by employers, as the experience in the Netherlands shows.
       Moreover, the Chilean employment-related occupational accident and
       diseases scheme involves experience-rating on a sectoral basis. Policy may

OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
30 – ASSESSMENT AND RECOMMENDATIONS

     consider extending experience-rating to enterprises for both the
     employment-related and private disability schemes to encourage employers
     to invest more in preventive measures.

Chile should invest more in employment
and active social policies.

         Chilean social policy for the working-age population is at a crossroads
     in that, for the first time, all the main political parties are debating how to
     deal with the “in-work poverty” that affects large parts of the working-age
     population. If adopted, the recent proposal for in-work benefits (see above)
     could cost as much as half a percent of GDP – three times the Chile
     Solidario spending (not counting the basic pension).
          Strengthening public support for the working-age population would be
     appropriate. Compared with an OECD average of just over 20% of GDP,
     Chile spends much less on social protection: about 9% of GDP (not
     including education). Most of current social protection outlays are towards
     pensions and/or health, while other social support (including family benefits
     and housing) only amounted to 1.5% of GDP. As public spending on social
     support is low, the redistributive power of the Chilean tax/benefit system is
     relatively limited.
         If Chile wants to achieve its objectives of more and better jobs and a
     reduction in inequality, it should spend more on social protection, and
     particularly on labour market and social policies.
          There are several promising areas for investment with potentially high
     social returns including Chile Solidario, in-work benefits, employment and
     training services and labour market programmes as well as childcare
     support, all policies that promote labour force participation and
     self-sufficiency. Comfortable public finances lay the groundwork for
     expanding labour market and social programmes. But in the future, if the
     fiscal situation deteriorates, financing these programmes may imply some
     reallocation of resources and/or increases in taxes that are currently
     relatively low from an international perspective.




                OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                                                     ASSESSMENT AND RECOMMENDATIONS – 31



          Box 1.1. Labour market and social policy recommendations for Chile
     In the context of its policies to enhance job opportunities for all, the Chilean government is invited
to consider the following items as part of its strategy to improve the balance between employment
security and flexibility, generate trust between the social partners, and the development of an inclusive
and active social policy:
• Intensify efforts to introduce and enforce the new sub-contracting regulations.
• Phase out the existing system of severance pay while simultaneously increasing the dual
    unemployment benefit scheme.
• Reinforce the solidarity component of the dual unemployment benefit scheme to raise
    coverage and the pooling of the unemployment risk.
• Consider merging municipal employment services with the national employment and
    training agency.
• Monitor the implementation of the new legislation to promote collective bargaining and
    consider developing organisations of consultation and dialogue with the unions and employers
    to improve trust between social partners.
• Improve the effectiveness of industrial relations, promote bargaining on other issues than
    wages; enhance the effectiveness of the Labour Inspectorate; and continue to simplify the
    judicial process regarding labour cases.
• Increase the age for receiving the full minimum wage from 18 to 25, and prescribe lower rates
    (increasing with age) for younger workers and further develop a system of apprenticeships.
• Invest more in the capacity of employment and training services, and the expansion of active
    labour market programmes, and enhance the application of the national certificate for training.
    Consider whether it would be feasible to sub-contract the market for employment and training
    services to private actors.
• Enhance the effectiveness of in-work benefits by keeping design simple while targeting
    strictly defined groups of workers. To promote female labour supply, design of the in-work
    benefit scheme should be linked with childcare supports, for example, by differentiating
    payment rates with parental employment patterns.
• Strengthen the redistribution within the Chilean tax/benefit system, proportionally increase
    allocations for social support within public budgets, and invest more in active social policies, and
    reinforce the Chile Solidario gateway to further increase access to such support.
• Re-design the Social Protection Record or introduce a measure alongside it to properly account
    for changes in current household incomes and facilitate a gradual withdrawal of income support
    if need be. Clients should also be obliged to report changes in their income situation to the social
    services (and give permission for verification of such information with relevant authorities).
• Monitor carefully the reform that schedules the extension of mandatory private pension coverage
    to the self-employed, and be ready to make changes if outcomes are not in line with expectations.
• Monitor closely the recent disability reform to ensure the right people receive the assistance to
    which they are entitled. The Chilean authorities should also consider introducing experience-
    rating of disability premiums to stimulate employers to invest more in preventive measures.


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                CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION – 33




                                                Chapter 1.


                      Key Trends: Strong Economic Growth
                          but Insufficient Job Creation




          Chile’s unequal income distribution is linked with relatively low
          employment and a segmented labour market, two factors that also
          contribute to the difficulties in extending social protection to the whole
          population. Despite strong and sustained economic growth, job creation
          has been insufficient to give opportunities to under-represented groups
          and to cope with a growing working-age population. For women and
          youth, in particular, employment rates are low by OECD standards. The
          manufacturing sector’s share in total employment declined in the 1990s,
          after which it has been mostly stagnant at a low level for a country at
          Chile’s development stage. Informal employment is less widespread
          than elsewhere in Latin America, but still sizeable by OECD standards.
          The recent job creation has occurred partly in sectors that employ many
          high-skilled workers, but also in the areas where jobs tend to be
          low-productive and precarious.




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34 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

1. A favourable macroeconomic environment

           Chile has sustained high rates of economic growth for over two decades,
      permitting it to gradually reduce its income gap relative to the OECD area.
      Despite a cyclical slowdown during 1998-2003, real GDP increased by
      nearly 6% per year over the period. Chile is now one of the richest countries
      in Latin America in terms of GDP per capita. Chile’s strong performance
      over the past two decades has been in sharp contrast with the general Latin
      American trend until recently, characterised by slow growth overall but also
      by very volatile performance (Figure 1.1). Sound macroeconomic
      management over the years, and institutional reforms of monetary and fiscal
      policy around the turn of the century, made Chile more resilient to terms-of-
      trade shocks and the financial crisis that then affected the region. These are
      all good news, but there is no room for complacency. With GDP per capita
      at only 29% of the United States level in 2006 (as measured in purchasing
      power parities), Chile still has a long way to go in catching up with the more
      advanced OECD economies.

                Figure 1.1. Chile’s annual GDP growth compared with OECD
                            and selected Latin American countries
      %
       14

                                                                                               Chile
      12
                                                                                               Argentina, Brazil and Mexico
      10
                                                                                               OECD
       8

       6

       4

       2

       0
            1985 86   87   88   89   90   91   92   93   94   95   96   97   98   99 2000 01   02      03   04   05   06 2007
       -2

       -4


     Note: The OECD growth line does not include Mexico and Turkey.
     Source: World Development Indicators.
          In recent years, the country’s already strong public finances have been
      further nourished by the upswing in the price of copper, the country’s main
      export (Figure 1.2). This has permitted a steady improvement in the trade
      balance – rising from negative figures in the 1990s to a surplus of 13% of
      GDP in 2007 – and, also, an upward trend in public social spending.
      However, as shown in Chapters 3 and 4, the latter remains relatively low by
      most internationals standards.

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                 CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION – 35


                                        Figure 1.2. Chile’s exports
                                               Percentage of GDP

           45%

           40%

           35%

           30%

           25%

           20%                                                                               Primary
           15%                                                                               Manufacturing
           10%                                                                               Other mining
            5%                                                                               Copper
            0%
               1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Source: Calculations based on data from Banco Central de Chile (www.bcentral.cl/estadisticas-
economicas).

2. Chile has large human resources that are not well utilised

           The estimated population size in 2008 is about 16.8 million, following
       an increase by one-third over the past two decades. The total fertility rate
       has been a little lower than the replacement rate of 2.1 children per woman
       since about 2000, but the working-age population will continue to grow for
       a considerable time because the biggest age cohorts are still no more than
       about 20 years old (Figure 1.3). Net immigration is positive but relatively
       modest, though it is possibly increasing as Chile is attracting workers from
       neighbouring countries.2
           Relative to the size of the working-age population, both employment
       and the effective labour supply is lower than in most OECD countries,
       especially for women and youths. Only for the 55-64-year age group does
       Chile record an employment rate similar to those of most OECD countries
       (Tables 1.1 and 1.2). Many more jobs would have to be created not only to
       give more opportunities to women and youths, but also to accommodate
       demographic pressures. Projections suggest that the working-age population,
       around 11 million in 2008, will increase by over 1.2 million over the coming
       ten years, not counting international migration.

2.           Reliable statistics about international migration do not exist. Estimates for the 1990s
             suggest a net immigration of around 15 000 persons per year (0.1% of the population). See
             INE and CEPAL (2004).

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36 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

                                 Figure 1.3. Population by age class
                                         Panel A. Millions of persons

  18

  16

  14

  12
                                                                                                          65+
  10                                                                                                      55-64
   8                                                                                                      25-54

   6                                                                                                      15-24
                                                                                                          0-14
   4

   2

   0




Source: Instituto Nacional de Estadisticas (INE).
                        Panel B. Population by age and gender in 2005 and 2050
                              Percentage of total population in each group
                                         2 005                      2050

                      MEN                                                            WOMEN
                                                       85+
                                                      80 - 84
                                                      75 - 79
                                                      70 - 74
                                                      65 - 69
                                                      60 - 64
                                                      55 - 59
                                                      50 - 54
                                                      45 - 49
                                                      40 - 44
                                                      35 - 39
                                                      30 - 34
                                                      25 - 29
                                                      20 - 24
                                                      15 - 19
                                                      10 - 14
                                                       5-9
                                                       0-4
 12     10      8       6        4       2        0             0      2         4      6        8   10      12
                 in 2005: 16.3              Total population (in millions)       in 2050: 20.7
                 in 2005: 14         Old age dependency ratio (65+ in % 20-64)   in 2050: 40

Source: Adapted from Population Division of the Department of Economic and Social Affairs of the
United Nations Secretariat, World Population Prospects: The 2006 Revision and World Urbanization
Prospects.

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                CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION – 37


     Table 1.1. Employment/population ratios by gender for selected working-age groups
                        in OECD and accession countries in 2006
                                                    Percentages1

 Men 15-64                     Women 15-64                  Youth 15-24                   Older 55-64

 Iceland               89      Iceland               82     Iceland                73     Iceland              85
 Switzerland           85      Denmark               73     Netherlands            64     New Zealand          70
 New Zealand           82      Norway                72     Australia              64     Sweden               70
 Mexico                82      Sweden                72     Denmark                64     Norway               67
 Japan                 81      Switzerland           71     Switzerland            63     Switzerland          66
 Denmark               81      Canada                69     New Zealand            59     Japan                65
 Australia             79      New Zealand           68     Canada                 59     United States        62
 Netherlands           79      Finland               67     United Kingdom         57     Denmark              61
 Norway                79      United Kingdom        67     United States          54     Korea                59
 United Kingdom        78      United States         66     Austria                54     Estonia              58
 United States         78      Netherlands           66     Norway                 53     United Kingdom       57
 Ireland               77      Australia             66     Ireland                48     Australia            56
 Spain                 77      Estonia               65     Mexico                 45     Canada               56
 Austria               77      Austria               64     Sweden                 44     Mexico               55
 Canada                77      Portugal              62     Germany                44     Israel               55
 Sweden                77      Slovenia              62     Spain                  43     Finland              55
 Greece                75      Germany               62     Japan                  41     Ireland              53
 Korea                 75      Ireland               59     Finland                41     CHILE                53
 Portugal              74      Japan                 59     Portugal               36     Portugal             50
 Czech Republic        74      Russian Federation    58     Slovenia               35     Germany              49
 Luxembourg            73      France                57     Russian Federation     33     Russian Federation   47
 Germany               73      Czech Republic        57     Estonia                31     Netherlands          47
 CHILE                 72      Spain                 54     Turkey                 31     Czech Republic       45
 Slovenia              71      Luxembourg            54     Czech Republic         28     Spain                44
 Finland               71      Belgium               54     Korea                  27     Greece               42
 Italy                 71      Korea                 53     Israel                 27     France               41
 Estonia               71      Slovak Republic       52     Belgium                26     Austria              36
 Turkey                68      Hungary               51     CHILE                  26     Hungary              34
 France                68      Poland                48     Slovak Republic        26     Slovak Republic      33
 Belgium               67      Greece                48     Italy                  26     Italy                33
 Slovak Republic       67      Italy                 46     France                 25     Slovenia             33
 Russian Federation    66      Israel                46     Luxembourg             25     Luxembourg           32
 Hungary               64      Mexico                43     Greece                 25     Belgium              30
 Poland                61      CHILE                 39     Poland                 24     Turkey               30
 Israel                56      Turkey                24     Hungary                22     Poland               28

1.       Countries are ranked from highest to lowest employment rates in each column.
Source: OECD Labour Force database.




OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
38 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

            Table 1.2. Labour force status of the Chilean population, 1996-2007

              Labour force/Population            Employed/Population             Unemployed/Labour force

                1996     2000       2007         1996      2000       2007         1996      2000       2007

    Both genders
    15-19       17.2      13.7      13.8          13.9      10.1      10.5          19.6      26.2      24.1
    20-24       57.5      55.3      53.3          49.5      44.2      44.9          13.8      20.1      15.8
    25-29       68.7      70.5      72.6          63.2      61.5      64.9           8.1      12.6      10.6
    30-34       70.2      71.6      76.8          66.5      65.3      71.6           5.3       8.7       6.7
    35-39       70.7      71.1      74.6          67.7      66.3      70.5           4.2       6.8       5.6
    40-44       71.8      72.1      75.4          69.0      67.7      71.8           3.8       6.1       4.8
    45-49       68.7      70.9      73.7          66.4      67.1      70.5           3.4       5.3       4.4
    50-54       63.0      64.8      70.1          60.9      61.5      67.1           3.3       5.1       4.2
    55-59       53.1      57.2      63.6          51.4      53.8      61.0           3.1       5.9       4.1
    60-64       41.2      42.2      48.6          39.9      39.9      47.1           3.1       5.3       3.2
    65-69       24.9      24.4      28.1          24.3      23.7      27.5           2.4       3.0       2.0
    70+          9.7       9.1      10.0           9.6       9.0      10.0           1.3       1.1       0.4
    15+         51.4      51.9      55.1          48.5      47.5      51.4           5.9       8.9        7.2
    15-64       58.2      58.9      62.3          54.8      53.7      58.0           6.8      10.2        8.4

    Men
    15-19       23.8      18.1      17.9          19.7      13.8      14.2          17.1      23.9      21.1
    20-24       73.8      69.1      65.1          64.7      56.4      55.7          12.4      18.4      14.4
    25-29       93.1      90.4      87.4          86.5      79.4      79.6           7.0      12.2       9.0
    30-34       96.4      96.5      95.8          91.8      88.5      90.2           4.8       8.3       5.8
    35-39       97.0      96.5      96.6          93.6      90.0      91.8           3.5       6.7       4.9
    40-44       96.6      96.3      96.2          93.2      90.6      92.3           3.6       5.9       4.1
    45-49       94.7      95.2      95.1          91.9      90.3      91.4           3.0       5.1       3.8
    50-54       89.5      90.6      92.1          86.4      85.8      88.2           3.5       5.4       4.2
    55-59       80.9      84.8      86.6          78.2      79.3      82.9           3.3       6.5       4.2
    60-64       66.1      66.5      73.0          63.6      62.3      70.6           3.8       6.4       3.3
    65-69       40.7      39.5      43.3          39.6      38.0      42.3           2.5       3.7       2.3
    70+         17.7      16.6      17.1          17.5      16.4      17.0           1.2       1.2       0.4
    15+         72.5      71.7      72.2          68.9      65.9      68.0           5.5       8.6        6.5
    15-64       81.2      80.4      80.6          77.0      73.6      75.7           6.2       9.9        7.5

    Women
    15-19       10.6       9.1       9.1           8.0       6.3       6.3          25.2      31.0      30.8
    20-24       41.1      40.7      41.6          34.3      31.3      34.1          16.5      23.2      18.1
    25-29       44.9      50.9      57.9          40.3      44.1      50.3          10.2      13.4      13.1
    30-34       45.7      47.1      58.1          42.8      42.6      53.3           6.2       9.6       8.3
    35-39       45.3      46.6      53.6          42.8      43.2      50.1           5.7       7.2       6.6
    40-44       46.6      48.7      55.4          44.6      45.5      52.2           4.3       6.6       5.8
    45-49       42.9      47.7      53.1          41.1      45.1      50.3           4.2       5.6       5.4
    50-54       37.3      40.7      49.0          36.1      38.8      46.9           3.0       4.7       4.3
    55-59       27.1      30.8      41.0          26.4      29.5      39.4           2.6       4.3       3.9
    60-64       19.0      19.5      25.9          18.8      19.0      25.1           1.0       2.1       3.0
    65-69       10.8      11.8      14.6          10.6      11.6      14.4           2.1       1.1       1.3
    70+          3.4       3.3       4.8           3.4       3.3       4.8           1.4       0.7       0.4
    15+         31.2      33.1      38.7          29.1      30.0      35.6           6.9       9.1        8.4
    15-64       36.1      38.2      44.5          33.5      34.5      40.8           7.9      10.7        9.9

Source: Instituto Nacional de Estadisticas (INE) ; Labour Force database.

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                   CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION – 39



        Women and youth face difficulties in entering the labour market
            Over the past 12 years, the labour force participation rate remained
        stable around 81% for men (Table 1.2), similar to the OECD average, while
        the corresponding rate for women increased from 31% to 39%. But the
        female unemployment rate has also increased significantly, and thus the
        gender difference has declined much less in employment rates than in labour
        force participation. Chile’s female employment rate is also low compared
        with Argentina, Brazil, and Uruguay (World Bank, 2007a). Nevertheless,
        the trends suggest a considerable improvement for prime-age and older
        women since the mid-1990. For men, the same holds only for the 55-64 year
        age group (Figure 1.4).
             The situation is particularly worrisome for large groups of young labour
        market entrants, and, despite some recent improvement, for prime age
        women. For prime-age men, the employment rate is rather stable at around
        90%. It is also notable that 16.5% of people older than 65 are participating
        in the labour market, often reflecting insufficient pensions.

      Figure 1.4. Evolution of employment/population ratios by gender and age groups,
                                        1996-2007
                              Females                                                    Males
 60                                                         100
                                                             90
 50
                                                             80
 40
                                                             70
 30                                                          60

 20                                                          50
                                                             40
 10
           25-54      55-64      15-24                       30
                                                                       25-54     55-64      15-24
 -                                                           20




Source: Instituto Nacional de Estadisticas (INE).


             The difficulties faced by the 15-24 year age group are illustrated by the
        fact that only 5.6% of them combine education with work, while around
        19% are for various reasons neither in employment nor in education or
        training (noted as NEET hereafter; Table 1.3). Although several OECD
        countries face a similar challenge, the latter ratio in Chile is almost twice the
        OECD average, with only Turkey and Mexico showing higher NEET rates
        (OECD, 2008a, Figure 1.1). This situation probably has several
        explanations, including both the structure of secondary and higher



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40 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

      education, which is more easily combined with work in some countries than
      in others, and a significant incidence of teenage pregnancies.

          Table 1.3. Youths in 2006: unemployment, labour force participation
                     and the proportion who neither study nor work

          Age, gender            Unemployment Participation rate Neither study nor
                                    rate (%)         (%)             work (%)

          15-24                         17.6                   36.3                  19.0
          Men                           15.1                   42.9                  13.5
          Women                         21.3                   29.7                  24.5
          15-19                         24.5                   17.6                  14.4
          Men                           19.0                   21.5                  11.8
          Women                         33.5                   13.6                  17.0
          20-24                         15.1                   58.2                  24.3
          Men                           13.6                   68.0                  15.4
          Women                         17.4                   48.3                  33.3

          Source: Based on Mideplan (CASEN 2006).

           In Chile, the family conditions typically seen as obstacles to female
      labour force participation concern young women more than in most OECD
      countries. Chilean mothers gave birth to their first child at an average age of
      only 23.7 years in 2006, compared with around 30 years in many OECD
      countries. Teenage mothers have recently accounted for about 15% of all
      births, with substantially higher incidence in low-income groups and poor
      regions (INE, 2006). Some 26% of Chilean households consist of single
      parents with children, of which sole mothers represent 22 percentage points
      including one-third of the poor households and one-fifth of those not
      classified as poor (CASEN 2006). About half of the sole mothers are not in
      the labour force.
          For Chilean women in general, labour force participation is strongly
      correlated with education attainment and family income. In the 25-64 year age
      group, women in the top income quintile had on average over five years longer
      education than those in the bottom quintile, while the labour force participation
      rate was 74% in the top quintile compared with only 36% in the bottom
      quintile in 2006 (Table 1.4). To some extent, this reflects a wage structure that
      makes it worthwhile for well-educated parents to work and pay for child care,
      but less so for those with little education. But in addition, low-income families
      have on average more than twice as many children as high-income families
      have (despite a lower average age reported for the heads of poor households).
      Poor households are also more likely to include persons not belonging to the

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       nuclear family, most often a grandparent – a situation that involves additional
       care responsibilities for some working-age women, but which can also have
       positive effects, as shown by above-average rates of labour force participation
       and education enrolment for mothers living with their own parents (Larrañaga,
       2009). Low-income women are over-represented in rural areas, reducing their
       access to jobs. (In the bottom quintile, 22% of women live in rural areas
       compared with 5% in the top quintile.)

   Table 1.4. Profile of women between 25-64 years old by per capita income quintiles,
                                         2006

                                                          Per capita autonomous income quintile

                                                    I           II         III          IV         V    Total

  Urban residence                               78%         85%         89%           93%        95%    88%
  Age                                           41.4        42.4        43.2          43.3       43.0   42.7
  Years of education                             8.2         9.2         9.9          11.1       13.5   10.4
  Family headed by women                        36%         32%         29%           29%        29%    31%
  Children
   children less than 18 years old               1.9         1.6         1.2           1.0        0.8    1.3
   children less than 6 years old                0.5         0.4         0.3           0.3        0.2    0.4
  Hours worked                                  41.8        44.8        47.6          46.6       44.9   45.2
  Employees without formal contract             50%         34%         26%           22%        14%    26%
  Labour force participation                    36%         46%         55%           64%        74%    55%

Note: Employees without formal contract are counted as a percentage of all female employees
(i.e. excluding employers, self-employed persons and unpaid family workers).
Source: Based on Mideplan (CASEN 2006) and OECD calculations.

                      Figure 1.5. Reasons for inactivity among women, 2006

                               Other reasons
                                  17.9%
                                                                                 Childcare and
                                                                                  household
                               Illness                                             activities
                                7.5%                                                 39.0%



                           Retirement
                             15.1%

                                             Student
                                              20.5%

        Source: Based on Mideplan (CASEN 2006) and OECD calculations.

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42 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

                 Asked about the reasons for not seeking jobs, women most often
             mention care of children or elderly relatives and household activities, but a
             range of other reasons also play a role (Figure 1.5). Among employed
             women, those in lower income quintiles are over-represented in the informal
             economy, particularly domestic services. Cultural factors can also be
             important, as suggested by a relatively high inter-correlation between
             spouses’ educational attainment.3

3. Job creation in low-productivity sectors
                  The recession of the late 1990s led to both absolute and relative declines
             in industrial employment, including mining, manufacturing and public
             utilities, as well as in agriculture. As measured in absolute numbers, this
             cyclical decrease was reversed after 2000. But in relative terms, the
             manufacturing and agricultural sectors continued to shrink until 2005 or
             2006, when they stagnated at, respectively, 13% and 12% of total
             employment (Table 1.5). With currently almost two-thirds of total
             employment in the service sector, Chile’s “de-industrialisation” process
             appears about as advanced as in many “old” industrialised economies even
             though the agricultural employment share is still as high as 12%, which is
             more comparable to Mexico, Portugal or Poland (Table 1.6).4

                        Table 1.5. Employed persons by economic sector in 1996-2007
 Sector                                            Percentage distribution of total employment                               Accumulated
                                                                                                                            absolute change
                                                                                                                                  (%)
                                    1996   1997   1998   1999   2000   2001   2002   2003    2004      2005   2006   2007    96-01     01-07
 Primary                             15     14     14     14     14     13     13     13      13        13     12     12       -10       9
 Industry                            19     19     18     17     16     16     16     16      16        15     15     15       -12      13
 Mining                              1.8    1.7    1.6    1.4    1.4    1.4    1.3     1.2       1.3    1.3    1.4    1.5       -23      23
 Manufacturing                        16    16     16     15     14      14     14     14        14     13     13     13        -10      12
 Utilities                           0.8    0.7    0.6    0.6    0.6    0.6    0.6     0.6       0.6    0.6    0.6    0.6       -25      23
 Construction                         8      9      9      7      7      8      8      8       8         8      8      8        1       24
 Services                            58     59     59     62     63     63     63     63      63        64     64     64       12       19
 Commerce and tourism                 18    18     18     19     19      19     19     19        19     19     19     20        10       20
 Transports, communications           8      8      8      8      8       8      8      9         8      8      8      8        10       20
 Finance and business services         7     7      7      8      8       8      8      8         8      9      9      9        17       28
 Social and personal services         26    26     26     28     28      28     27     27        28     28     28     27        12       15

 Total                              100    100    100    100    100    100    100    100     100       100    100    100         3      17

Source : Instituto Nacional de Estadisticas (INE).

3.                De Ferranti et al. (2004) find a correlation coefficient of 74.5%. A similarity in education
                  levels within couples can be considered as a cause of social segmentation, contributing to
                  the inequality of household incomes.
4.                The World Bank (2008) reported similar shifts of employment from manufacturing to
                  services since the early 1990s for most of the Latin American region, where manufacturing
                  represented on average 15% of employment in 2003. To a large extent these employment
                  shifts were directed towards relatively low-productive activities.

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      Table 1.6. Employment by economic sector in Chile and OECD countries, 2007
                                             Percentage of total employment
                United Kingdom   Sweden Australia Denmark     Ireland   Korea   Italy   Chile   Mexico Portugal Poland
                                             (2005)
 Primary                     1         2         4        3        5       7      4       12         13     12     15
 Industry                   14        15        13       16       14      18     22       15         19     20     24
 Construction                8         6         9        7       13       8      9        8          8     11      7
 Services                   76        76        75       73       67      67     65       64         59     58     55

Countries are ranked by service sector shares.
Source: Instituto Nacional de Estadisticas (INE) and OECD Labour Force database.

            The employment growth recorded in the service sector has partly
        concerned relatively high-skilled and well-paid jobs, for example in finance,
        whose growth has been facilitated by increased education attainment in the
        young population. Nevertheless, much of the observed labour flows appear
        to reflect the supply pressures created by population growth and a
        continuing, albeit slow, relative decline of agricultural employment.
        Significant employment shifts have thus been directed towards sectors with
        modest average wages, for example in commerce, tourism and construction.
        In these areas and in the manufacturing sector, relative wages have
        reportedly declined since the 1990s (Table 1.7).

                        Table 1.7. Relative wages in selected economic sectors

                        Overall average = 100. Sectors ranked by average wage in 2005

                    Mining       Utilities   Financial   Transport, Manufacturing Commerce Construction
                                              services      comm.
     1994             204          208           178           86               97              82            87
     1995             195          208           176           92               97              81            87
     1996             183          215           188           90               95              82            86
     1997             193          206           190           89               94              81            79
     1998             191          196           195           89               93              81            76
     1999             189          203           184           96               89              80            66
     2000             191          201           190          100               88              77            68
     2001             193          198           190           98               87              76            68
     2002             189          202           192           98               84              76            63
     2003             194          207           189           99               85              75            61
     2004             212          209           190           97               84              73            57
     2005             207          204           197           95               85              72            56
Source : Instituto Nacional de Estadisticas (INE).




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44 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

4. The quality of jobs

      Sub-contracting and worker dispatching
          Many Chilean firms sub-contract part of their production and services to
      other firms or use workers dispatched from temporary work agencies
      (TWAs). Available statistics do not show the number of workers concerned,
      but the 2006 ENCLA survey (Encuesta Laboral) indicated that 41% of the
      formal enterprises – including over two-thirds of the big firms – used
      sub-contractors and almost as many used some TWA workers. Both
      phenomena have often been found to concern tasks within client enterprises’
      own work processes as well as more separate tasks. As discussed in
      Chapter 2, the legal and labour market implications are complex and have
      recently been subject to much controversy. Sub-contracting, in particular,
      has been considered to cause an excessive fragmentation of enterprises and
      to exacerbate the segmentation and opacity of Chile’s job market. Available
      sector-level statistics about employment and wages, such as those in
      Tables 1.6 and 1.7, must therefore be treated with caution.

      The role of informal employment
          Informal work is less prevalent in Chile than elsewhere in Latin
      America, as shown by the number of individuals who contribute to social
      insurance systems (Figure 1.6). But it is still relatively widespread by the
      OECD standards. In many countries, informality is often related to a desire
      on the part of both employers and employees to avoid paying taxes and
      social contributions, or it may reflect other conditions in the business
      environment such as a high minimum wage, rigidities in labour law or
      administrative costs associated with formality. Tax enforcement may be less
      of a problem in Chile: OECD (2007a, Chapter 4) found that only about 11%
      of the potential value-added tax base appeared to have been undeclared in
      2005, while undeclared work concerned a substantially higher percentage of
      the workforce.
          Analysis based on Chile’s 2006 CASEN household survey suggests that
      much of the informal work is associated with ingrained patterns of labour
      market segmentation, being typically concentrated in small firms with
      low-skilled workers in low-paid jobs. Tax evasion also plays a role –
       sometimes among high-skilled groups – as do more transitory situations,
      especially among youths who may be waiting for better jobs.




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     Figure 1.6. Employed persons in Latin America not contributing to social insurance
                                   Percentage of employment in urban areas

       90
       80
                   Self-employed
       70
                   Salaried
       60
       50
       40
       30
       20
       10
        0




Source: Adapted from World Bank (2007b).


            As an alternative measure of informality, the proportion of employees
        without labour contracts increased in the 1990s, but began to decline
        after 2000. This proportion has tended to converge with the share of
        employees not contributing to pension insurance, the two situations being
        often combined; both were around 20% of the employees in 2006,
        corresponding to about 15% of total working-age employment in 2006
        (Box 1.2).5 The share of self-employment (including employers and those
        without employees) in total employment has been relatively stable since the
        early 1990s, being 22% in 2006 according to the CASEN surveys, or some
        percentage points more according to labour force surveys. About three-fifths
        of them were “own-account workers” without employees, amongst whom
        barely 20% contributed to pension insurance compared with 34% for those
        who were employers. Counting all forms of employment, it can thus be
        estimated that a little more than 30% of the employed working-age
        workforce did not contribute regularly in 2006.




5.           Some 80% of those without contract did not contribute to social insurance, and vice versa.
             In addition, AFP surveys indicate that at least 5% of the contributing employees paid
             too little.

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46 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION


              Box 1.2. Alternative measures of labour informality in Chile

     As discussed in the OECD Economic Survey of Chile (OECD, 2007a), labour informality is a
broad concept that is difficult to measure. There is no consensus in the academic literature or in the
policy world over what constitutes the “informal sector”, even among OECD countries. The table
below documents three possible definitions for employees: 1) employees without signed contract;
2) employees not contributing to social security; and 3) employees without contract who do not
contribute to social security, along with 4) self-employed and 5) self-employed persons who do not
contribute to social security.1 The first three ratios are calculated over all employees and over total
working-age employment; the last two only over the latter denominator.
     The different rates for the first three definitions suggest a non-negligible number of employees
without labour contracts who are still making social security contributions. Women are
over-represented amount informal employees, but under-represented among the self-employed. One
reason for the higher informality rate for female is that about half of the female domestic servants and
unpaid family workers have no signed contracts.

                        Incidence of informality by alternative measures

                                   Employees not        Employees without
                  Employees
                                   contributing to       contract and not
                without contract
                                   social security     contributing to social      Self-         Self-
                                                                                employed      employed
                                   as % of all employees                        persons in   persons not
                                                                                 general     contributing
        Men         19.1%              16.4%                  14.0%
                                                                                               to social
        Women       25.9%              23.3%                  20.5%                           insurance
        M+W         21.8%              19.1%                  16.5%

                                                     as % of total employment

        Men         14.4%              12.3%                  10.5%               23.0%         16.7%
        Women       19.9%              17.9%                  15.7%               20.6%         16.3%

        M+W         16.6%              14.5%                  12.6%               22.1%         16.6%


Note: The employees counted here include those in the private and public sectors, household servants
and the military. Self-employed groups include employers and those counted as own-account workers
(irrespective of the number of their employees).
Source: Based on Mideplan (CASEN 2006) and OECD calculations.

1. These figures refer to employees in the private and public sectors including domestic work and the
military. Self-employment as defined here covers both employers and those without employees
(own-account workers). It should be noted that social security is voluntary for the self-employed, while a
few employees have contracts that do not refer to the Labour Law (called honorarios), allowing the
employer to decide whether or not to contribute to social security.
Note also that any individual can make contributions to the health institutions or the pension fund, and the
self-employed can choose varying payment intervals. In any given month, the proportion reported by the
pension administration to contribute is therefore lower than the survey-based figures used here (i.e. they
suggest a higher informality rate).



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             Youths of both genders are disproportionally present among informal
         employees (Figure 1.7), especially when they have low education, while
         persons aged 55 or more are over-represented among the self-employed (not
         shown). Women are over-represented among informal employees (see Table
         in Box 1.2 and Table 1.8), but this gender difference almost disappears if
         one does not count domestic work (Figure 1.7). If domestic work is
         excluded, the wage premium for a formal contract is only about 20% for
         women compared with 30 to 40% for men; in other words, the male-female
         wage gap appears smaller in informal than in formal jobs.

          Table 1.8. Activity rate, informality and earnings in the 25-64 population
                                       by education, 2006

Gender               Labour force                           Self-employment:               Job earnings
                   participation rate   Lack of contract:
Years of                                                         % of the
                                        % of employees
education                                                       employed        Contract   No contract Self-employed

Men                      94%                  20%                25%               6 782         4 101       12 915
Less than 8              88%                  30%                36%               3 445         2 498        5 928
8-11                     94%                  25%                27%               4 086         3 035        7 793
12                       96%                  15%                19%               5 175         3 726       11 358
>12                      93%                  13%                21%              12 279         9 507       26 284

Women                    59%                  26%                22%               6 035         3 546       10 246
Less than 8              40%                  48%                34%               2 822         2 250        4 734
8-11                     50%                  39%                26%               3 187         2 506        5 541
12                       61%                  23%                19%               4 136         2 887        7 911
>12                      77%                  15%                15%               9 232         7 656       20 698

Note: The figures for employees in this table include the military and domestic services.
Job earnings = average hourly income in pesos from the main job for people working at least 30 hours
a week.
Source: Based on Mideplan (CASEN 2006) and OECD calculations.
              Informality of any type is most common in micro-firms, including
         persons working alone and those with a few employees and/or family
         workers. Almost 40% of employees in firms with up to five workers have no
         signed contract, compared with 7% in firms with over 200 workers. The
         linkage with firm size is similar in most economic sectors, resulting in the
         highest overall incidence of informality in agriculture (where 40% are
         self-employed and 31% of the employees lack contracts) followed by social
         services, commerce and manufacturing. While informality increased in the
         1990s it shows no clear pattern with respect to business cycles. Regional
         variations are also moderate, apart from those that depend on the size of the
         agricultural sector.
             All told, a large part of the observed informal employment represents a
         fragile segment of the labour market. Low-skilled employees are often hired

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48 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

      informally by small firms that are themselves informal. For the workers
      concerned, often young, informal employment is probably a second-best
      solution in many cases. However, self-selection probably plays a role as
      well. There is some evidence that white-collar workers who work informally
      often gain from this situation – e.g. earning more take-home pay with the
      same gross income – while the predominant low-skilled groups typically
      earn less in both net and gross terms when they work informally (Puentes,
      2007). Furthermore, panel surveys show that employees without contracts
      often expect their informal status to be temporary, an expectation largely
      confirmed by data about transitions to formal jobs.6
                     Figure 1.7. Informality among employees by age1
                     40.0
                     35.0          age 14-24                                 Females
                                   age 25-54
                     30.0
                                   age 55-64
                     25.0
                     20.0
                     15.0
                     10.0
                      5.0
                      0.0
                            1990      1992     1994   1996   1998   2000   2003    2006

                    40.0
                    35.0
                                   age 14-24                                      Males
                                   age 25-54
                    30.0
                                   age 55-64
                    25.0
                    20.0
                    15.0
                    10.0
                     5.0
                     0.0
                            1990      1992     1994   1996   1998   2000   2003    2006

Note: The data used here do not cover the military and domestic workers. Female informality rates
appear significantly higher when the about 300 000 domestic workers are included, as shown in the
table in Box 1.2 and in Table 1.8.
1.       Persons without signed labour contract.
Source: Calculations based on Mideplan, various years.

6.         Over half of the employees who lacked contracts in one year had contracts two years later.
           About one-third of the self-employed made the transition to formal employee jobs over the
           same periods. Conducted in 2002, 2004 and 2006, these surveys referred to the about
           5.6 million persons affiliated to pension insurance – thus not all the employed (over
           6 million), but many more than the monthly contributors (about 3 million).

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5. Significant improvements in health, education and housing

           Traditionally, Chile’s social agenda has mainly focused on providing
       access to services, especially in the areas of education, health care and
       housing, and this with quite some success. The share of the population
       without health insurance came down from 12.2% in 1990 to 5.1% in 2006,
       education enrolment has increased substantially and the previous housing
       deficit was much reduced. Despite such achievements, there is still a need to
       improve the quality of available provisions and to reduce access barriers for
       disadvantaged groups.
           As measured by conventional health indicators such as life expectancy
       and infant mortality, Chile is probably the best performer in Latin America
       and it also compares relatively well with some OECD countries (Figure 1.8).
       Further efforts are required in education because the overall stock of human
       capital remains relatively low. The reported illiteracy rate for adults
       decreased from 5.7% in 1992 to 3.6% in 2006,7 but Chile’s population
       aged 25-64 years still had only ten years of schooling on average, compared
       with an OECD average of 12 years. Enrolment is nearly complete in primary
       and lower-secondary education, while enrolment rates at upper-secondary
       and higher levels have increased dramatically since 1990, especially for
       youths from low-income households (Figure 1.9, Panel A). Income-related
       differences in higher-education enrolment can depend partly on students’
       performance at lower levels, but they must also be attributed to a difference
       in families’ financial capacity and its impact on the quality of education
       received at lower levels.
           PISA scores for 15-year-olds reveal that Chile’s student performance
       remains relatively far below the OECD average (Panel B). In contrast with
       the general experience in OECD countries, the performance differs too
       much between rather than within the public, subsidised private and fully
       private sectors of the education system. Based on the 2007 SIMCE
       national test for language and mathematics performance, fully private
       schools – covering 6% of the students, mainly from the top income
       quintile – outperform the subsidised private schools that cover 46% of the
       students, mainly from middle-income groups. The subsidised private
       schools in turn outperform municipal (fully public) schools, which educate
       47% of the students who come mainly from the lowest quintiles (Panel C).




7.           Source: UNESCO Institute for Statistics.


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                                        Figure 1.8. Health indicators

                                    Panel A. Life expectancy at birth (years)

 85
                 2006      1980
 80

 75

 70

 65

 60




                                             Panel B. Child mortality1

 140
                2006        1980
 120

 100

     80

     60

     40

     20

     0




1.        Child mortality is defined as the probability of dying by the age of 5 per 1 000 live births.
Source: World Health Organisation and World Bank.




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                                      Figure 1.9. Education outcomes

                         Panel A. School enrolment rates by income level, 1990-2006
                   Pre-primary            Primary and lower-         Upper-secondary
Income                                                                                           Higher education
                    education            secondary education            education
quintile
                  1990       2006          1990         2006          1990        2006            1990      2006
I                 17.0        38.0          95.6        98.4          73.8        87.7             4.4      19.8
II                17.6        39.2          96.9        99.0          77.1        90.9             7.7      25.1
III               20.8        44.3          97.7        99.2          80.6        93.4            12.4      33.3
IV                27.0        46.4          97.5        99.6          87.0        97.3            22.0      47.2
V                 32.5        52.0          98.9        99.6          94.5        97.6            40.7      67.1

Total             21.0        42.4          96.9        99.0          80.8        92.4            16.2      38.7

Source: Based on Mideplan (CASEN 1990 and 2006).

             Panel B. Student performance: average PISA score for science in OECD members
                                      and accession countries, 2006
 600
 550
 500
 450
 400
 350
 300




Horizontal line indicates the OECD average.
Source: OECD PISA 2006.

      Panel C. Education performance by school type: SIMCE scores for secondary education, 20071

                                           Language                                      Mathematics
                                             Private                                         Private
                            Municipal                    Fully private       Municipal                   Fully private
                                           subsidised                                      subsidised

Primary and lower
                                241            261             299              231              254         298
secondary education
Upper secondary
                                241            260             299              242              263         312
education
1.         The scores of language vs. mathematics cannot be compared because they are rescaled each
           time to yield a national mean of 250 and a standard deviation of 50.
Source: Adapted from the Spanish version, Ministry of Education (SIMCE database).

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52 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

          There is also still room for improvement in the housing area, although a
      range of housing subsidies introduced in the 1990s has led to a sharp
      quantitative and qualitative improvement of the housing stock. An officially
      estimated “housing deficit” – defined as the percentage of households without
      their own dwellings or whose dwellings did not fulfil certain minimum
      requirements – declined from 30% in 1990 to under 10% in 2006 (Table 1.9).
      The proportion of owner-occupied dwellings increased from 61% to 69% over
      the same period (Figure 1.10). Strikingly, the increase in home ownership
      mainly concerned low-income groups, a fact that appears to reflect the limited
      market for rental accommodation apart from relatively expensive homes.8 The
      share of owner-occupied dwellings acquired with the help of public subsidies
      has recently been over one-third from the first four quintiles and one-sixth in
      the highest quintile.
                            Table 1.9. Housing conditions in 1990 and 2006
                                           Percentage of households concerned
                Housing          Dwelling shared      Dwelling shared   2.5 or more     Poor building Lack of WC3
                        1         with unrelated       with extended    persons per                2
                deficit                                                                  materials
                                   households              family        bedroom


      1990         30                      5                20              24                37          32
      2006        9.5                      4                19              11                23          25
1. Households who lack dwellings of their own or have dwellings of unacceptable quality.
2. Perishable, not water-tight, etc.
3. Lack of WC connected to sewer or sceptic tank.
Source: Based on Mideplan (CASEN 1990 and 2006).

                     Figure 1.10. Households owning their main dwellings
                            %
                            80
                                      1990     2006
                            70

                            60

                            50

                            40

                            30

                            20

                            10

                            0
                                       I              II         III         IV             V
                                                                                      Income quintile

                        Source: Based on Mideplan (CASEN 1990 and 2006).

8.           Rental housing with contracts is common mainly in the highest income quintiles
             (CASEN 2006). Low-income households not owning their homes more often rent
             informally or live in borrowed dwellings.

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6. Poverty has been much reduced, but the income distribution
remains very unequal

            Years of sustained growth in Chile have resulted in a substantial decline
       in the absolute poverty headcount ratios (as defined nationally) between
       1990 and 2006 (Table 1.10, Panel A).9 Poverty went down from 38.6% to
       13.7% of the total population, which corresponds to around
       2.76 million persons moving out of poverty. The drop in the incidence of
       poverty was particularly sharp during 2003-06. The percentage of people
       living in extreme poverty (indigence) fell by 9.8 percentage points to 3.2%
       in 2006. Although children and youth have benefited the most from this
       reduction (Table 1.10, Panel B), their poverty rate remains double that
       observed for other age groups. Persons aged 45 or more show the lowest
       levels of poverty. However, these two last-mentioned observations may
       reflect the use in Chile of a household income concept per capita instead of
       equivalent units: large households look poorer when all household members
       are given the same weights.
           Notwithstanding Chile’s economic success, the country faces a difficult
       problem of inequality. Table 1.11 (left column) ranks countries according to
       the best known index of income inequality, the Gini coefficient.10 With a
       Gini coefficient of 0.53, the degree of inequality in Chile is far above that of
       OECD member countries including those with the highest income
       inequality, Turkey and Mexico. Chile also shows high relative poverty, with
       around 16.5% of the population having an equivalised disposable income of
       under 50% of the median for the entire population in the mid-2000s – more
       than in all OECD countries except Mexico, Turkey and the United States
       (right panel). Although this measure allows a benchmarking of countries’
       performance, this is done on an essentially arbitrary basis; it is less
       informative about the minimum standard of living that is considered
       acceptable in a country (Box 1.3).




9.           These poverty headcount ratios are the shares of the population living below the national
             poverty and indigence lines, which correspond to certain consumption baskets.
10.          The Gini coefficient is defined as the area between the Lorenz curve (which plots
             cumulative shares of the population, from the poorest to the richest, against the cumulative
             share of income that they receive) and the 45° line, taken as a ratio of the whole triangle.
             The values of the Gini coefficient range between 0, for “perfect equality” (i.e. each share of
             the population gets the same share of income), and 1, for “perfect inequality” (i.e. all
             income goes to the individual with the highest income).

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                                   Table 1.10. Poverty trends

                     Panel A. Evolution of poverty and indigence, 1990-2006


                       Indigence               Not indigent poverty               Total poverty

                     Persons            %           Persons            %           Persons            %

     1990          1 674 736         13.0         3 293 566         25.6         4 968 302         38.6
     1992          1 206 421          9.0         3 184 146         23.8         4 390 567         32.9
     1994          1 045 083          7.6         2 770 816         20.1         3 815 899         27.6
     1996            822 371          5.7         2 498 156         17.5         3 320 527         23.2
     1998            825 545          5.6         2 358 444         16.0         3 183 989         21.7
     2000            838 196          5.6         2 200 709         14.6         3 038 905         20.2
     2003            726 509          4.7         2 178 915         14.0         2 905 424         18.7
     2006            516 738          3.2         1 692 199         10.5         2 208 937         13.7


                Panel B. Percentage of population in poverty by age, 1990 and 2006
               With respect to the total number of persons in the relevant age group


                         Age group                          1990           2006
                         0-3                                53%           22%
                         4 - 17                             50%           20%
                         18 - 29                            36%           11%
                         30 - 44                            38%           14%
                         45 - 59                            27%             9%
                         60 and older                       21%             8%
                         Total                             38.6%         13.7%
              Note: In-house domestic servants and their families are excluded. The official
              income concept provided by Mideplan is used (household market income
              per capita).
              Source: Adapted from the Spanish version of Mideplan (2007a).




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                    Table 1.11. Poverty and inequality indicators, mid-2000s1

                       Gini coefficient of income              Relative poverty rates at 50%
                               inequality                           of median income2
                    Denmark                 0.232              Denmark                 0.053
                    Sweden                  0.234              Sweden                  0.053
                    Luxembourg              0.258              Czech Republic          0.058
                    Austria                 0.265              Austria                 0.066
                    Czech Republic          0.268              Norway                  0.068
                    Slovakia                0.268              France                  0.071
                    Finland                 0.269              Iceland                 0.071
                    Belgium                 0.271              Hungary                 0.071
                    Netherlands             0.271              Finland                 0.073
                    Switzerland             0.276              Netherlands             0.077
                    Norway                  0.276              Luxembourg              0.081
                    Iceland                 0.280              Slovakia                0.081
                    France                  0.281              United Kingdom          0.083
                    Hungary                 0.291              Switzerland             0.087
                    Germany                 0.298              Belgium                 0.088
                    Australia               0.301              New Zealand             0.108
                    Korea                   0.312              Germany                 0.110
                    Canada                  0.317              Italy                   0.114
                    Spain                   0.319              Canada                  0.120
                    Japan                   0.321              Australia               0.124
                    Greece                  0.321              Greece                  0.126
                    Ireland                 0.328              Portugal                0.129
                    New Zealand             0.335              Spain                   0.141
                    United Kingdom          0.335              Poland                  0.146
                    Italy                   0.352              Ireland                 0.148
                    Poland                  0.372              Korea                   0.149
                    United States           0.381              Japan                   0.149
                    Portugal                0.385              CHILE                   0.164
                    Turkey                  0.430              United States           0.171
                    Mexico                  0.474              Turkey                  0.175
                    CHILE                   0.530              Mexico                  0.184
                    OECD average            0.311              OECD average            0.106

Countries are ranked in increasing order of the respective indicator.
1.      The income concept used is that of disposable household income in cash, adjusted for
        household size.
2.      Poverty rates are defined as the share of individuals with equivalised disposable income less
        than 50% of the median for the entire population.
Source: OECD Income Distribution questionnaire, and Larrañaga (2009).




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                                     Box 1.3. Poverty line in Chile

     There is no standardised procedure for measuring poverty, even among OECD countries. Often, a
relative income measure is used. For example, a threshold of 60% of median income is used as a
benchmark for at-risk-of-poverty at the EU level, while the poverty line used in the United States is
closer to 40% of median income. Poverty measurement also allows for variations in absolute criteria,
such as the poverty line of USD 1 or USD 2 per capita per day used by the World Bank. The procedure
chosen depends on the interpretation of the “minimum needs”, which can be considered absolute or
relative with respect to the standard of living in the country.
     In Chile, as in most Latin American countries, the national poverty line is measured on the basis of a
basic food basket. This is the cost-efficient food basket that satisfies the nutritional requirements of
household members, and which defines the indigence or line of extreme poverty. After adding up the cost
of other commodities, such as clothing, transport, and housing, the poverty line is obtained. The
calculation is based on the 1987 consumption spending of a reference group of households (adjusted for
inflation). Table A shows the official poverty and indigence lines for the period 1990-2006.

                   Table A. Official poverty and indigence lines, 1990-2006
                                   In Chilean pesos of November each year

                           1990        1992      1994       1996       1998       2000       2003       2006

  Poverty line
   Urban zone            18 594       25 750   30 100     34 272     37 889     40 562     43 712     47 099
   Rural zone            12 538       17 362   20 295     23 108     25 546     27 328     29 473     31 756

  Indigence line
    Urban zone             9 297      12 875   15 050     17 136     18 944     20 281     21 856     23 549
    Rural zone             7 164       9 921   11 597     13 204     14 598     15 616     16 842     18 146

Note: The official income concept provided by Mideplan is used (household market income per capita).
Source: Adapted from the Spanish version of Mideplan (2007a).

     Poverty lines are a key factor in the allocation of social spending and hence deserve critical
assessment. Larrañaga (2009) calculates an alternative poverty line based on the OECD income
concept and estimates the impact of various poverty lines on the incidence of poverty through micro-
simulations (cf. Table B).1 These estimates show that the incidence of poverty is quite sensitive with
respect to the value of the poverty lines. The reference line is 82 000 Chilean pesos, which is
comparable to the level actually used in the country (based on the Chilean official income concept).
An increase of 25% in the reference value of the poverty line causes an increase of more than 50% in
the incidence of poverty in 2006, whereas a decrease of 25% in the poverty line almost halves the
percentage of poor. Since there are many households whose income hovers around the poverty line,
changes in the line have a large impact on the poverty rate. This is also reflected in the changes in
poverty rate over time across the different poverty lines. Although poverty clearly declined over time
(independently of the poverty line used), the percentage change decreases when the value of the line
increases. This is because higher poverty lines are associated with a lower density in the income
distribution function.
1. See Annex 1.A1 for a detailed discussion of the methodological issues on income measurement.


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                      Table B. Percentage of poverty, for alternative poverty lines
                              Household disposable income per equivalent adult

                                 Poverty lines in Chilean pesos of November 2006
                           62 000       82 000         102 000      122 000    144 000
         1990               17.1          27.4           36.6         45         52.6
         2006                6.4          11.3           17.6        23.6        30.6
Source: Larrañaga (2009).



7. Income inequality in Chile is closely linked with wage inequality

            The distribution of household market income remained virtually
       unchanged between 1990 and 2003 (Table 1.12). Household market income
       covers the income generated with the household’s own means and includes
       labour income, capital income (rents and interest), benefit payments from
       contributory pensions, and other private income (such as transfers from
       relatives not living in the household and donations). In 2006, there was for
       the first time a visible improvement in the income distribution. Deciles 2
       to 9 increased their share in household market income at the expense of the
       10th income decile, whose share of income declined from 41.5% in 2003 to
       38.6% in 2006.

                       Table 1.12. Distribution of household market income

                        By decile of household market income per capita, 1990-2006

      Decile         1990        1992        1994       1996        1998        2000       2003    2006
      I                1.4         1.5         1.4        1.3         1.2         1.3        1.2     1.2
      II               2.7         2.8         2.7        2.6         2.5         2.7        2.7     2.9
      III              3.6         3.7         3.5        3.5         3.5         3.6        3.6     3.9
      IV               4.5         4.7         4.5        4.5         4.5         4.5        4.7     4.9
      V                5.4         5.6         5.6        5.4         5.3         5.7        5.4     5.6
      VI               6.9         6.6         6.4        6.3         6.4         6.2        6.6     7.0
      VII              7.7         8.1         8.1        8.2         8.3         7.9        8.2     8.7
      VIII            10.4        10.5        10.6       11.1        11.0        10.4       10.7    11.1
      IX              15.2        14.8        15.4       15.4        16.0        15.1       15.3    16.0
      X               42.2        41.8        41.8       41.8        41.4        42.7       41.5    38.6
      Total          100.0       100.0       100.0      100.0       100.0       100.0      100.0   100.0
      Note: The official income concept provided by Mideplan is used (household market income
      per capita).
      Source: Adapted from the Spanish version of Mideplan (2007b).

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              The evolution of the income distribution can also be analysed through
         the Lorenz curve, which plots the cumulative share of income received by
         people in each decile of the distribution. A distribution is less unequal than
         another if one Lorenz curve lies above the other (or closer to the 45 degree
         or equal distribution line). Figure 1.11 shows the distance between the
         Lorenz curve of the year 2006 and those of 1990, 1996 and 2000. In each
         case, the distance is positive over the entire income distribution, indicating a
         strictly lower level of income inequality in 2006 compared with previous
         years. The combination of such Lorenz dominance and higher average
         income tells us that the country is both richer in 2006 compared with 1990
         and 1996 and less unequal in terms of income.

  Figure 1.11. Change in the Lorenz curve: a measure of declining income inequality
                0.05


                0.04


                0.03


                0.02


                0.01


                  0
                       0               20           40             60             80            100

                           Distance 1990-2006        Distance 1996-2006          Distance 2000-2006


      Note: The OECD income concept is used (household disposable income per equivalence unit).
      Source: Larrañaga (2009).

              The largest component of household market income is wages,
         representing around 80% of the household’s market income across all
         income deciles (Mideplan, 2008).11 In general, the wage distribution is more
         unequal than other components of household market income (Table 1.13).
         The ratio between the wage incomes of the 10% richest households and the
         10% poorest households is 35 to 1, whereas the same ratio is only half as big
         for the rest of the household market income. With little change in the wage
         distribution over the past 16 years, labour income continues to be the major
         determinant of the income distribution.

11.          Household surveys generally do not capture capital income well, nor the income of the
             wealthiest sectors of the population.

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  Table 1.13. Distribution indices for wages and other household market income, 2006

                                         Ratio decile 10/         Ratio quintile 5/        Ratio decile 10/
                                             decile 1                quintile 1             deciles 1+2

   Labour income                                 34.8                     13.9                   3.1
   Other autonomous income                       18.0                      9.5                   2.3
   Total autonomous income                       31.3                     13.1                   3.0
Note: The official income concept provided by Mideplan is used (household market income per capita).
Total market income is divided into “Labour income” and “Other market income”. The latter includes
capital income (rents and interests), payments from contributory pensions, and other private income
(such as transfers from family members and donations).
Source: Adapted from the Spanish version of Mideplan (2007b).

8. Regional diversity

            Income and earnings discrepancies also have a clear regional dimension.
       Chile’s population is highly concentrated in a few big cities and regions,
       with 40% of the population living in the main metropolitan area, Santiago.
       Different types of economic activity are often concentrated by region,
       e.g. mining in the north, traditional agriculture and agro-industry in the
       centre, and forestry and fishing in the south. There are also significant
       regional differences in living standards, with the highest poverty rates
       recorded in some of the regions south of the capital (Maule, Bío Bío,
       Araucanía, and Los Rios), but not in the less-populated extreme south
       (Table 1.14). High poverty rates are often associated with low employment
       rates, which, in turn, tend to be low in regions marked by a high incidence of
       employees without labour contracts.
           Interactions between regions can be expected to increase in a climate of
       economic growth. However, OECD (2005) found that the speed of
       convergence between Chilean regions had been slower than expected in
       view of the long period of strong development. Geographic distances
       evidently play a role, as evidenced by the above-average performance of the
       Santiago area, which offers a large potential for job mobility and a richer
       choice of jobs than other regions. Significant investments in transport
       infrastructure are underway that will contribute to the extension of local
       labour markets in and around Santiago and other larger cities, and there is
       undoubtedly a potential for further improvement in this direction.




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                             Table 1.14. Regional differences, 2006

                         Population size                    1   Employed/ Informality           Job
                                             Poverty rate                         2                   3
                             (15+)                              Population   rate            earnings

     Arica Parinacota           135 888          15.6%           52.5%          21%            203 228
     Tarapacá                   203 389           9.0%           49.1%          18%            272 402
     Antofagasta                387 971           5.5%           55.9%          16%            313 438
     Atacama                    191 135           8.7%           54.8%          15%            308 299
     Coquimbo                   516 570          13.1%           48.0%          26%            246 008
     Valparaíso               1 259 086          12.1%           51.9%          22%            258 060
     Libertador                 838 961           9.3%           39.9%          18%            240 081
     Maule                      740 067          15.0%           51.2%          24%            219 932
     Bío Bío                  1 508 122          17.3%           45.6%          21%            251 197
     Araucanía                  692 461          16.5%           48.6%          21%            235 963
     Los Rios                   275 782          15.5%           47.7%          23%            232 143
     Los Lagos                  591 360           9.4%           53.8%          19%            248 364
     Aysén                       67 764           6.8%           58.5%          14%            288 872
     Magallanes                 114 002           5.6%           55.1%          14%            331 248
     Metropolitana            5 013 764           8.7%           57.0%          19%            381 092
     Total                   12 536 322          11.3%           52.2%          20%            309 501

1. The poverty rate is the percentage of households with an income below the official poverty line.
   The official income concept provided by Mideplan is used (household market income per capita).
2. Informality rate is the percentage of employees without a signed contract.
3. Job earnings represent the average monthly income from the worker’s main occupation in
   Chilean pesos.
Source: Based on Mideplan (CASEN 2006).

9. Conclusions

          Chile’s income distribution is among the most unequal in the world.
      This must largely be attributed to a low level of employment and to a
      segmented labour market. Each of these two factors are also important
      causes of the difficulties faced in extending effective social protection to the
      whole population.
          Chile needs to create more and better jobs. Many women and youths, in
      particular, are suffering from the shortage of adequate employment
      opportunities. The downsizing of the manufacturing sector has not been
      matched by a corresponding job creation in other relatively high-productive
      sectors. This outcome may depend partly on geographic factors – with long
      distances within the country and between it and potential markets – but it
      must also be seen in the context of the general business climate and the
      labour market. OECD experience suggests that labour market reforms can
      contribute to substantially better outcomes.

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                                Annex 1.A1.
                  Measurement issues on income distribution


           Statistics on the distribution of household income and poverty can only
       be compared across countries if similar measurement methodologies are
       used. To facilitate comparison among its member countries, the OECD
       works with a standard income concept. The data are collected through a
       network of national experts, who apply common conventions and definitions
       to collect data from different national data sources and supply detailed
       cross-tabulations to the OECD. The OECD basic income concept has three
       key features:12
             •    It is based on household disposable income net of taxes and in cash
                  (i.e. excluding items such home production or imputed rents);
             •    It refers to the distribution among individuals living in private
                  households, where the income of the household is attributed to each
                  of its members, irrespective of who in the household receives that
                  income; and
             •    Household income is “adjusted” to reflect differences in household
                  needs with a common but arbitrary equivalence elasticity (i.e. the
                  square root of household size), implying that a household’s
                  economic needs increase less than proportionally with its size.
           The official statistics provided by the Chilean Ministry of Planning
       (Mideplan) are collected through the National Socioeconomic
       Characterisation Survey (CASEN).13 It is a multi-topic household survey
       with a sample size of 75 000 households in the year 2006, and has been
       implemented every two or three years since 1987. The CASEN survey is the
       traditional source for statistics on income distribution, poverty and the
       incidence of social spending in Chile. But CASEN’s income concept differs
       in three aspects from the income concept used by the OECD: 1) it is
       expressed in per capita terms instead of equivalent units; 2) it includes
       imputed rental for own-housing; and 3) it excludes contributions made to
       private social security funds (Larrañaga, 2009). In Table 1.A.1, the Chilean

12.          For an overview of the income distribution statistics and a detailed description of the
             underlying methodological issues, see OECD (2008b).
13.          Encuesta de Caracterizacíon Socioeconómica Nacional.

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62 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

      official statistics on inequality and poverty used by Mideplan are compared
      with the indicators following the OECD guidelines, as constructed by
      Larrañaga (2009). Although the statistics are not strictly comparable, the
      income distributions show a similar trend.

                   Table 1.A.1. Comparing data on income distribution
                       Ratio decile 10/decile 1                          Gini coefficient
                      Larrañaga        Mideplan                    Larrañaga         Mideplan
       1990              36.8            30.1                         0.56             0.57
       1996              35.3            32.2                         0.56             0.57
       2000              42.6            32.8                         0.56             0.58
       2006              29.5            31.3                         0.53             0.54
       Note: The Gini coefficient is defined as the area between the Lorenz curve (which plots
       cumulative shares of the population, from the poorest to the richest, against the
       cumulative share of income that they receive) and the 45° line, taken as a ratio of the
       whole triangle.
       Source: Larrañaga (2009) and Mideplan (2007b).
          It is also worth mentioning that the income data of the CASEN survey
      are corrected for under-reporting. The methodology used consists of
      multiplying each of the income components (with the exception of income
      from capital) by a constant factor that adjusts the data to the level of income
      reported in the national accounts. The adjustment factor is constant for all
      recipients of the respective income component, assuming that
      under-reporting is constant throughout the distribution of the variable. The
      only exception is property income, for which the entire difference between
      reported and actual income is imputed to households from the
      two richest deciles.




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         La Plata, La Plata, Argentina.
       INE – Instituto Nacional de Estadísticas (2006), Fecundidad en Chile:
         Situación reciente, Santiago.
       INE (Instituto Nacional de Estadísticas) and CEPAL (Comisión Económica
         para América Latina y el Caribe) (2004), Chile: Proyecciones y
         Estimaciones de Población. Total País, Santiago.
       Larrañaga, O. (2009), “Inequality Poverty and Social Policy, Recent Trends
          in Chile”, OECD Social, Employment and Migration Working Papers,
          OECD, Paris.
       Mideplan (2007a), “Serie Análisis de Resultados de la Encuesta de
         Caracterización Socioeconómica Nacional (CASEN 2006)”, No. 1, La
         Situación de Pobreza en Chile, Ministerio de Planificación, Santiago,
         June.
       Mideplan (2007b), “Serie Análisis de Resultados de la Encuesta de
         Caracterización Socioeconómica Nacional (CASEN 2006)”, No. 2,
         Distribución del Ingreso e Impacto Distributivo del Gasto Social 2006,
         Ministerio de Planificación, Santiago, June.
       Mideplan (2008), “Políticas Sociales”, Documento para la OECD, Santiago,
         July.
       OECD (2003), OECD Economic Surveys: Chile, Paris.
       OECD (2006, 2007b, 2008a), OECD Employment Outlook, Paris.
       OECD (2007a), OECD Economic Surveys: Chile, Paris.
       OECD (2008a), OECD Employment Outlook, Chapter 1, Paris.


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64 – CHAPTER 1. KEY TRENDS: STRONG ECONOMIC GROWTH BUT INSUFFICIENT JOB CREATION

      OECD (2008b), Growing Unequal, Paris.
      Puentes, E. (2007), “Occupational Choice and Wage Distribution in a
         General Equilibrium Model. Evidence from Chile: 1965-2004”, Mimeo,
         University of Chicago.
      World Bank (2007a), “Expanding Women’s Work Choices to Enhance
        Chile’s Economic Potential”, Chile Country Gender Assessment,
        Washington DC.
      World Bank (2007b), “Informality: Exit and Exclusion”, World Bank Latin
        American and Caribbean Studies, Washington DC.
      World Bank (2008), Job Creation in Latin America and the Caribbean:
        Recent Trends and the Policy Challenges, Washington DC.




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                                                   CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 65




                                                Chapter 2.

                    Towards More Equal Job Opportunities




          To create more and better jobs, Chile needs to pursue its recent efforts
          to develop a strategy for work and equity. While partly successful, this
          policy endeavour is facing many obstacles, including not only limited
          resources and administrative capacity but also a weak social dialogue
          and many conflicting interests in a segmented labour market. The
          OECD Reassessed Jobs Strategy and the international experience of
          policy compromises for “flexicurity” are therefore relevant. This
          chapter considers the principal issues of labour market policy in Chile
          from such a perspective.




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1. Introduction

          Chile’s growing human resources are not as efficiently used as they could
      be. Economic growth has been driven largely by improved productivity in
      capital-intensive sectors, especially mining, while job creation has been too
      limited and occurred partly in relatively low-productive service sectors,
      contributing to the continued inequality of opportunities.
          The twin problems of under-employment and inequality have recently
      been much discussed in Chile and several options for labour market reform
      have been considered, but the challenges are complex and several specific
      issues have proved controversial. In an effort to reconcile flexibility for
      employers with income security for workers, a Presidential Advisory
      Commission for Work and Equity presented a package of possible reforms
      in April 2008 (see Annex 2.A1). But despite extensive analysis and
      consultations, many of this Commission’s suggestions had been found too
      contentious to form the basis of unanimous recommendations, being
      complicated by conflicting interests of employers, trade unions and other
      actors in a fragmented labour market.
          In this situation, there is a particular need to explore the possibility of a
      broad policy package of the “flexicurity” type that can satisfy the objectives
      of different labour market groups. The OECD Jobs Strategy and the related
      international debate about flexicurity is therefore relevant to Chile, although
      many detailed implications will be different in a developing country
      compared with more advanced economies. First presented in 1994, the
      OECD Jobs Strategy was reassessed in 2006 with the help of new empirical
      research. Econometric results, covering all member countries in the period
      since the early 1990s, leave no doubt that both macroeconomic policy,
      structural reforms in the labour market and policies to strengthen
      competition in product markets have a strong bearing on employment,
      productivity, job creation and other indicators of labour market
      performance. The principal issues of relevance in the labour market area are
      also important in Chile, as developed in the following.
          Both demand and supply-side measures need to be considered. To
      stimulate labour demand, public policy must first ensure macroeconomic
      stability and a business climate that is attractive to enterprise and job
      creation on market conditions. Many specific labour market institutions and
      their functioning in practice are important in this regard. Chile’s labour
      supplies have the potential to grow substantially with increasing demand, as
      shown in the previous chapter. A supply-side response should be facilitated
      by policies to make the labour market flexible and transparent and to reduce
      obstacles to labour force participation, especially for women and youths. To

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       enhance the quality of jobs and the equality of opportunities, the existing
       segmentation of the labour market should be reduced as far as possible.
       OECD experience shows that equity goals can and should be compatible
       with economic efficiency, which is best served by a well-integrated labour
       market where everybody can compete on equal terms.
            It is useful to consider the goals of more jobs, better jobs and equal
       opportunities together because they depend partly on the same set of
       institutional arrangements in the labour market. In the following, the
       principal instruments of labour market policy are discussed in turn from
       such a perspective, beginning with labour legislation, industrial relations,
       labour taxation and questions about informal employment. Subsequent
       sections are devoted to the Labour Inspectorate, unemployment insurance,
       employment services, job-related training and some special issues motivated
       by the low employment of women.

2. Important issues of labour legislation have yet to be resolved
           After the end of military rule, when many labour rights had been
       suppressed, new labour regulations were adopted that correspond to OECD
       standards in most respects. But the necessary social dialogue about such
       reforms has not been very effective, a fact that continues to make their
       implementation more difficult than it should be. The OECD (2003) observed
       that a series of Labour Law amendments from 2001, which sought to
       strengthen enforcement and gave additional rights to trade unions, had been
       met with much hostility from employers. Many of them had then responded
       by reducing their recruitments, choosing instead to rely increasingly on
       sub-contractors – a phenomenon that has later become subject to legal
       regulation as well. In many respects, the application of the Labour Law has
       continued to be a source of discord in the social dialogue, for example
       concerning employment protection legislation, the allocation of working
       time and rules about sub-contracting.
       Employment protection legislation (EPL)
           Chile’s EPL is not extraordinarily rigid by OECD standards. As
       measured by the OECD’s scoring method it is more flexible than in many
       member countries, notably in Continental Europe (Figure 2.1 and
       Annex 2.A2). However, the rigidities that exist can have potentially more
       severe effects in Chile for two reasons. First, as a middle-income country
       with a relatively young population, Chile needs more flexible labour
       markets in order to sustain high growth and strong job creation. Second,
       Chile’s EPL imposes relatively big differences between different types of
       labour contract, contributing to a market segmentation that exacerbates an
       already-high level of inequality in incomes and opportunities.

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68 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES

             Figure 2.1. Measuring employment protection legislation (EPL)
                         Average scores 0-6 from lowest to highest strictness

       6.0

                 Indefinite-duration jobs (collective or individual)
       5.0
                 Regulation of temporary employment
       4.0


       3.0


       2.0


       1.0


        -




Source: OECD (2004), Employment Outlook, Chapter 2, Annex 2.A; Chile’s Labour Law as applicable
in 2008.
          Just as in many European countries, the Labour Law in Chile establishes
      an element of discrimination, favouring “insiders” with indefinite-duration
      contracts at the expense of “outsiders” with more precarious jobs. Empirical
      results in OECD countries have shown that this reduces labour turnover in
      indefinite-duration jobs, which makes the labour market less dynamic and
      contributes to the difficulties faced by many youths and women who would
      like to have stable employment. In Chile, as noted below, the nature of a
      labour contract is also important for the right to unemployment compensation.
           Employers in Chile can usually dismiss indefinite-duration workers for
      economic reasons (“needs of the enterprise”), a criterion that is widely used
      by employers. If a dismissed worker has over one year’s tenure, the
      employer must pay one monthly wage for every year of service as a
      severance benefit, up to a ceiling at eleven monthly wages. Dismissal
      procedures are relatively simple, and there are no additional procedures for
      “collective” dismissal of many workers. But it is not possible to dismiss
      individuals for lack of skills. As a result, an enterprise facing major
      business-related problems can dismiss many workers relatively easily; but if
      there is no indisputable economic justification, an employer may find it
      difficult to lay off just one or a few workers. A fixed-term contract can only
      last one year, but it is possible to accumulate two contracts and there are no


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                                                   CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 69


       restrictions on the types of work concerned. Contracts can also be signed for
       specific tasks and services and for seasonal work.
           The relatively high severance pay has been much criticised by
       employers, but proposals to reduce it have been rejected until now. As
       explained further below, employers who pay severance benefits can deduct
       their previous contributions to the worker’s individual accounts under the
       unemployment insurance (UI). However, these deductions account for a
       modest part of the total severance pay in typical cases, implying that the
       employer’s direct cost of dismissal for economic reasons is still high, and so
       a source of rigidity and distortions. The severance-pay system can also be
       regarded as unfair because it concerns only workers with indefinite-duration
       contracts and 12 months’ tenure who are dismissed for “needs of the
       enterprise” – a group that has been roughly estimated to represent a little
       more than 6% of all formal and informal employees who become
       unemployed. Even in this small group, a significant proportion probably
       receive no severance pay or less than they are entitled to, as employers often
       persuade workers to accept a reduced amount or simply refuse paying.14
       Workers with average or higher incomes are over-represented among
       the recipients.15
            Severance pay represents a potentially high direct cost of dismissal for
       employers, or at least a source of uncertainty about the full labour costs. At
       the same time, the limited coverage and the poor enforcement mean that the
       programme does not offer very effective protection against a loss of income.
       In OECD countries where such programmes exist, the maximum severance
       benefit is usually lower, often three or four monthly wages. As part of a
       “flexicurity” package of labour market reforms, Chile should consider
       abolishing the severance-pay regulations in connection with its planned
       improvements of the UI programme (see further below). Such a reform was
       implemented in Austria in 2003 (Box 2.1). If the severance-pay programme
       is not abolished, the maximum amount should be substantially reduced so as
       to limit the disincentive for employers to sign indefinite-duration contracts.


14.          Based on analysis of a panel of Social Protection Survey (ESP) respondents, Escobar
             (forthcoming) finds that 6.4% of all employed persons who became unemployed in certain
             periods were theoretically eligible for severance pay. But only about one-fifth of them
             (1.25% of the whole group) recognised having received it.
15.          Different types of distortions are probably common. First, employers face an incentive to
             dismiss workers before 12 months’ tenure in order to avoid paying the benefits, with
             economically unjustified mobility as a result. Second, weak enforcement means that
             workers dismissed after 12 months cannot always defend their rights. Third, employers
             with limited profit incentives (e.g. in the public sector) may be persuaded to record
             voluntary quits incorrectly as “dismissals” giving a right to severance pay.

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            Box 2.1 Severance pay and unemployment insurance in Austria

Individual accounts replaced severance pay by employers
     Austria converted its severance payment system to individual accounts in 2003. Employers’ direct
payments to workers were then replaced by individual accounts, to which employers must contribute
1.5% of the payroll during the contract duration. If a worker leaves before three years of tenure, the
individual account balance is transferred to the new job. But if the contract is terminated after more
than three years, the worker has the options of receiving a severance payment from the account or
transferring the balance to the new position. At the end of a career, the accumulated balance can be
used for a pension.
     These individual accounts thus provide workers with a degree of security while allowing job
mobility. The general coverage of all employees and all types of mobility means that the risk of
distorting effects on labour market behaviour is relatively low.
Unemployment insurance and unemployment assistance are unrelated to the
individual accounts
     Austria also implements a UI programme for all employees and some of the self-employed.
Financed by employer and employee contributions (each paying 3% of payroll), it pays benefits during
certified unemployment that usually cover 55-60% of the previous income, with maximum durations
of 20 to 52 weeks depending on the length of the contribution period.
     If the claimant is still unemployed after exhausting the UI entitlement, an unemployment
assistance benefit can be paid for an additional 52 weeks, amounting to 95% of the previous
UI benefit.



          About 70% of all formal employee jobs are of indefinite duration, but
      those with limited duration account for 60% of the annual labour turnover
      (ENCLA 2006). Fixed-term and other non-standard contracts are most
      common in construction and agriculture, followed by large parts of the
      service sector, while being less common in industrial enterprises and the
      transport sector (Table 2.1). It must be noted that these figures concern
      enterprises’ relations with their own employees, not those with
      sub-contractors and TWAs. (Some sub-contracting firms are probably
      counted as employers under the category “business services, etc.”, which
      has a significant proportion of employees with task-related contracts.)
          All told, Chile’s EPL is flexible in many respects, but the perception that
      some of its provisions might be too rigid, especially severance pay, is
      frequently mentioned not only as an extra cost for employers, but as a factor
      fostering disrespect of the law. Poor enforcement evidently reduces the
      value of such regulations for workers. But the legal uncertainty can
      nevertheless contribute to employers’ reluctance to hire workers with
      indefinite-duration contracts if these involve a risk of high costs or
      expensive litigation.

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                                                   CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 71


     Table 2.1. Incidence of fixed-term and other temporary labour contracts in 2006

                                   Fixed-term     Task or service         Fees, etc.             Total1         Total:1
                                                                                                          thousands of
                                      Percentage of all employees with labour contracts                       persons
Construction                               13                       60            1                74             363
Agriculture, forestry                       6                       35            2                42             198
Education                                  21                   -                20                41              85
Finance                                    26                   -                 1                28              34
Business services etc.                      7                       14            4                25             303
Other services                             17                        0            7                24              23
Commerce                                   11                        6            2                19             167
Mining                                      4                       12            2                18               5
Manufacturing, non-metal                    8                        7            2                16              27
Health, social services                    11                   -                 6                16              10
Hotels, restaurants                        12                   -                 4                15              25
Transport, comm.                            6                        6            2                14              25
Fishing                                     7                        1            1                 9               3
Utilities                                   4                        2            3                 8               1
Manufacturing, metal                        3                        2            1                 6              10
 Total                                     11                       15            5                31           1 307

1.      Total = all employees whose contracts are not of indefinite duration.
Source: ENCLA 2006 (Encuesta Laboral), covering firms with five or more workers.

       Sub-contracting and temporary-work agencies (TWAs)
           As a further option, big enterprises have achieved much flexibility over
       the past two decades by using sub-contractors and temporary-work agencies
       (TWAs). Both options were unregulated until 2007, when they became legally
       defined in a new section of the Labour Law. In OECD countries, by
       comparison, labour legislation usually regulates TWAs but not
       sub-contracting, which is more often treated as part of business law. But in
       Chile, a crucial function of these new rules is to distinguish the two
       phenomena from each other, a distinction that was hardly possible until the
       implications for labour law had been clarified. From now on, sub-contracting
       should only concern separate work processes and not merely “dispatching” or
       lending of employees, which is the typical function of TWAs.
            Although sub-contracting is common in OECD countries, its apparent role
       in Chile stands out by the extent to which it has raised suspicions – intrinsically
       difficult to verify or reject – that its real purpose might have been to relieve
       client firms of employer responsibilities. Such objectives are not necessarily
       incompatible with good labour standards. Nevertheless, it is pertinent to
       consider the possible role of sub-contracting in the context of Chile’s generally
       high inequality and its often opaque labour market arrangements.


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          The policy decision to regulate sub-contracting, long resisted in business
      circles, responded to widespread claims that big enterprises were taking
      advantage of the lack of rules to hire and fire workers repeatedly through
      intermediaries, whose compliance with labour law was not the client firms’
      responsibility. During the OECD review team’s visit to Chilean authorities,
      the outcome was frequently described as a fragmentation of enterprises: the
      so-called phenomenon of “100 firms within a firm”.16 For client firms, this
      gave flexibility and lower labour costs and it prevented many workers from
      organising and bargaining together. For the workers concerned, typically
      low-skilled, the result was precarious jobs.
          According to the last ENCLA survey of firms with five or more workers
      – conducted in 2006, thus before the reform – over 40% of employers used
      sub-contractors. Among those who did, about one-third said it concerned
      work that was part of their “principal activity”. No figures were given about
      the numbers of workers concerned, but the practice was found in all
      economic sectors, with the highest incidence in big firms (Direccion del
      Trabajo, 2007). The sub-contractors were typically small or medium-sized
      enterprises, while 32% of them were individuals or families. Among all
      surveyed enterprises (with five or more employees), 12% had themselves
      done sub-contracting jobs during the past 12 months. Some 5% of all
      surveyed firms performed over 75% of their work as sub-contractors.
          Agreements between client firms and sub-contractors were most often
      oral (ibid.). It is not known how many of the workers concerned had labour
      contracts. However, sub-contracting was relatively common both in
      agriculture, where informality is widespread, and in big industry and
      service-sector firms whose own employees typically have formal contracts.
      In mining, for example, 95% of the firms’ own employees have labour
      contracts and earn relatively high wages. Under such circumstances,
      sub-contracting probably permits substantial labour-cost reductions even if
      the workers have formal labour contracts with the sub-contractors.
          As mentioned, the new law allows sub-contracting only for jobs that are
      separate from the client’s own work process; in addition the client firm must
      give certain guarantees, e.g. for the event of a sub-contractor’s failure to pay
      wages. These restrictions do not apply to the “transitory” workers
      dispatched from TWAs, but this solution is henceforth allowed only in
      certain situations of urgency and for no longer than three or six months,
      depending on the nature of the urgency. In effect, due to these tighter

16.       One enterprise visited by the OECD employed about 7 000 workers of whom a little more
          than 400 were its own employees, the others being sub-contractors or employees of
          sub-contracting firms. Sub-contracting contracts had been signed for five years in about 80%
          of the cases, while no information was available about the types of labour contract used.

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       restrictions, many firms that previously used sub-contractors or TWAs are
       now expected to hire the workers – or ensure that their jobs are separate
       from the main work process, in which case sub-contracting is still allowed.
       Moreover, the client firms’ shared responsibility for wages is putting
       pressure on them to act as “labour inspectors” and verify contract workers’
       employment conditions.
           A survey conducted in industry during 2007 suggested little change
       since 2006 in the total use of “external personnel” including fee contracts,
       TWAs and sub-contracting (SOFOFA, 2007).17 Such personnel was thus
       reported to hold 43.0% of available jobs in 2007 compared with 43.5% in
       2006. Comparable statistics are not available from other sectors, but some
       firms have reportedly hired previous sub-contract workers – e.g. cashiers in
       banks, whose jobs were considered as part of the main work process.
           According to officials interviewed in the Ministry of Labour and Social
       Security, the Labour Inspectorate has experienced many difficulties in
       implementing the new rules. The Inspectorate began to check who was
       acting as employer on many worksites, a type of investigation that is
       frequently obstructed. Big firms have challenged the powers of the
       Inspectorate in complex court cases, and the Supreme Court has partly
       sustained such complaints. In the mining sector, an attempt to enforce the
       new rules faced such strong legal and political opposition that the
       government accepted to suspend it, at least temporarily.18
           It is not known how the new rules may affect the future development of
       TWAs, but the immediate effect can be assumed to involve a significant
       reduction. At the time of the 2006 ENCLA survey, 38% of the enterprises
       used dispatched workers (trabajadores suministrados) and these were
       estimated to represent about 5% of employment in all surveyed firms. But
       over half of these jobs were expected to last over six months, implying that
       they would not be legal as TWA jobs today.19

17.          The employer association, SOFOFA, conducts annual remunerations surveys of industrial
             companies. The cited results are percentages of all workers in these companies who have
             contracts of one kind or the other.
18.          CODELCO, a state-owned mining firm with some 14 000 employees and many thousands
             of sub-contract workers, opposed the 2007 law change and its implementation. In late 2007,
             the Labour Ministry ordered CODELCO to hire over 2 000 sub-contract workers. But the
             Supreme Court reversed this decision in April 2008, provoking a nationwide three-week
             strike in mines.
19.          The 2003 CASEN survey asked employees and domestic workers to define their labour
             relations, and about 3% chose the reply option “temporary services”. However, it is not
             known to what extent the respondents might have understood this phrase as a reference to
             TWA jobs.

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      Working time
          For about half of the employed workforce including most employees,
      the usual working time is equal to the legal maximum, which was reduced in
      2005 from 48 to 45 hours per week (Table 2.2).20 A common complaint
      from enterprises – including those visited by the OECD review team –
      concerns the limited possibilities to reallocate the standard working time,
      notwithstanding some small changes towards more liberal rules that have
      recently been adopted.

                 Table 2.2. Employed persons by effective working time
                                        Percentage distribution
                                                   Men                   Women
                                            2001        2006,         2001   2006,
                Hours per week
                                                       second               second
                                                         half                 half
                <15                           1%          5%           3%           8%
                15-29                         3%          6%            7%         11%
                30-34                         2%          4%            5%          5%
                35-43                        11%         12%           13%         13%
                44-47                         6%         50%           11%         43%
                48                           57%          5%           44%          3%
                49-50                         7%          7%            7%          6%
                55-59                         2%          2%            1%          1%
                60+                          11%         10%           9%          9%
                 Total                      100%         100%         100%        100%
                Average working hours         47          43            44          40

          Source: Instituto Nacional de Estadisticas (INE).

           Part-time work has increased since 2001, contributing to the growth of
      female employment. However, the incidence of part-time in total female
      employment is still lower than in many OECD countries. By 2006, 19% of the
      employed women and 11% of the men worked less than 30 hours per week,
      compared with OECD averages of 26% and 8%, respectively. For employees
      in firms covered by the 2006 ENCLA survey, the proportion was only 14%
      for women and 3% for men, with the highest incidence in small firms.
          Overtime is allowed for up to two hours per day at a 50% wage
      premium, but only if this is agreed upon in writing in order to meet the
      needs of the enterprise. The working week must be either five or six days
      and it cannot include Sundays or public holidays, apart from certain sectors.


20.       As in most countries, own-account workers are more likely than employees to deviate from
          the standard working time. See OECD (2005), OECD Economic Surveys: Chile, Table 5.2.

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       According to ENCLA 2006, employees worked on average 0.7 hours of
       overtime per day, in this case with the highest incidence in large enterprises.
           The limited use of working weeks shorter than 45 hours is probably
       compatible with many households’ preference for higher incomes. But some
       rules in the law can unnecessarily discourage enterprises from introducing
       shorter working time. For example, if an enterprise introduces a shorter
       standard working week, the workers’ right to overtime pay will kick in from
       the reduced standard, while individual part-time labour contracts are not
       recognised as such if the agreed working week is over 30 hours, a fact that
       can also lead to higher overtime pay.
            Employers have repeatedly demanded a possibility to “average”
       working time over periods longer than a week, which is allowed only in
       certain areas such as transports. After heated debate in 2003, the authorities
       introduced a few minor changes in this direction, while rejecting a discussed
       proposal for more radical change called the “adaptability law”.21 Had this
       proposed law been adopted, it would have become allowed to “average”
       working hours over a year via collective agreements in enterprises – an idea
       still subject to controversial debate, as reflected in the Work and Equity
       Commission’s report in 2008.
           Judging from OECD experience, such a reform would indeed be justified.
       But in addition, in Chile as in OECD countries, it must be recognised that the
       flexibility required in business is different from the type of flexibility that
       would facilitate employment of youths and women. As discussed further
       below, reforms to make working time regulations more flexible must therefore
       be accompanied by further measures to help parents combine work with
       family duties, such as child-care support and parental leaves.

3. Industrial relations and collective bargaining

            Chile’s weak industrial-relations institutions are probably both a cause
       and an effect of the fragmented state of the labour market. Trade unions,
       being largely absent in small firms, have seldom been in a good position to
       promote formal employment and their role in other matters of law
       enforcement has also been limited. Industrial action has recently taken place
       on some important institutional issues, notably the application of the new
       sub-contracting law, but it is not clear how this may influence the chances of
       a fruitful social dialogue.


21.          Cf. OECD (2003), Chapter IV. The limited reform adopted in 2003 permits such
             rescheduling that workers can stay at home on a one-day “bridge” between a Sunday and a
             public holiday. The list of sectors allowed to work on Sundays was also extended.

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           Certain groups are legally excluded from collective bargaining rights.
       This especially concerns civil servants, along with the employees of a
       limited number of enterprises that depend on state financing, as well as
       management staff and workers hired exclusively for temporary tasks.22
       The exception for temporary tasks could potentially concern many workers
       – cf. Table 2.1 – but this does not appear to be the case in practice, due to a
       restrictive administrative interpretation.23
            Trade union membership has been stable at about 11% of total
       employment since the late 1990s, which currently corresponds to 13% of all
       employees and 15% of those with a right to organise (Table 2.3). Higher
       membership is found in big enterprises, especially in sectors with significant
       public ownership such as mining, transportation and communications, and
       utilities (electricity, gas and water). But even in the group of enterprises with
       over 200 workers, a majority of the firms have no trade unions, a proportion
       that rises to 78% for firms with 50-199 workers and 96-99% for the smallest
       size categories (ENCLA 2006).

                                Table 2.3. Trade union membership in 2007

                           Agriculture,    Mining     Manu- Utilities     Con- Commerce Transport,   Finance, Social and      Total
                              forestry,             facturing         struction            comm.     business  personal
                                fishing                                                               services  services

 Number of union members      66 157      39 215    118 571   7 449   55 163   128 808   116 287     41 332    151 624     724 606
Members as a percentage
                                   9%       42%        14%     20%      11%        10%       22%         7%         8%        11%
of employment

The percentages refer to total employment in each sector.
Source: Direccion del Trabajo (2008); Instituto Nacional de Estadisticas (INE).

           The Labour Law sets practically no limits to the scope or coverage of
       collective bargaining. But in practice, any bargaining that occurs tends to
       take place within enterprises and to focus on wages only. Worker
       representatives receive some outside assistance in a little more than half of
       the cases. Newly signed collective agreements have recently concerned


22.         Articles 304-305 of the Labour Law exclude the following groups from collective
            bargaining rights: civil servants including police and defence; employees of state-owned
            enterprises if they depend on the Ministry of Defence or have been financed at over 50% by
            the state in the past two years; apprentices; employees hired exclusively for temporary
            tasks; employees with general managerial powers and those authorised to hire or fire
            workers or to decide about production processes or marketing.
23.         According to explanations provided by the Ministry of Labour and Social Security, the
            exception applies only if the employer notifies the Labour Inspectorate in each case and if
            the Inspectorate then decides that the worker can be legally excluded from
            collective bargaining.

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       around 200 000 workers per year (about 5% of employees), of whom about
       three-fourths were represented by trade unions, the others by ad hoc groups
       of bargaining workers. There is often more than one union or bargaining
       group in an enterprise, each of which is bargaining for its members.
       Collective agreements usually last two years, so around 10% of the
       employees are likely to be covered. However, only about two-thirds of the
       valid agreements are of the formal type (contratos colectivos) that must be
       bargained according to certain procedures. The remaining third were of a
       less-regulated type called convenios colectivos.24
            Judging from data submitted by the Ministry of Labour and Social
       Security, the greatest bargaining efforts aim to achieve scheduled wage
       adjustments to inflation, often about twice a year. Between 2000 and 2006,
       when the total real-wage growth was around 3% per year, the negotiated
       initial real-wage increases never reached 1% on average (Table 2.4).
       Bargained real-wage changes do not appear sensitive to cyclical changes.
       Almost half of the collective agreements envisage adjustments to
       productivity; but in practice, the partners have seldom been able to agree on
       how to achieve this.
              Table 2.4. Wage adjustments resulting from collective agreements
          Percentage of wage increase by type of instrument and type of worker representation

                       Average initial                   Scheduled                       Readjustment
                       increase (%)                  readjustments as a                 periods (months)
                                                          % of CPI
                        Trade       Other                Trade        Other                Trade      Other
                        union      worker                union       worker                union     worker
                                 grouping                          grouping                        grouping
      2000               0.83         0.87                98.9         97.4                 6.40      6.50
      2001               0.80         0.32                99.6         99.5                 5.50      6.70
      2002               0.71         0.28               100.0        100.1                 7.00      6.50
      2003               0.96         0.79               100.1         99.9                 7.20      7.20
      2004               0.74         0.90               100.0        101.4                 6.80      7.10
      2005               0.63         0.87               100.1         99.8                 6.80      6.50
      2006               0.79         0.56                99.8        100.1                 6.80      6.50
1.     Data for 2006 are preliminary
Source: Direccion del Trabajo (DT).



24.          Contratos colectivos can be negotiated by ad hoc bargaining groups as well as by trade
             unions, provided that they have been set up according to certain rules in the law and that
             certain bargaining procedures are followed. If the latter procedures are not followed – as
             happens most often when ad hoc groups are concerned – the parties can only sign
             convenios colectivos.

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          During 2008, the government has announced its intention to propose
      legal changes that would promote a wider use of collective bargaining,
      which it regards as the best way to promote social dialogue based on trust
      and co-operation. The aim would be to simplify bargaining in enterprises,
      make it richer in content and strengthen the representativeness of enterprise
      unions by involving more actors. To promote bargaining in matters other
      than wages, a procedure would be established for declaring unions
      representative in such questions as working hours, overtime, shift work and
      social benefits. The government has also offered to support training of trade
      union representatives in enterprises.
          This initiative was motivated by the policy makers’ perception that
      opinions about required changes were frequently not shared by employers and
      unions and that the spaces available for spontaneous dialogue had not been
      sufficient to create useful precedents. The suggestions had been designed to
      promote a more encompassing dialogue at enterprise level, but did not
      envisage any change with respect to the possible co-ordination between
      enterprises – an idea that has been strongly promoted by unions but resisted by
      employers. Some international studies have suggested that sector-level wage
      bargaining leads to lower employment than either enterprise or national-level
      bargaining (OECD, 2006). Nevertheless, it would be useful in Chile if the
      social dialogue in large enterprises could be extended to cover some of the
      issues about sub-contractors and their employees.

      The minimum wage is relatively high
          The OECD (2003, Chapter IV) found evidence that a substantial
      increase in the minimum wage since the mid-1990s had contributed to a rise
      in unemployment. This result is still relevant because the minimum wage
      has remained in the range of 42-45% of the average wage for most of the
      period since 2003. The minimum wage was raised in mid-2008 to
      159 000 pesos per month, which then corresponded to a little over 45% of
      the average wage – a higher proportion than in most OECD countries
      (Figure 2.2). Given Chile’s relatively uneven wage distribution, the
      mentioned amount probably corresponds to over 50% of the median wage.
          Changes in the minimum wage are decided by Congress after
      discussions between the government and trade unions. It is unclear why
      business representatives do not to participate in these discussions, but the
      political decision makers should in any case take account of the full
      implications for the economy and the labour market.
          A high minimum wage can discourage job creation in the formal sector.
      For the smallest firms, where informality is still relatively widespread, it
      complicates the policy efforts to promote formality and to extend the

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       pension and healthcare coverage. Significant groups earn less than the
       minimum wage; the 2006 CASEN survey reported that a little over 10% of
       all full-time employees aged 18-65 excluding domestic services earned less
       than 0.95% of the minimum wage.25 There is nevertheless some evidence
       that the high minimum wage is putting upward pressure on informal as well
       as formal wages, implying that it can discourage hiring in both sectors
       (Cunningham, 2007).
           Perhaps most preoccupying are the likely effects for youths, whose entry
       into formal jobs should be encouraged. The Reassessed OECD Jobs Strategy
       recommended reduced minimum wages for problematic groups, especially
       youths. Chile’s minimum wage is currently reduced to 75% of the standard
       amount for workers who are younger than 18 or older than 65, and to 83% for
       domestic workers of any age. However, available labour market data leave no
       doubt that the special difficulties faced by youths concern young age groups in
       general and not only those under 18. In consequence, a reduced minimum
       wage rate should be applicable at least up to the age of 25.

                Figure 2.2. Minimum wage as a percentage of the average wage
                                in OECD countries and Chile
        60%

        50%

        40%

        30%

        20%

        10%

         0%




Note: Full-time minimum and average wages are compared before tax.
Source: OECD (2006), Taxing Wages 2005/2006, Paris.


25.           In contrast to many OECD countries’ wage statistics, the survey-based figures in
              CASEN 2006 reveal no significant concentration of wages near the minimum level,
              suggesting weak enforcement. Thus, only 2.2% of employees reported between 0.95% and
              1.05% of the minimum wage. This does not exclude that a high minimum wage can have a
              positive impact on informal as well as formal wages via market competition.

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80 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES

4. Labour taxation and informal employment

          Chile’s labour taxation is relatively low compared with OECD
      countries, a fact that should facilitate a rise in formal employment.26 The top
      marginal tax rate is 40%, but most workers pay only the mandatory
      contributions to social insurance (see Box 2.2). These are charged at a total
      rate of about 26% of the wage for employees, of which about 20 percentage
      points are deducted from their wages and the rest is paid by the employers.

                 Box 2.2. Labour taxation and mandatory contributions

    Income tax is charged only on incomes higher than about 1.4 times the average wage. The
marginal tax rate begins at 5% and rises in six steps up to a maximum 40%, which currently applies to
wages of over about 15 times the average wage. This tax scale follows consumer prices.
     Social contributions: Employees must contribute to pension, healthcare and unemployment
insurance. For the self-employed, only healthcare and work-injury insurance can be mandatory. The
total contribution rate, usually about 26%, includes the following items:

      •    12.5% for pensions, paid by employees and the self-employed.

      •    7% for healthcare, also paid by employees and the self-employed.
      •    2.85-4.35% for work-injury and occupational diseases, paid by employers and the
           self-employed. These contributions are differentiated by sector according to
           occupational risks.

      •    Unemployment:
           −    Indefinite-duration contracts: 0.6% for employees and 2.4% for employers.
           −    Fixed-term contracts: 3% for employers.
     Social contributions are charged on incomes that exceed the minimum wage for pensions, while a
lower floor applies in the other programmes. Pension contributions are currently charged on incomes
up to about 3.5 average wages, while the ceiling applicable to unemployment insurance is about
five average wages. These ceilings follow the price index.



          According to OECD experience, an efficient collection of taxes and
      social contributions is usually the most important instrument for enforcing
      formal employment regulations, but Labour Inspectorates can be important
      as a complement, especially in countries with large informal economies

26.        In the average OECD country, a 10-percentage-points reduction in taxes and social
           contributions can be expected to reduce unemployment by 2.8 percentage points and
           increase employment by 3.7% (OECD, 2006). The impact on employment is even greater if
           effects on working time are taken into account.

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       (OECD, 2004, Chapter 5). OECD (2007) found that Chile’s tax
       administration is relatively efficient by Latin American standards, a fact that
       contributes to a lower incidence of informality than elsewhere in the region
       (see Chapter 1, Figure 1.8). However, less than half of all employed persons
       have earnings at the level where income tax is charged. Social insurance
       contributions are collected by the respective insurance administrators.
           While the incidence of informal employment is relatively low in Chile
       compared with neighbouring countries, it is still widespread by
       OECD standards. Chapter 1 above found that about one-third of the
       employed do not contribute regularly to the social security programmes, a
       situation that concerns not only most of the self-employed (who are not
       obliged to contribute) but also a little more than one-fifth of the employees.
       The employees who do not contribute often lack labour contracts as well,
       implying that few labour regulations are likely to be enforced.
           Several recent reforms and reform proposals have been designed to
       promote the formalisation of informal jobs. The 2008 pension reform (see
       Chapter 4) introduced subsidies to pension insurance for young workers, and
       it will gradually make pension insurance mandatory for the self-employed
       (assuming that they are known to the tax authorities). The Work and Equity
       Commission proposed several further measures of potential relevance,
       including a “pre-formalisation” programme that would permit small firms to
       become formal in a gradual manner over three years, and an in-work subsidy
       for poor persons who take up formal jobs.
           As discussed in Chapter 1, informality is often a result of tax evasion
       and/or a desire to avoid complying with various regulations. But in the
       present situation in Chile, a significant part of the remaining pockets of
       informality represents a fragile segment of the labour market, including
       many small firms often characterised by below-average levels of education,
       productivity and income as well as precarious job conditions. Enforcement
       measures that target micro-firms may therefore have to be accompanied by
       other targeted measures for them, as envisaged in the just-mentioned
       proposal for a “pre-formalisation” programme. Moreover, both taxes, social
       contributions and various regulations should be regularly reassessed with a
       view to enforcement issues. For example, as the government is now facing
       the challenge of implementing regulations of sub-contracting, it also needs
       to consider the risk that some businesses that previously used
       sub-contractors might now respond by turning to informal arrangements.




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82 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES

5. The Labour Inspectorate (Direccion del Trabajo, DT)
and labour courts

          Much of the existing segmentation and inequality in the labour market
      must be attributed to an uneven implementation of existing rules in the
      Labour Law. Considerable progress is under way, notably in terms of
      various legal procedures described in the following. The labour inspectorate
      – henceforth called DT – is the main enforcement body. As in most
      countries, it cannot monitor all enterprises, so an important function is to
      deal with disputes and complaints.
          The DT has 1 960 employees, of whom 1 285 are professional staff
      members, including the central administration, 15 regional offices and
      80 provincial or municipal Labour Inspection offices. It is responsible for
      enforcing the Labour Law and regulations of hygiene and safety at work,
      and it can intermediate between workers and employers and it plays a role in
      informing them about the regulations.
          There is no mandatory registration of labour contracts, but the DT can
      check during inspections that workers have contracts and that social
      contributions are paid in proportion to declared wages. Over
      100 000 inspections    were     carried    out    in   2005,     concerning
      1.7 million workers or over 40% of all employees (Table 2.5, Panel A).
      About two-thirds of these inspections responded to complaints by workers,
      the others being conducted ex officio (Panel B). Most complaints concerned
      wages, followed by working time and lack of contract.
                                 Table 2.5. Labour inspections
                                          A. Number per year
                                                       2003            2004              2005
           Inspections                               97 947           94 981          111 937
            - ex officio                             36 348           33 627           37 276
            - by complaint                           61 599           61 354           77 661
           Workers covered                       1 216 617        1 105 518        1 709 187
                                 B. Reasons for workers’ complaints

                                                       2003            2004              2005
           Length of working day                     11 132           14 260           22 050
           Wages                                     20 257           21 250           24 519
           Sanitary conditions                        3 549            5 161            6 522
           Labour contract                           17 949           19 606           20 561
           Contributions                              8 500           10 671            7 431
          Source: Direccion del Trabajo (DT).

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            In 2005, the DT imposed fines on employers in 80 800 cases, of which
       about 9 000 concerned labour contracts.27 But the employer is usually given
       some time to correct the problem, and if this is done, the fine is reduced or
       suspended. If the employer chooses to pay the fine, the DT can seldom do
       more unless the worker brings the case to a labour court, a step that must be
       initiated by the person concerned.
            It therefore falls on the employee to check that the employer pays social
       insurance contributions. Apart from inspections, neither the DT nor any
       other public institution is likely to intervene if this is not done. For the
       employee, it can be difficult to detect non-payments and take the necessary
       legal steps: pension, healthcare and unemployment insurance are separate
       institutions using partly different procedures.28 Pension contributions are
       delayed most often because the pension fund agencies (AFPs) generally
       allow this, requiring only that the employer acknowledges the debt. The tax
       authority is stricter, imposing monthly provisional tax payments and annual
       consolidations, with substantial penalties if the provisional payments prove
       too low. The DT can also seek to identify and inspect unregistered
       enterprises that are unknown to the tax authority, but this is not done to a
       very large extent. The tax authority does not intervene in such cases. As
       mentioned, however, the government plans to transfer such responsibilities
       from AFPs to the tax authority in a near future.
           The government has recognised that the court system for labour cases is
       cumbersome, bureaucratic and slow (often about three years before a
       judgement). Employers can frequently obstruct the process, e.g. by not
       providing the necessary proof that the complainant has worked in the firm.
       Significant policy efforts are therefore in progress to increase the capacity to
       handle labour cases and to improve the procedures. Specialised courts for
       labour and social insurance were set up in the most populated regions in
       2006, but elsewhere the ordinary courts must also handle labour cases. The
       number of specialised labour judges will increase gradually from 19 to 84.
       The number of labour cases resolved increased from 174 000 in 2004 to
       251 000 in 2007, of which 104 000 under the specialised courts.
           A new court procedure for labour cases, introduced in 2008 in two
       small regions, will replace the present slow procedure in the whole country
       by 2010. Key elements of this reform, supported by the main employer and
       worker associations, are that 1) all procedures are oral and the judge hears


27.          The usual penalty for lack of contract is 5 UTM (unidades tributarias mensuales, an
             inflation-adjusted unit for monthly taxation) or about USD 350.
28.          The payment of contributions to healthcare insurance may be most easily checked by
             applying for a healthcare service, which will be refused if the insurance is not valid.

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84 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES

      both the employer and the worker at the same time; 2) the judge can act
      ex officio to prevent that proceedings are delayed or paralysed by deliberate
      actions by either party; 3) proceedings are free of charge and special lawyers
      are available to defend workers; and 4) the possibilities of appeal are
      restricted. Where the new system is operational, it takes on average 90 days
      to resolve a case.
           In addition, the DT has begun to offer an optional “fast-track” or
      “monitoring” option for disputes of limited economic consequence (up to
      ten minimum monthly wages). If the worker chooses this option, which
      takes about 30 days, the DT first organises a conciliatory meeting; if no
      agreement is reached, the worker can still turn to the court, which can often
      decide quickly based on the minutes of the conciliatory meeting.29 Another
      fast-track procedure has been created for cases that concern fundamental
      rights, including trade union rights.

6. An atypical unemployment insurance programme (UI)

          Chile’s UI, described in Box 2.3, consists mainly of individual accounts,
      from which the accumulated contributions are paid out on job separation for
      any reason, most often as a lump-sum. A subsidised Solidarity Fund, little
      used until now, can give complementary support to claimants who are
      unemployed and dismissed for economic reasons, provided that their
      previous earnings were modest. Those claiming support from the Solidarity
      Fund are compensated according to a defined-benefit model, based on
      previous income and fixed replacement rates (up to 50%, with a modest
      maximum amount), paid in up to five monthly benefits. But the Solidarity
      Fund itself will contribute only when the individual account is empty.
          The use of individual accounts has almost no equivalents among
      UI schemes in OECD countries, though a few other Latin American
      countries have programmes that share some of its characteristics. Austria
      implements a similar individual-account programme – see Box 2.1 above –
      but this was introduced to replace employers’ severance payments and not
      as a complement to these. Austria also administers a UI scheme of an
      internationally common model as well as an unemployment assistance
      programme.



29.       The worker can ask the court to make a judgement based on the minutes from the
          conciliatory meeting and other documents. The judge can then make a judgement or call the
          parties to another conciliatory meeting within fifteen days. In the first case, either party can
          ask the judge to come and explain the sentence in a conciliatory meeting, or appeal to a
          higher court.

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            When the Chilean programme was introduced in 2001, workers’
       “ownership” of individual funds was seen as a means to make participation
       attractive and to reduce moral hazards. It was deemed desirable to reduce
       the need to target the unemployed, which would be difficult in the absence
       of a fully-fledged employment service. But large parts of the accumulated
       funds must then be paid out for reasons other than unemployment, reducing
       the resources available for this particular contingency.
           The relatively strict rules for Solidarity Fund benefits were initially
       motivated by concerns with the risk of abuse (moral hazard). However,
       officials interviewed by the OECD review team acknowledged that these
       fears had been exaggerated, contributing to the limited use of the Solidarity
       Fund. At present, only some 10% of all claimants are eligible for benefits
       from this fund, and perhaps only half of them find it worthwhile to apply.
           In the Bill of August 2008, mentioned in Box 2.3, the government
       proposed to make the Solidarity Fund’s guaranteed benefit scale somewhat
       more generous and to apply it in all cases of dismissal for economic reasons.
       In all such cases, the claimants would have to register as unemployed. As a
       further novelty, Solidarity Fund benefits would also become available to
       workers who complete fixed-term jobs, but with much less generous benefit
       amounts. As seen in Table 2.6, those terminating fixed-term contracts are
       the biggest group of UI claimants under the present (unreformed) system.


            Box 2.3. Chile’s unemployment insurance (UI, seguro de cesantía)

Financing and main structure
     Chile’s UI, introduced in 2001, consists of individual accounts with a small Solidarity Fund as a
complement. It is financed by contributions from 1) employers, who pay 2.4% of the wage for
indefinite-duration contracts and 3% for fixed-term contracts, 2) employees with indefinite-duration
contracts (0.6%); and 3) the state budget. Contributions are not charged on wages in excess of UF 90
(over five average wages). The state subsidy goes to the Solidarity Fund along with 0.8 percentage
points of the employer contribution for indefinite-duration contracts. All remaining contributions are
allocated to the workers’ individual accounts. Administration has been entrusted, after competitive
bidding, to special bodies connected with the pension-fund administration.

    An indefinite-duration worker’s individual account will thus receive 2.2% of the wage for up to
11 years in a job, after which no more contributions are charged. The worker will thus accumulate
26% of a monthly wage per contribution year, to be adjusted for financial returns, administrative costs
and changing wages (see Table A) Similarly, a fixed-term worker would accumulate 36% of a monthly
wage for every 12 months of work. By comparison, the severance benefit that employers must pay on
dismissal for economic reasons amounts to a full monthly wage per year of service, with a ceiling at
11 years. The employer’s contributions to a dismissed worker’s UI account are deductible from the
mandatory severance benefit.



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86 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES


                Table A. Expected amounts of benefits from individual accounts
                                compared with severance pay
                              All amounts are expressed as numbers of monthly wages

Number     Accumulated capital on the         Hypothetical benefits from the individual account      Severance pay by the
of years       individual account                                                                          employer
                                                                                                                    1

in a job          Total    Of which: from       Total      Month 1 Month 2 Month 3 Month 4 Month 5   Total   After deducting the
                                employer                                                                             employer's
                                          1                                                                                      1
                            contributions                                                                          contributions
1                 0.26             0.19        0.26         0.26      -       -        -       -        1                    0.8
2                 0.53             0.38        0.53         0.28     0.25     -        -       -        2                    1.6
3                 0.79             0.58        0.79         0.29     0.26    0.23      -       -        3                    2.4
4                 1.06             0.77        1.06         0.31     0.28    0.25     0.22     -        4                    3.2
5                 1.32             0.96        1.32         0.33     0.30    0.26     0.23    0.20      5                    4.0
6                 1.58             1.15        1.58         0.40     0.36    0.32     0.28    0.24      6                    4.8
7                 1.85             1.34        1.85         0.46     0.42    0.37     0.32    0.28      7                    5.7
8                 2.11             1.54        2.11         0.53     0.48    0.42     0.37    0.32      8                    6.5
9                 2.38             1.73        2.38         0.59     0.53    0.48     0.42    0.36      9                    7.3
10                2.64             1.92        2.64         0.66     0.59    0.53     0.46    0.40     10                    8.1
11                2.90             2.11        2.90         0.73     0.65    0.58     0.51    0.44     11                    8.9

Note: These calculations are only a hypothetical illustration. They disregard administrative costs,
financial returns and changing wages.
Severance pay applies only when indefinite-duration workers are dismissed for "enterprise needs" or
force majeure.
1. Assuming an indefinite-duration contract.
Source: Ley del eguro de cesantia.

Benefit rules
     Once a worker has been employed for 12 months (six months for fixed-term contracts), the
individual account is available on job separation for any reason. Withdrawals of funds must be made in
as many monthly payments as the number of years of service, up to a maximum of five. These
payments come at declining amounts, which add up to the account balance if they are all paid. But to
receive more than one benefit, the claimant must also register as unemployed at the municipal
employment service (OMIL) from the second month. Once a claimant finds a job, he or she can collect
the benefit for only one more month, while the remaining funds will stay on the account for possible
future use.
      If the account balance is too low to permit a certain level of compensation, claimants who are
dismissed from indefinite-duration jobs for economic reasons (“enterprise needs”; the Labour Code’s
Art. 161, or force majeure) and become unemployed can apply for an additional benefit from the
Solidarity Fund. This can be done twice in a five-year period. When the Solidarity Fund is involved, it
guarantees that the total benefit in the first month is 50% of the last wage up to a ceiling, in the second
month 45%, and so on down to 30% in the fifth month (all depending on the number of benefit months
that apply in each case). The benefit ceiling follows consumer prices, so it has declined since 2001
relative to typical wages. It is currently around 90% of the minimum wage in the first month of
unemployment, and subsequently lower. In effect, a complement from the Solidarity Fund can be
relevant mainly to workers with moderate job tenures (up to about seven years) and modest wages
(cf. Table A).




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How many are concerned and what they receive

     Affiliation to UI has increased gradually and now concerns some 5.6 million workers, of whom
about 3 million (and/or their employers) contributed in June 2008 (cf. Table B). Those with fixed-term
or similar contracts accounted for over half of the insured, but contributed less regularly and with low
average amounts. A large majority of accounts had accumulated less than one minimum wage (then
CLP 145 000; cf. Table C). Monthly benefits were paid to 135 000 workers – a figure that corresponds
to about one-third of the survey-based unemployment, though it is not known how many of the
recipients were unemployed (Table 2.6).

     The average benefit payment is about 30% of the average wage (Table 2.6, Panel A). Over half of
the benefits concern temporary workers, who all receive lump-sums. Claimants who previously had
indefinite-duration contracts collect on average two monthly payments. Indefinite-duration workers
represent almost all of those considered as dismissed, but they also include a significant proportion of
workers who quit their jobs voluntarily. The Solidarity Fund is involved in only about 6% of all benefit
cases. Officials interviewed by the OECD team thought that a similar number of clients may well be
eligible for Solidarity benefits but never apply for them, contenting themselves with the right to
withdraw individual funds without having to register as unemployed.


                            Table B. Individual UI accounts in June 2008

 Type of contract, gender                         Thousands of        Average       Thousands of        Average
                                                      accounts         balance       contributions       monthly
                                                                      (in CLP)        made in the    contribution
                                                                                            month       (in CLP)
 All insured workers                                       5 683     131 612                3 041         8 505
 Men                                                       3 151     161 039                1 866         9 295
 Women                                                     1 944     115 625                  954         7 369
 Unknown                                                     589      26 929                  221         6 739
 Indefinite contracts, total                               2 601     208 144                1 741         9 203
 Men                                                       1 467     244 204                1 026        10 124
 Women                                                       939     184 591                  615         7 963
 Unknown                                                     195      50 358                  101         7 407
 Fixed-term or other temporary contract                    3 082      67 004                1 300         7 568
 Men                                                       1 683      88 544                  840         8 282
 Women                                                     1 005      51 170                  339         6 293
 Unknown                                                     394      15 312                  120         6 178
Source: Calculations based on SAFP data (www.safp.cl).




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              Table C. Persons affiliated to UI in June 2008 by contribution status
                                       and account balance
 Category of account                 Affiliated persons                            Average account balance (in CLP)
holders                     Number       Percentage Percentage     Up to 100 000   100 001-   200 001-      500 001-   1 000 001
                                             of all     of the                     200 000    500 000      1 000 000    or more
                                           accounts contributors
 Contributors by taxable
income (in CLP):
 Up to 100 000               299 307        5%          10%            289 342        7 042       2 308          425         190
 100 101-200 000             858 217       15%          30%            743 725       84 595      29 206          557         134
 200 001-300 000             634 433       11%          22%            518 922       68 711      45 458        1 239         103
 301 000-500 000             545 172       10%          19%            384 048       74 138      73 126       13 565         295
 501 000-1 000 000           351 179        6%          12%            187 640       47 084      70 004       39 443       7 008
 1 001 000-1 800 000         129 761        2%           5%             42 526       14 087      27 051       24 783      21 314
 More than 1 800 000          62 993        1%           2%             14 687        5 431      10 615       12 459      19 801
 All contributors           2 881 062      51%         100%           2 180 890     301 088     257 768       92 471      48 845
 Percentage distribution        100%        -            -                  76%         10%          9%           3%          2%
 Minimum wage earners
(145 000 CLP)                591 732       10%           -             549 726       33 487       7 685          590        244
 Non-contributors           2 802 368      49%           -            1 718 839     465 931     435 700      122 441      59 457
 All insured persons        5 683 430     100%           -            3 899 729     767 019     693 468      214 912    108 302

Note: The monthly contribution to these accounts is 2.2% or 3% of the taxable income.
Source: Calculations based on SAFP data (www.safp.cl).


The Government’s Bill of August 2008
      The proposed reform has the following main elements:
       1.      Benefits to the unemployed would as a rule be calculated according to the more
               generous five-month benefit scale now used only when the Solidarity Fund is
               involved. This Fund would be used whenever necessary to cover the expenses.
       2.      Access to the Solidarity Fund for the unemployed who previously had fixed-term or
               temporary contracts. To minimise negative effects on work incentives, this group
               would receive only two monthly benefits, replacing previous earnings at the rates of
               35% and 30%.
       3.      Relaxed contribution requirement for benefits from the Solidarity Fund (still
               12 months, but not necessarily continuous).
       4.      A possibility for the government to pay two additional monthly benefits after
               indefinite-duration jobs, applicable in situations of high unemployment. The
               two benefits will be worth 25% and 20% of the previous wage, respectively. After
               fixed-contracts, the income replacement rate would instead be increased.
       5.      Reallocating 0.2 percentage points of employer contributions for fixed-term workers
               to the Solidarity Fund.




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                                   Table 2.6. UI benefits in June 2008

                A. Benefits paid: number of cases and average amounts by source of finance
 Number of cases and average amounts, expressed as percentage of the average wage for both genders
                                         (CLP 345 000)

                   Total              Individual account*            Solidarity Fund                Mixed
                Cases Average             Cases Average              Cases      Average          Cases    Average
                         amount                   benefit (%                       (% of                    (% of
                           (% of                           of                    average                  average
                         average                    average                        wage)                    wage)
 Total        134 629       29%          126 352            30%      4 762          23%          3 515        33%
 Men           91 076       32%           86 463            32%      2 491          24%          2 122        34%
 Women         43 553       24%           39 889            23%      2 271          22%          1 393        32%

* Including 4 400 persons whose benefits were paid out according to the rules about Solidarity Fund
benefits (Art. 25).

              B. Benefits paid and approved benefit claims by reason and type of job contract

 Type of                        Benefit      New benefit claims approved: total and percentage distribution by reason
contract by                   payments             Total          Voluntary     End of     Individual        Economic
gender                                                                   quit   contract    (Art. 160)     (Art. 161)*
 Total                         134 629             98 520     100%      20%       58%             5%            17%
   Men                          91 076             68 304     100%      20%       58%             5%            17%
   Women                        43 553             30 216     100%      22%       58%             4%            16%
 Indefinite contracts           64 106             27 998     100%      36%        5%             8%            50%
 Men                            41 690             18 919     100%      34%        6%             8%            52%
 Women                          22 416              9 079     100%      42%        4%             7%            47%
 Fixed-term contracts or
similar                         70 523             70 522     100%      14%       78%             4%             4%
 Men                            49 386             49 385     100%      14%       78%             4%             4%
 Women                          21 137             21 137     100%      14%       81%             3%             3%

* Including force majeure (Art. 159, point 6).
Source: SAFP (www.safp.cl).

            Several factors make it difficult to predict the effects on labour market
       behaviour. Assuming that individuals have varying preferences with respect
       to risk and consumption, it is perhaps inevitable that some will be eager to
       withdraw their individual funds.30 The proposal to extend the use of the
       Solidarity Fund’s benefit scale would increase the proportion of benefit
       claimants who must register as unemployed, and their benefits would be
       interrupted if they find work. This can encourage excessive mobility in some

30.           UI funds have a limited range of investment options, primarily fixed-interest instruments.
              Gross returns were 1.22% in real terms over the period August 2007-July 2008 (SAFP), but
              an administrative fee of 0.6% of the capital is deducted once a year, subject to some
              cyclical adjustments.

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      groups: after 12 months in a job, a worker would still get access to the
      individual funds as a lump-sum if he or she quits in agreement with the
      employer.
          As mentioned already, more consideration should be given to the
      possibility of a “flexicurity” package of reforms. If more generous
      UI benefits are envisaged for the unemployed, they should be combined not
      only with an effort to improve the public employment service – as the
      government has envisaged, see below – but also with the elimination of
      employers’ duty to pay severance benefits.

7. The public employment service

          An important lesson OECD countries have drawn from experience is
      that reforms to make the unemployment compensation more generous will
      increase the need to monitor and support individual efforts to find jobs. This
      was also stressed in the Chilean Government’s Bill to Congress in
      August 2008, which envisaged a new information system for the
      employment service and improvements of the electronic labour exchange
      Bolsa Nacional de Empleo (see below). The SENCE offices that administer
      training and hiring-subsidy programmes for registered job seekers would
      also be strengthened.
           Employment services are provided by 233 Municipal Employment
      Intermediation Offices (Oficinas Municipales de Intermediación Laboral,
      OMIL), covering 277 of the 345 municipalities. They had altogether
      654 staff members in 2007, with numerous small municipalities having only
      one employee for this function – often in the town halls, not necessarily as a
      distinct office – while bigger cities may be somewhat better equipped.31
      Though belonging to the municipal administrations, OMILs depend
      essentially on state funding. Most municipalities have too low revenues of
      their own to contribute much to the employment service, implying that few
      of them can develop policies of their own.32
          Key OMIL tasks are to certify unemployment on behalf of the Solidarity
      Fund, which is done in co-operation with the UI administration, and to keep a
      similar register of Chile Solidario clients. Both registered groups are
      presumed to seek jobs and demand the assistance they may need. However,


31.       The biggest city areas, Santiago and Concepción, consist of several municipalities which
          have their own OMIL offices.
32.       Local taxation targets a limited number of items such as alcohol, car registration, tourism
          and property development. The OMIL office in a prominent tourist resort, whose leader met
          the OECD team, was exceptionally well-equipped by Chilean standards.

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       according to what the OECD team was told during visits in two regions, many
       clients do not come back to the office after the initial registration, and only a
       few of the most well-equipped OMILs are likely to contact them unless there
       is a suitable job offer. But OMILs also serve various other clients who come
       to the office spontaneously, including young first-job seekers.
            According to data submitted by the Chilean authorities, the annual flows
       of registered job seekers, new vacancies and filled vacancies are modest
       compared with the size of the labour force, and they have declined
       since 2001. In 2006 there were reportedly 292 000 newly registered job
       seekers, 92 000 new vacancies and 49 000 filled vacancies.33 Clients are
       encouraged to use the Bolsa Nacional de Empleo, a nationwide search
       engine available free of charge on the Internet, which the UI administration
       created in 2006 in order to help job seekers and employers to find each
       other. The Bolsa also helps OMILs to check that Solidarity Fund
       beneficiaries fulfil the requirements for certification. Still under
       development, it has registered fewer workers and vacancies per month than
       the OMILs, but the ratio of filled vacancies appears more favourable,
       e.g. during August 2008 it registered 1 374 vacant jobs while 837 vacancies
       were filled (www.bolsadeempleo.cl).

       Active labour market programmes (ALMPs) are relatively
       insignificant
            The OMIL network is supervised and complemented by the National
       Training and Employment Service (Servicio Nacional de Capacitación y
       Empleo, SENCE) – part of the Ministry of Labour and Social Security –
       which is represented in all regions and has 532 staff members. SENCE
       provides OMILs with technical and financial support and administers
       training and job-subsidy programmes for OMILs’ job seekers, notably the
       beneficiaries of the Solidarity Fund and Chile Solidario. Clients may also
       be referred to more broadly-targeted adult training via Chilecalifica, a
       programme managed jointly by the Ministries of Economy, Education and
       Labour. In 2007, subsidies were paid for recruitment of about
       20 000 unemployed clients, while under 10 000 received training, to which
       must be added a similar number of Chile Solidario clients. (These
       measures are separate from SENCE’s larger training scheme for employed
       workers – see below – but the same training centres can be used.)
          By OECD standards, all these job-subsidy and training programmes are
       small relative to the number of potential participants registered at the
       OMILs. Where they have been implemented, they have often appeared to be

33.          Available figures for 2007 are much lower, but this is possibly a result of slow reporting.


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      successful and welcomed by employers, as for example an apprenticeship
      programme and a similar scheme under Chile Solidario (Jovenes), which
      together are expected to enrol around 10 000 young clients in 2008.
      However, OECD experience of ALMPs indicates that such positive results
      would be difficult to sustain if they were to be implemented on a much
      larger scale. If more large-scale training schemes are found necessary for
      disadvantaged youth, e.g. school drop-outs, OECD experience indicates that
      the objectives are more likely to be achieved if targeted measures are
      implemented within the general education system.
          The most cost-effective type of active labour market policy is usually
      the basic job-counselling and placement. When unemployment benefit
      claimants are concerned, such services should be combined with effective
      controls of availability for work. To the extent that more expensive
      programmes such as training and job subsidies are targeted on the
      unemployed, job counsellors are usually best place to select the individuals
      whose job chances are likely to improve as a result of a particular measure.
      For this reason, an expansion of the more expensive active programmes
      should not be a high priority as long as the budgetary and administrative
      capacity is not sufficient even for job counselling.
           The municipal employment offices are probably so weak in large parts
      of the country that they are unlikely to fulfil their expected functions in
      relation to the unemployed. The chief priority must be to strengthen the
      job-counselling function and to monitor individual job-search efforts. This
      problem is set to become more urgent if UI and other benefit schemes
      become more generous. The additional services now provided by SENCE
      and the Bolsa Nacional de Empleo are evidently needed as a complement.
      Various options for organisational reform merit consideration, including that
      of replacing OMILs by a nationwide office network under the national
      employment service agency, as found in most OECD countries.

8. Job-related training and lifelong learning

           Extended initial education has already made large parts of the young
      generation better prepared for entering the labour market and for lifelong
      learning on and off the job. An important long-term effect is that demands
      for vocational training are addressed increasingly to higher education
      institutions, both at a young age and as recurrent courses for adults. In line
      with recommendations in OECD (2005), Chilean authorities decided in 2006
      to 1) give more financial support of higher-education for students from low
      and middle-income households, 2) step up checks on quality through the



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       accreditation of higher-education providers, and 3) pursue reforms that make
       academic training more attuned to market demand.34
           But education and training policy must still cater for numerous adults
       not eligible for higher education, a group that includes many of those at risk
       of unemployment. Moreover, lifelong learning usually depends on a
       complex interaction between work and learning that is difficult to achieve
       unless employers and workers share a mutual interest in skill enhancement.
       According to OECD experience, low-educated workers are usually among
       the least likely to attend job-related adult training, a problem that is
       accentuated when they are employed under precarious conditions.
           Secondary education, where enrolment is now relatively high, includes a
       significant element of vocational as well as general options. A large
       expansion of the system in the 1980s and 1990s was accompanied by policy
       efforts to develop vocational courses, targeting a range of occupations
       selected in co-operation with employers. A dual apprenticeship programme
       was also introduced, inspired by the system in Germany. But in Chile as in
       many OECD countries, more recent reforms have reduced the differentiation
       of secondary education, which now generally includes two years of common
       education for all followed by two final years with general and vocational
       streams. The OECD (2004a) argued that while the previous emphasis on
       vocational education may have been appropriate at the time, putting too
       much emphasis on vocational education at the secondary level may be
       undesirable if it reduces the chances that the pupils will subsequently be able
       to participate in tertiary education.
           Employee training in Chile is financed predominantly by tax credits,
       deductible from a 1% payroll tax, and to a lesser extent by grants financed
       by this tax. About 20% of the dependent employees reportedly participate
       each year (about 1 million persons in 2008, up from 600 000 in 2000). As
       observed in OECD (2005 and 2007), the administrator, SENCE, has limited
       control because it must generally approve tax relief when the training is
       purchased from an authorised provider, and also, with few exceptions, if it is
       provided in-house. Employers are free to choose training content and to
       select trainees. A slightly higher tax rebate is available if the training is
       decided by a bipartite training committee at enterprise level, but very few
       enterprises use this option. In 2005, the tax rebate was replaced by training

34.          The number of higher-education grants to students with modest incomes increased by about
             20% in 2007, with additional support for students from the two lowest income quintiles and
             a new type of student loans. A new Higher-Education Standards Law (Ley de
             Aseguramiento de la Calidad de la Educación Superior) led to the creation of a national
             accreditation commission (CNA). Other changes concerned curricula, equipment and
             management (the so-called MECESUP2 Programme, second phase).

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      grants for the smallest micro-firms with up to one employee, where the
      frequent presence of informal and family workers had made it difficult to
      assess the wage costs.
          Policy makers have been concerned for a considerable time about the
      quality of such training. The relatively lax regulations combined with
      insufficient information – especially in small firms – have tended to make
      the programme supply-driven as employers are sensitive to training centres’
      marketing. The government and SENCE have gradually tightened the
      requirements for accreditation of training centres (OTECs), with important
      changes notably in 2006, after which the number of approved training
      centres was reduced by almost one-third to about 1 900. SENCE also seeks
      to provide more advice and information to employers about the training.
           A national certification system for vocational skills has been under
      development for several years. Regulated in law since mid-2008, it has been
      designed to cover the whole labour market although standards have not yet
      been developed for more than a limited part of the job market (e.g. tourism,
      food and beverage production, construction, technical and mechanical
      installations). The effort has been managed by SENCE until now, but the
      new law envisages the creation of a tripartite commission with powers to
      adopt sector-specific skill requirements. This will be co-ordinated jointly by
      the Ministries of Economy, Education and Labour and Social Protection
      under the Chilecalifica programme for lifelong learning, which covers
      vocational guidance and measures for educational up-skilling as well as
      vocational and technical training. Some tax rebates will also be available for
      skill evaluation and certification.

      Strengthen SENCE’s controls and speed up the development of
      skill certifications
          As noted in OECD (2007), SENCE’s decision powers need to be
      further strengthened if it is to use the tax relief effectively as lever to
      enforce quality. This is required especially when tax relief is accepted for
      in-house training in enterprises. Many OECD countries have similar
      experience of programmes to subsidise enterprise training, and for
      example Belgium, Canada, France, Ireland, Spain and the United Kingdom
      have from time to time used levy/grant or “train-or-pay” schemes
      resembling the present one in Chile (OECD, 2005, Box 5.3). Some
      positive effects have usually been reported, but international experience
      suggests that such programmes often have a high deadweight effect and
      they can lead to distortions of the training effort.
           In any case, subsidies and tax relief are less important than the
      institutional developments that are necessary in order to make the many

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       different forms of general and vocational education and training compatible
       with each other and with the labour market. OECD experience suggests that
       the existence of widely recognised skill certifications is important, although
       the role of government in setting such standards is variable; it can often be
       reduced once an effective set of non-government training bodies are in
       place. Some countries such as Germany and Korea have long traditions of
       apprenticeships co-managed by employers and business associations, which
       have contributed to high vocational skills and relatively low youth
       unemployment in these countries.
            Given Chile’s heterogeneous labour market, efforts to promote human
       capital accumulation must be designed to target a broader cross-section of
       the labour market, including small entrepreneurs and their formal or
       informal employees. This could justify a greater element of direct subsidies,
       if this can be afforded, for example by extending the just-mentioned training
       grant for micro-firms to somewhat bigger firms, e.g. those with up to five or
       ten formal or informal employees. Other programmes under the
       Chilecalifica also merit expansion, for example those designed to promote
       ICT training in SMEs. The up-skilling and labour training programme
       (Nivelación de Estudios y Competencias Laborales) financed by FOSIS (the
       Solidarity Fund related to Chile Solidario, see Chapter 3) could be extended
       to target a broader client base than youths, and it should not necessarily
       exclude informal workers.

9. Special issues concerning employment of women

           As seen in Chapter 1, female labour force participation and employment
       rates are lower than in almost all OECD countries, even though they have
       increased substantially. The situation is most preoccupying for young
       women, whose employment rates remain remarkably low both by
       international standards and compared with young men in Chile (Figure 1.4).
       Women’s entry into the labour market is often obstructed by a combination
       of family responsibilities and difficulties faced in making the transition from
       school to work. As mentioned in Chapter 1, this problem is more widespread
       among young women in Chile compared with most OECD countries
       because Chilean mothers tend to have their first child at a lower average age
       (less than 24 years), with a significant incidence of teenage pregnancies
       among those with relatively low education and low household incomes. The
       policy challenge is thus to help parents combine work and family
       responsibilities, a goal that will require more flexibility in enterprises and
       more child care and related measures.
           As discussed above, labour demand needs to be encouraged by a
       relaxation of EPL, which currently favours insiders too much at the expense of

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      outsiders, as well as a reduced minimum wage and more flexible regulations
      about working time and part-time work. Concerning working time, however,
      OECD experience shows that reforms to increase flexibility can have
      undesirable effects for parents unless they have access to affordable child care
      (OECD, 2006). The overall effect of flexible rules can still be positive because
      it stimulates higher production and higher labour demand. But to make it
      possible for parents to accept the additional jobs, such reforms should be
      accompanied by further measures to help them combine work with family
      duties, such as childcare support and parental leaves.
          Child care is often the most crucial condition for female labour force
      participation, especially for parents with small children. As seen above, the
      problem in Chile is greatest for low-skilled women, who often seem to
      regard their potential work incomes as insufficient to justify the cost of
      private childcare. Their participation in the labour force can nevertheless be
      advantageous in the long term, considering the potential for on-the-job
      learning and other personal development. Mothers with low education also
      show the highest incidence of part-time work in Chile, indicating that
      affordable child care could help many low-income mothers to overcome
      poverty by working longer hours.
          The following childcare provisions are currently found in Chile:
          •   For children aged less than 2, Chilean employers are obliged by law
              to provide childcare if they have 20 or more female employees.
              Firms often do this in their own premises or by paying for care
              elsewhere, but many enterprises probably seek to keep the number
              of employed women below the mentioned limit.
          •   About half of the total child-care provisions were reportedly private
              in 2003, including 17 percentage points representing facilities
              managed by employers (Politeia, 2007). These provisions were used
              predominantly by households in the two highest income quintiles.
          •   Public child care generally targets low-income groups. The Junta
              Nacional de Jardines Infantiles (JUNJI), under the Ministry of
              Education, expects to increase its day-care provision for from about
              15 000 places in 2006 to 70 000 places in 2010. Its day-care centres
              target children aged 3 months to 4 years. JUNJI also sponsors some
              preschool facilities for 5-year-olds with part-time working mothers,
              mainly in rural areas, and to help integrate children from ethnic
              minorities (www.junji.cl). An additional programme, Integra, targets
              families in extreme poverty.
          •   Municipal preschool education covers mainly 5- and 6-year-olds.
              The government has announced plans to expand the enrolment of

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                  4-year-olds, which until now has concerned under 15% of the age
                  class. In 2006, the number of pupils was 317 000 of which some
                  45 000 were aged 4 or less.

10. Conclusions

           This chapter has discussed a broad range of policy issues in the labour
       market area. The overall goal should be to make the labour market more
       dynamic and flexible and at the same to offer more equal opportunities.
       Chile’s labour market institutions already permit a considerable degree of
       flexibility for business, but this has been achieved too much at the price of
       an excessive segmentation of the labour market, which contributes to a high
       level of inequality. Such market segmentation is neither fair nor
       economically efficient as it hampers competition for jobs and reduces
       incentives for human capital investment in disadvantaged groups.
           Chile therefore has good reason to pursue its efforts to improve the
       social dialogue and to develop a policy package that would combine more
       flexibility for business with better social protection of workers. There is also
       reason to eliminate many labour market rules that discriminate too much
       between workers with different contract arrangements. Recent proposals to
       encourage enterprise-level collective bargaining about flexible working
       conditions and to support training of the participants in such bargaining are
       also welcome.
           Much remains to be done in improving the government’s capacity to
       implement effective labour market policies. Not only is there a case for
       higher budgetary allocations to labour market policy, insofar as this can be
       afforded; there is also a need for more investment in administrative
       networks and their human capital, especially at local level. This notably
       includes the following:
             •    On-going reforms to strengthen the Labour Inspectorate and labour
                  courts should continue along with further efforts to eliminate the
                  remaining pockets of informality and non-coverage of social
                  insurance.
             •    The new legislation about sub-contracting should be enforced and
                  its underlying principles should be clarified, if necessary by further
                  legislation.
             •    Unemployment compensation should be extended to the groups that
                  face high risk of unemployment, and its different treatment of
                  various labour market groups should be reduced.



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          •   The public employment service needs to be enhanced as a
              complement to higher spending on unemployment insurance. The
              possibility of merging it with the SENCE should be considered.
          •   The policy efforts to develop the education and training system for
              lifelong learning must have high priority. The quality of enterprise
              training needs to be ensured, and further efforts are needed to
              provide training to the workers of the smallest firms.
          •   Public support of childcare merits further development in view of
              the large numbers of parents for whom it is a necessary condition
              for labour force participation.




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                                                   CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 99




                         Annex 2.A1.
  The Presidential Advisory Commission “Work and Equity”

           This Advisory Commission, chaired by Prof. Patricio Meller Bock,
       delivered its report “Towards a Fairer Chile: Work, Pay, Competitiveness
       and Social Equity” in April 2008. Key proposals of interest to this OECD
       policy review include the following:
        1. In-work benefits, child benefits and job-related training for vulnerable
           groups.
        2. More generous unemployment insurance and better employment
           services.
        3. Measures to develop industrial relations and collective bargaining.
        4. Stipends to the best pupils in secondary education.
        5. A strategy to formalise subsistence-level enterprises.
           Some potentially crucial issues proved so controversial that the
       Commission it could not make unanimous recommendations. Different
       groups of commissioners therefore gave separate opinions, This notably
       concerned a number of institutional questions, about which the Chilean
       society has been divided for a considerable time:
        • The governance of public programmes for job-related training.
        • Reducing the severance payments which employers must pay to dismissed
          workers. If adopted, this would come as a counterpart to the above-
          mentioned proposal to improve to unemployment insurance (which would
          require higher employer contributions and state subsidies).
        • Who should set the minimum wage.
        • How to determine which trade unions are representative; at what levels
          and about what they should bargain.
        • Whether or not to create a Council for Social and Economic Dialogue.
          As mentioned in the main text, the government presented a bill to
       Congress on 18 August 2008, which proposed a partial reform of the
       unemployment insurance (UI) along the lines of the Commission’s proposal.

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100 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES




                                Annex 2.A2.
              Measuring employment protection legislation (EPL)
                        by the OECD scoring method
                                           Scores 0-6 from lowest to highest strictness

                                                                1. Termination of indefinite contracts
                  a) Procedural                b) Difficulty of dismissal                      c) Notice and severance pay for no-fault       Average
                 inconveniences                                                                           individual dismissal                 for 1)
                 Proce-   Delay to   Criteria for      Trial    Compen-        Possi-
                 dures      start     justified      period     sation for     bility of    Notice period after       Severance pay after
                           notice    dismissal      before a    unjustified   renstate-
                                                      job is    dismissal       ment       9m        4y      20y     9m       4y      20y
                                                    protected    after 20y

United States      0         0            0            ..           ..            1        0          0       0       0       0           0     0.2
United Kingdom     2         0            0            2            1             2        1          2       2       0       1           1     1.1
Canada             2         0            0            4            ..            2        1          2       1       0       1           1     1.3
New Zealand        3         1            0            6            ..            2        2          1       0       0       0           0     1.7
Ireland            3         1            0            2            4             2        1          1       1       0       1           1     1.6
Australia          2         1            0            4            1             3        1          1       1       0       2           1     1.5
Switzerland        1         0            0            5            1             0        3          4       2       0       0           1     1.2
Hungary            2         1            0            4            2             4        3          2       2       0       2           2     1.9
Japan              3         1            2            4            2             6        3          2       1       1       3           1     2.4
Denmark            2         0            0            2            2             2        5          5       2       0       0           1     1.5
Czech Rep.         4         3            4            4            1             6        6          5       1       2       2           1     3.3
Korea              4         3            2            ..           1             6        3          2       1       0       0           0     2.4
Slovakia           4         6            0            4            2             5        6          4       2       2       2           1     3.5
Chile              4         0           6             6            1            0         3         2       1        0       6        4        2.7
Finland            4         2            4            4            3             0        2          2       3       0       0           0     2.2
Poland             4         2            0            5            0             4        3          5       2       0       0           0     2.2
Austria            4         1            2            6            1             6        3          2       1       0       0           0     2.4
Netherlands        4         4            3            5            3             2        2          1       1       0       4           3     3.1
Italy              3         0            0            6            3             4        1          2       1       0       0           0     1.8
Germany            5         2            4            3            3             3        3          2       4       0       0           0     2.7
Belgium            1         1            0            4            3             0        6          5       6       0       0           0     1.7
Norway             2         2            5            4            2             4        3          2       2       0       0           0     2.3
Sweden             4         2            4            4            6             2        3          5       3       0       0           0     2.9
France             3         2            4            5            3             0        3          4       1       0       2           2     2.5
Greece             4         0            1            5            2             4        2          3       4       1       2           2     2.4
Spain              4         0            4            5            4             0        3          2       1       1       4           4     2.6
Mexico             2         0            6            ..           3             2        0          0       0       6       4           1     2.3
Portugal           4         3            4            4            4             4        6          4       1       6       6           6     4.2
Turkey             4         0            0            4            5             0        3          4       1       0       6           6     2.6

Source: OECD (2004), OECD Employment Outlook, Chapter 2, Annex 2.A; Códogo del trabajo as
amended until March 2008; Ministerio del Trabajo.




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                                                    CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 101



                                 2. Regulation of temporary employment                               3. Special     Total:
                                                      b) Temporary-work agencies           Average    rules for   Average
                    a) Fixed-term contracts
                                                                (TWA)                       for 2)   collective     for all
                 Valid cases Maximum     Maximum     Types of     Restric-    Maximum                dismissal      listed
                 other than   number of cumulated    work for    tions on    cumulated
                  the usual  succes-sive duration     which     number of    duration of                          forms of
                  objective   contracts             TWAs are    renewals     temporary                              EPL*
                   reasons                           allowed                  contracts

United States        0           0          0          0            2            0           0.3        2.9          0.7
United Kingdom       0           0          1          0            2            0           0.4        2.9          1.1
Canada               0           0          0          0            2            0           0.3        2.9          1.1
New Zealand          2           2          0          0            4            0           1.3        0.4          1.3
Ireland              1           0          1          0            2            0           0.6        2.4          1.3
Australia            0           5          0          0            2            0           0.9        2.9          1.5
Switzerland          0           5          0          0            4            0           1.1        3.9          1.6
Hungary              1           4          1          0            2            0           1.1        2.9          1.7
Japan                1           0          0          1.5          4            1           1.3        1.5          1.8
Denmark              1           5          2          0            2            0           1.4        3.9          1.8
Czech Rep.           1           0          0          0            2            0           0.5        2.1          1.9
Korea                1           1          0          2.3          4            2           1.7        1.9          2.0
Slovakia             0           0          1          0            2            0           0.4        2.5          2.0
Chile               0           4          3           3            0            5           2.3         0           2.1
Finland              4           5          0          0            2            0           1.9        2.6          2.1
Poland               0           0          0          3            2            2           1.3        4.1          2.1
Austria              1           5          0          1.5          2            0           1.5        3.3          2.2
Netherlands          0           3          0          0.8          4            1           1.2        3.0          2.3
Italy                2           6          0          1.5          4            0           2.1        4.9          2.4
Germany              1           2          3          1.5          4            0           1.8        3.8          2.5
Belgium              1           2          2          3            4            5           2.6        4.1          2.5
Norway               4           5          0          3            4            0           2.9        2.9          2.6
Sweden               1           0          5          0            2            4           1.6        4.5          2.6
France               4           4          4          3            4            3           3.6        2.1          2.9
Greece               6           3          3          0            4            4           3.3        3.3          2.9
Spain                3           3          3          3            4            6           3.5        3.1          3.1
Mexico               5           0          0          6            4            6           4.0        3.8          3.2
Portugal             2           2          1          3            4            5           2.8        3.6          3.5
Turkey               6           5          0          6            4            6           4.9        2.4          3.5

* Weighted average.
Source: OECD (2004), OECD Employment Outlook, Chapter 2, Annex 2.A; Ministerio del Trabajo.




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102 – CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES




                                         Bibliography


      Acevedo, G., P. Eskenazi and C. Pagés (2006), “Unemployment Insurance
        in Chile: A New Model of Income Support”, SP Discussion Paper
        No. 0612, World Bank, Washington D.C.
      Anderson, P.M. and B.D. Meyer (1998), “Using a Natural Experiment to
        Estimate the Effects of the Unemployment Insurance Payroll Tax on
        Wages, Employment, Claims and Denials”, NBER Working Paper
        No. 6808, Washington D.C.
      Congreso Nacional (2001), Ley del seguro de cesantía, Santiago (quoted in
        August 2008 from www.safp.cl/573/articles-3847_recurso_1.pdf).
      Congreso Nacional (2008), Código del trabajo (first adopted in 2001, with
        changes until March 2008), Santiago.
      Consejo Asesor Presidencial Trabajo y Equidad (2008), Hacia un Chile Más
        Justo: Trabajo, Salario, Competitividad y Equidad Social (two
        documents: Informe Final and Informe Ejecutivo), April, Santiago.
      Cowan, K., A. Micco, A. Mizala, C. Pagés and P. Romaguera (2003), Un
        Diagnóstico del Desempleo en Chile, IADB and Ministry of Finance,
        Santiago (www.dipres.cl/publicaciones/empleo.html).
      Cunningham, W.V. (2007), Minimum Wages and Social Policy: Lessons
        from Developing Countries, World Bank, Washington D.C.
      Dirección del Trabajo (2007), ENCLA 2006: Resultados de la Quinta
         Encuesta Laboral, Santiago.
      Dirección del Trabajo (2008), Compendio de Series Estadísticas, Santiago.
      Escobar, L.E. (forthcoming), El seguro de cesantía en Chile: diagnóstico y
         propuestas para fortalecerlo, Chile 21, Santiago.
      INE – Instituto Nacional de Estadísticas (2006), Fecundidad en Chile:
        Situación reciente, Santiago.
      Larrañaga, O. (2009), Inequality, poverty and social policy. Recent Trends
         in Chile, OECD, Paris.
      Mideplan (2006), CASEN 2006: Enquesta de Caracterización
        Socioeconómica Nacional, Ministerio de Planificación, Santiago.


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                                                 CHAPTER 2. TOWARDS MORE EQUAL JOB OPPORTUNITIES – 103


       Ministerio del Trabajo (2007), ENCLA 2006: Resultados de la Quinta
         Encuesta Laboral, Dirección del Trabajo, Santiago.
       Ministerio del Trabajo y Previsión Social (2006), Encuesta de Protección
         Social 2006: Presentacion General y Principales Resultados (EPS
         2006), Santiago.
       OECD (2003, 2005, 2007), OECD Economic Surveys: Chile, OCDE, Paris.
       OECD (2004, 2006, 2008), OECD Employment Outlook, OECD, Paris.
       OECD (2004a), OECD Reviews of National Policies for Education: Chile,
         OECD, Paris.
       Politeia (2003), Salas Cuna y Jardines Infantiles para Hijos e Hijas de
          Mujeres Trabajadoras, Primer Informe: Diagnóstico Inicial y Base
          Metodológica del Estudio, Santiago.
       Puentes, E. (2007), Occupational Choice, Wage Distribution and
          Technological Changes in a General Equilibrium Model. Evidence from
          Chile: 1965-2004, University of Chicago.
       SOFOFA (2008), Informe de remuneraciones y materias laborales de la
         industria, Diciembre 2007, Santiago (www.sofofa.cl, accessed
         31 January 2009).
       World Bank (2007), Doing Business 2008: Chile, Washington D.C.




OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: CHILE – ISBN- 978-92-64-06060-9 © OECD 2009
                                    CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION – 105




                                                Chapter 3.


            Reducing Poverty in the Working-age Population




          Strong growth in economic prosperity has led to increased demands for
          a more inclusive society, with a more equal distribution of income and
          opportunities. So far, Chilean social policies for the working-age
          population have focused on developing health, housing and education
          policies (pension policies are discussed elsewhere). Using a
          combination of home visits and questionnaires, Chilean policy has been
          able to identify many of those in need and target support to low-income
          households. However, gaps in coverage remain, especially in rural
          areas. Other challenges remain, not least extending the local capacity to
          deliver services. Concerns about the quality of services have also been
          raised.
          This chapter gives a summary of education, health and housing policies,
          and analyses social policies, in view of the public resources put into
          them, their redistributive power, and their ability to identify clients and
          successfully target policies at those who are most urgently in need of
          support. The chapter looks at how the “holistic” approach of social
          service delivery in the Chile Solidario package helps clients to achieve
          better outcomes. The chapter concludes by looking ahead and
          discussing future Chilean social policy development, in particular the
          emerging issue of how to design and introduce a system of financial
          transfers to working-age families without weakening financial incentives
          to work.




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106 – CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION

1. Introduction
          Reducing poverty has been one of the main priorities of the Chilean
      government since 1990. When considered against the absolute poverty
      threshold of 50% of the median income in 1996 as adjusted for inflation,
      poverty reduction has been impressive since 1990. At just over 10% in 2006,
      the poverty rate is only one-third of what it was in 1990 (Table 3.1).
      However, when measured against the relative poverty line of 50% of median
      income in respective years, poverty rates remained stable during the 1990s
      and only decreased between the years 2000 and 2006.
                 Table 3.1. Poverty and its severity has fallen since 1990
                                    Poverty indicators, 1990-2006

                                   Percentage of poverty
                                                                     Poverty gap as a % of
                              Absolute line        Relative line      GDP, absolute line
                 1990             30,3                 20,5                     4,6
                 1996             20,7                 20,7                     2,1
                 2000             18,9                 20,9                     1,9
                 2006             10,6                 16,4                     0,9

            For detail on poverty definitions, see Chapter 1.
            Source: Larrañaga (2009).

          The trend in absolute poverty better reflects the decline in the severity of
      financial hardship in Chile (see also Chapter 1). One indicator on the “depth
      of poverty” is the percentage of GDP that would need to be spent on poor
      households for them to reach the absolute poverty line. Abstracting from
      costs of targeting and adverse financial incentive effects, it is estimated that
      providing all poor households with sufficient cash transfers to reach the
      poverty line would have cost 4.6% of GDP in 1990, while only 0.9% of
      GDP would have been needed in 2006 (Larrañaga, 2009).
           Strong economic growth in recent years has reduced absolute poverty
      rates and increased average incomes of lower and middle income groups,
      but as incomes of the highest income groups increased at almost the same
      pace, there has been only a small decline in income disparities which remain
      large compared with most OECD countries (Chapter 1). In recent years,
      demands have been growing to develop policies which make growth more
      inclusive and which reduce both poverty and income inequality. Within a
      strict budgetary environment with little redistribution of resources among
      income groups (Box 3.1), the social policy response has been to first
      develop key services such as housing, health and education, but is now also
      focussing on increasing employment opportunities and providing financial
      support to low-income groups of working age.

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                                      CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION – 107




       Box 3.1. Public financing of social support in Chile: budgetary prudence
                          and little redistribution in taxation
     Chilean fiscal policy in recent years has been prudent and transparent. In 2001, the structural
budget surplus rule was introduced which stipulated a budgetary surplus of 1% of GDP net of the
effects of cyclical copper-price fluctuations. In 2006, the structural budget rule was enshrined in the
Fiscal Responsibility Law which also introduced rules on capitalisation of the Chilean Central Bank,
the provision of public job-creation programmes when regional unemployment rates are in excess of
10%, and a Pension Reserve Fund. This fund is financed by between 0.2% to 0.5% of the previous
year’s GDP. Fund assets can only be used to finance (means-tested) pension benefits from 2016
onwards (OECD, 2007a). Any surplus beyond these three institutions will be placed in a Fund for
Economic and Social Stabilisation. In view of the recent decline in public indebtedness and savings for
future pension liabilities, the structural budget target was relaxed from 1% of GDP to 0.5% for 2008
which facilitated an increase in public spending, including on education (OECD, 2007a).
     The tax burden is not heavy in Chile; at about 17% of GDP it is well below the OECD average of
around 37% (Figure below, Panel A). However, employees in Chile make mandatory contributions
towards their retirement, disability and survivors pensions to private funds to the tune of about 12.6%
of earnings (Chapter 4). In comparison, mandatory contributions to Superannuation pension funds in
Australia concern 9% of earnings. These mandatory contributions are not counted as social security
contributions in the OECD Revenue Statistics (OECD, 2007b) and to that extent the Chilean tax-to-
GDP ratio is “artificially” low. In 2005, the value of mandatory pension contributions amounted to 5%
of GDP in Chile (Chapter 4); by comparison social security receipts amount to 9.2% of GDP on
average across the OECD in the same year (OECD, 2007b).
                 The Chilean tax burden is not heavy1 and VAT and excises make up half
                                 of central government tax revenue
                         Panel A. Tax-to-GDP ratios in Chile and OECD countries, 2005

         50.0
                           Without social security contributions

                           With social security contributions

         40.0




         30.0




         20.0




         10.0




          0.0




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108 – CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION


         Panel B. Chilean central government tax revenue as a percentage of GDP, 1993-2006
             18.0
             16.0
                                                                                         Other taxes
             14.0
             12.0
             10.0                                                                        Excises

              8.0
              6.0                                                                        VAT

              4.0
              2.0                                                                        Income tax
              0.0
                      1993         1997         2000         2003         2006

1. Local tax revenue is not included, and the tax burden does not include mandatory contributions to
private (pension) funds.
Source: OECD Revenue Statistics and Servicio de Impuestos Internos 2008 (www.sii.cl).
     Another important feature of the Chilean tax system is its reliance on value-added tax (VAT) and
other taxes on goods and services (including excises) in the tax mix. Because of the high copper
revenues, the proportion of indirect taxes in central government tax revenue has declined from 60%
during the 1990s to just over 50% in 2006 (Figure above, Panel B). This was much higher than the
32% OECD average; only Mexico and Turkey are similarly reliant on indirect taxation (OECD,
2007b). Personal income tax amounted to 30% of tax receipts in Chile in 2006, compared with an
OECD average of 25%. The income tax system has 6 rates from 0 to 40% (Cantallops et al., 2007).
Since the corporate tax rate is only 17%, there are incentives for high-income taxpayers to “incorporate
themselves” and opt for (partial) own-account employment.
     The relative simplicity of operating value-added taxation (a VAT rate of 19% with few
exceptions) can help compliance with tax collection (see Keen and Smith, 2007 for an overview of
VAT-evasion issues). Registered taxpayers can obtain a credit for purchasing immediate goods and
services if acquired from another registered taxpayer, so the system provides financial incentives to
comply with the rules. With administration costs less than 1% of net revenue, the efficiency of the
Chilean tax administration compares well with that in most of the OECD countries (OECD, 2007b).
While proceedings can be further streamlined and enforcement improved it is estimated that the
combination of a relatively simple system and increased enforcement has brought down the estimated
proportion of non-reported VAT from about 20% in 2000 to 11% in 2005 (OECD, 2007b). Compared
with the estimated VAT-evasion rate of around 5 percentage points or below in Denmark, Germany,
the Netherlands and the United Kingdom, Chile can still make considerable improvements in tax
collection, but it already compares favorably with Greece, Spain and Italy where estimated
VAT evasion rates are in excess of 20% (Nam et al., 2003).
     A drawback of reliance on VAT is that it does not redistribute spending power. Indeed,
comparisons of income distributions before and after taxation show that the overall effect of the tax
system on the income distribution in Chile is, in fact, slightly regressive (Engle et al., 1998; Cantallops
et al., 2007). Moreover, simulations of tax reform indicate that a steeper progressivity would have
limited effect on the income redistribution, reflecting the relatively small overall income tax revenue.
Taxing top-income groups more effectively and focusing benefits more on low-income groups of the
working-age population has greater potential to generate a more equal distribution of resources and
opportunities in Chile.


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                                    CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION – 109



2. Social policy
       Overall spending and redistributive effect
           In the Chilean context, social policy consists of four key areas:
       education, health, pensions, and housing, with targeted income and family
       support for low-income households as an overarching objective cutting
       across these themes. Education, health and to a lesser extent housing
       policies are not among the core themes of this labour market and social
       policy review. Nevertheless, any discussion of Chilean social policy would
       be incomplete without some information about policy developments and
       concerns in these areas. Private arrangements for pensions and other social
       protection will be discussed in the next chapter.
           Regardless of whether or not education is counted, Chile ranks low in an
       OECD comparison of public social spending relative to GDP (Figure 3.1,
       Panel A). With public social expenditure at around 8.7% in 2007, Chile only
       spends more than Korea and Mexico among the OECD countries. Including
       spending on pension benefits and annuities that derive from mandatory
       pension contributions, publicly-mandated social spending (including
       benefits derived from mandatory pension contributions) amounted to just
       over 10% in 2005, about half the OECD average.
           Public social spending and spending on education in Chile amounted to
       almost 12% of GDP in 2007 (Figure 3.1, Panel B); almost two-thirds of total
       public spending (18.7% of GDP in 2007; MdH, 2007). Education and health
       accounted for around 3% of GDP each, but despite the development of a
       mandatory private pension system since the early 1980s, at 4.1% of GDP in
       2007 public spending on pensions is the largest item of social spending.
       Such expenditure includes spending on benefit-entitlements established
       prior to the pension reform in the early 1980s, pensions for the armed forces
       and minimum pensions (Chapter 4). Compared with spending on education,
       health and retirement support, public spending on employment support,
       family support, and housing support is limited.
           Public spending on education and health has increased as a percentage
       of GDP since the mid-1990s, while spending on retirement support has
       increased only gradually and declined in proportional terms (Figure 3.1,
       Panel B). On the whole, public spending on social policy and education has
       been increasing in real terms (see Panel C), but it has not kept pace with
       GDP growth in recent years (except in the health area with public spending
       being 2.8% of GDP both in 2000 and 2006). The recent change in the
       structural budget rule (Box 3.1) allowed for further increases in public
       spending in 2008, including on education, which in 2006 amounted to 3.1%
       of GDP (by comparison the OECD average was 5% of GDP in 2004,
       OECD, 2007d).

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110 – CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION

             Figure 3.1. Public social and education spending has increased in Chile,
                          but remains low in international comparison

       Panel A. Publicly-mandated social spending to GDP ratios in Chile and OECD countries, 20051
30.0



25.0



20.0



15.0



10.0



 5.0



 0.0




   Panel B. Central government spending on social purposes and education as a percentage of GDP,
                                            1997-2007
  16.0

  14.0
                                                                                                   Other
  12.0
                                                                                                   Housing
  10.0
                                                                                                   Family support
       8.0
                                                                                                   Public pensions
       6.0
                                                                                                   Education
       4.0
                                                                                                   Health
       2.0

       0.0
                  1997                2000                  2003                 2007




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                                    CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION – 111


           Figure 3.1. Public social and education spending has increased in Chile,
                    but remains low in international comparison (cont’d)

      Panel C. Public spending on social policy and education in real terms, 1990-2006 (1990 = 100)

           400
                                                                                            Education
           350

           300                                                                              Health

           250

                                                                                            Total social and
           200                                                                              education
                                                                                            spending
           150
                                                                                            Non-health
                                                                                            (mainly
           100
                                                                                            retirement
                       1990             1996             2000              2006             support)


1. Publicly-mandated social spending includes both public social spending (which includes spending
on health, but not on education) and mandatory private social spending (for a comprehensive overview
of definitions, see OECD, 2007c). For Chile, such spending includes expenditures on pension benefits
and outlays by pension funds on annuities for clients (worth about 1% of GDP in 2005), see Chapter 5.
If only current outlays on pension benefits and annuity payouts (in a given year) were considered,
mandatory spending would be about 0.1% of GDP.
Source: OECD (2008), Social Expenditure database, 1980-2005, Larrañaga (2009), and Ministerio de
Hacienda (2008), Estadisticas de las Finanzas Publicas; www.dipres.cl.


            Spending on family supports includes services for (orphaned) youth,
        income-tested family benefits and allowances, and maternity payments.35
        Family allowances are paid almost completely out of general revenue by
        different social protection institutes. Payment rates are low, at about
        CLP 6 000 per month at maximum (about USD 12), and phased out on
        income of CLP 412 791, where the payment is CLP 1 375. These benefits
        towards dependents are nevertheless very important in the Chilean context
        as they are paid to about 2.7 million dependents (mostly children, but also



35.          Maternity pay is available to formal-sector employees (about 70% of female employees
             have a signed employment contract and are paying social security contributions) who have
             contributed continuously for three months (or the equivalent over a six-month period) and
             is paid at 100% of the average of their last three months’ earnings up to a maximum of
             UF 60 (different rules pertain to the self-employed). Maternity allowance can be payable
             for a period from six weeks prior to childbirth and 84 days after childbirth. The associated
             allowance for a sick child can be paid up to the first birthday of the child.

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      other dependent family members, including widowed mothers, disabled
      spouses, students and/or grandchildren).
          The Chilean benefit system is relatively good at targeting the poor,
      with almost 75% of public social expenditure and public spending on
      education going to households from the four lowest income deciles
      (Table 3.2, Panels A and B). Because of the value of education and health
      support (and to a lesser extent, the minimum pension payment), total
      disposable income of households in the lowest income decile is almost
      three times the income they generated autonomously in 2006. Table 3.2
      also shows that while the value of individual social benefits such as family
      payments,36 the Chile Solidario participation payment, and drinking water
      subsidies may be low, they constitute a significant part of income in
      poor households.
           It appears that social policies in a broad sense achieve a significant
      redistribution of resources. For example, in 2006, net market income (see
      note 1 to Table 3.2) of the 10% of richest households was 31 times higher
      than for the 10% of poorest households, but only 12 times higher if their
      consumption of publicly-financed social services, healthcare and education
      is taken into account (Table 3.2).
          The redistributive power of benefit systems not only depends on the
      extent to which spending is targeted at low-income groups (rather than on
      those who contributed most, as is the case in systems based on insurance
      principles). It also depends on the overall size of public spending on social
      benefits. As mentioned earlier, public social spending in Chile is low in
      international comparison, but, with the planned introduction of cash
      transfers supporting working-age households and families (see below
      section “Further developing supports to the working-age population”) the
      redistributive power of the Chilean benefit system will be
      strengthened significantly.37




36.       The family allowance (INP) is paid to workers in the formal sector, and as the poorest are
          most likely to be in informal employment, this payment is seemingly less important to
          households in the lowest income decile than the family allowance paid under the Chile
          Solidario regime (see Section on “An integrated approach towards supporting the poor:
          Chile Solidario”).
37.       Similarly, the degree of targeting public family benefits on poor families in the United
          States is the strongest across the OECD. However, since overall outlays on such
          programmes are small in international comparison, the overall redistributive impact is
          limited (Whiteford and Adema, 2007).

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           Table 3.2. Public spending on education and health is the most important
                      in redistributing resources towards the poor in Chile
    Panel A. Monthly value of household income and subsidies by deciles, 2006 (Chilean pesos, Nov. 2006)
                                                                                        Income decile
   Income and support items         I            II           III           IV           V       VI         VII          VIII       IX          X          Total
                  1
Net market income                  75 687      179 457       239 074       298 447     345 526   429 983   533 240      681 531    983 646 2 365 797 6 132 388

                      2
Education subsidies                57 485       58 775        50 126        42 673      34 501    32 052    28 200       22 592     16 967       9 075     352 446
                2
Health subsidies                   43 702       34 190        29 669        21 889      15 959    12 183     9 006       -1 119     -3 857     -11 005     150 617

Total social benefits              26 909       15 820        12 711        10 222       7 061     6 157     4 451        3 190      2 125          757     89 403
Of which
 Minimum pension (PASIS)          18 377        8 099         6 176         4 741       3 201     2 511     1 712        1 391        907           319     47 434
 Family allowance (SUF)            4 102        2 337         1 427           967         489       433       275          141         72            33     10 276
 Chile Solidario bonus             1 152          646           432           279         242       152       108           50         17             2      3 080
 Drinking water subsidy            1 172          998           982           917         706       663       540          387        229            61      6 655
 Family allowance (INP)            1 889        3 543         3 555         3 090       2 393     2 115     1 639        1 144        800           320     20 488
 Unemployment compensation           218          197           140           229          30       283       176           78         99            23      1 473

Total disposable income           203 783      288 242       331 581       373 232     403 047   480 375   574 896      706 194    998 881 2 364 624 6 724 855

Total disposable income without
social benefits                   176 874      272 422       318 870       363 010     395 986   474 218   570 445      703 004    996 756 2 363 867 6 635 452

Source: Adapted from Mideplan (2007).
                      Panel B. Monthly value of household income and subsidies by deciles, 2006
                                      (proportion of income and subsidy items)
                                                                                        Income decile
 Income and support items                  I            II           III         IV         V         VI          VII       VIII         IX           X     Total
                     1
 Net market income                       1.2           2.9          3.9          4.9       5.6       7.0          8.7      11.1      16.0        38.6       100.0

                         2
 Education subsidies                    16.3          16.7      14.2          12.1         9.8       9.1          8.0       6.4        4.8           2.6    100.0
                 2
 Health subsidies                       29.0          22.7      19.7          14.5        10.6       8.1          6.0      -0.7       -2.6          -7.3    100.0

 Total social benefits                  30.1          17.7      14.2          11.4         7.9       6.9          5.0       3.6          2.4        0.8     100.0
 Of which
  Minimum pension (PASIS)               38.7      17.1          13.0         10.0         6.7       5.3       3.6           2.9       1.9           0.7     100.0
  Family allowance (SUF)                39.9      22.7          13.9          9.4         4.8       4.2       2.7           1.4       0.7           0.3     100.0
  Chile Solidario bonus                 37.4      21.0          14.0          9.1         7.9       4.9       3.5           1.6       0.6           0.1     100.0
  Drinking water subsidy                17.6      15.0          14.8         13.8        10.6      10.0       8.1           5.8       3.4           0.9     100.0
  Family allowance (INP)                 9.2      17.3          17.4         15.1        11.7      10.3       8.0           5.6       3.9           1.6     100.0
  Unemployment compensation             14.8      13.4           9.5         15.5         2.0      19.2      11.9           5.3       6.7           1.6     100.0

 Total disposable income                 3.0           4.3          4.9          5.6       6.0       7.1          8.5      10.5      14.9        35.2       100.0

 Total disposable incomewithout
 social benefits                         2.7           4.1          4.8          5.5       6.0       7.1          8.6      10.6      15.0        35.6       100.0

1. Net market income refers to household income including labour income, capital income (rents and
interests), benefit payments from contributory pensions, and other private income (as, for example, transfers
from relatives who do not live in the household). Income is measured after direct taxes and social security
contributions (not including mandatory contributions to private pension funds), but before indirect taxes.
2. Education subsidies include the following subsidies: supports towards school supplies, text books,
meals, (dental) health, as well as contributions to national education services (as, for example, the
national council of school assistance and scholarships, or the pre-school supervising agency JUNJI). The
monthly education subsidies are imputed from the values reported by households in the CASEN survey
and the information provided by the Ministry of Education and its agencies. Health subsidies include all
health benefits delivered or financed by the public sector. These subsidies are net of co-payments made
by the beneficiary and contributions made by workers. The monthly health subsidies are imputed using
information from three different sources: CASEN survey, and the financial statistics of the Ministry of
Health as well as the Ministry of Finance.
Source: Adapted from Mideplan (2007).

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114 – CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION

      Education, health and housing policies
          Chilean social policy development since the mid-1990s includes two
      key elements. First, since the 1990s, policy intensified in the areas of
      education, health and housing policy, while prevailing budget constraints led
      to much prioritisation and targeting on the poor. Second, Chilean policies
      generally leave room for private-sector involvement in the provision of
      many social services, reflecting a generally strong belief in the powers of
      market competition to generate efficiency. The internationally most
      well-known example of the latter is pension policy (Chapter 4), but housing,
      health and education are also affected.

      Education
          As discussed in Chapter 1, Chile scores well below the OECD average
      in terms of educational attainment of the population and literacy rates for
      young people. Public spending on education is well below the OECD
      average (Figure 3.2). Recent Chilean governments have recognised the need
      for more human capital investment (and increased spending on education,
      Box 3.1). There is now nearly 100% coverage of the population and the
      school infrastructure has been improved.38 After eight years of compulsory
      primary schooling (and about two-thirds of 4- and 5-year olds attending
      non-compulsory pre-school), about 87% of the 14-18 year age group
      participates in secondary education. The proportion of youths aged 20 who
      are in higher education is about 34%, comparable with participation
      numbers often seen in OECD countries (see the detailed review of tertiary
      education in Chile available as of April 2009).
          Despite the significant investment, the Chilean education system suffers
      from a number of quality issues. Quality issues include a lack of
      technical/vocational focus in education. Strengthening linkages between
      education and enterprises (e.g. through apprenticeships and extending
      vocational secondary education in industrial fields), which improve the
      school-to-work transition and raise the very low youth employment rate in
      Chile are key policy concerns (OECD, 2004). The Chile Califica
      programme aims to develop a lifelong learning and training system with
      participation of the private sector, as there is too little capacity for catch-up
      education of adults with low general schooling. In general and across levels
      of education, the improvement in quality is lagging behind the recent
      increase in capacity.



38.       Full-day schooling was introduced in 1997 for municipal and subsidised private schools.
          Until then, many classrooms were shared between morning and afternoon classes.

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   Figure 3.2. Public investment in health and education in Chile is limited compared
                                  with OECD countries
            Panel A. Public spending on educational institutions as a percentage of GDP, 2004/05
    9.0
                       Other educational institutions, including pre-schools
    8.0
                       Tertiary education
    7.0
                       Primary and secondary education
    6.0

    5.0

    4.0

    3.0

    2.0

    1.0

    0.0




Source: OECD (2007d), Education at a Glance.
                    Panel B. Public expenditure on health as a percentage of GDP, 2005
      9.0

      8.0

      7.0

      6.0

      5.0

      4.0

      3.0

      2.0

      1.0

      0.0




Source: OECD Health Data 2008 and Ministerio de Hacienda (2007), Estadisticas de las Finanzas
Publicas (www.dipres.cl).


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          The Chilean education system was decentralised in the 1980s. Local
      authorities are responsible for staffing and maintaining school infrastructure,
      while the Ministry of Education has regulatory, supervisory and
      co-ordinating functions, including the setting of guidelines and curricula.
      There are three types of schools: municipal, subsidised private and fully
      fee-financed private (for an overview see OECD, 2004 and 2007a). Both
      municipal schools (which can receive additional municipal subsidies) and
      subsidised private schools are financed by an implicit voucher system.
      Central government makes a transfer to local authorities which then pay
      each school in their areas a certain amount per child depending on the level
      of education and daily participation (full-time or otherwise) so long as the
      parental co-payment to the school is within a set limit. Parents choose the
      school their children attend, thereby determining to which school the local
      authorities should make the payments.
          The voucher system helped to expand capacity within a short period of
      time, but otherwise, the effect of competition on school performance has
      been limited and there are considerable equity issues. In theory, funding
      follows children, but the system allows local authorities to cross-subsidise
      across schools in their jurisdiction. This provides an additional incentive to
      select students for (private) schools that wish to improve their performance.
      Selection is in theory illegal, but in practice it is widespread. The fee-based
      private schools select most obviously, though they must use 15% of their fee
      receipts to finance scholarships for low-income students.
          As from 2008, the Chilean authorities will be rolling out a differentiated
      voucher scheme in pre-school, primary and lower secondary education, which
      pays more to schools for children from low-income families (for identification
      purpose, the authorities use the Social Protection Index based on the Ficha de
      Protección Social, see the discussion of Chile Solidario below and
      information provided by health authorities). Given the different student
      populations, municipal schools are set to make the biggest financial gains.
           In order to improve quality, the Chilean system includes a Subvencion a
      los Establecemientos de Major Desempeno, a subsidy to generate excellence
      in performance. The National Education Evaluation Service (SNED)
      considers school performance in 6 dimensions: efficiency; improvement
      over time (both these factors are co-determined by pupils’ national SIMCE
      test scores); initiative (new projects); employment conditions; participation
      of vulnerable groups; and, participation by teachers and parents. The
      programme has operated since 1995 and in 2008/09 will be extended to
      assistant teachers. Awards are made to the group of teachers at a given
      school. Since payments are small (USD 6.5 per child for a total budget of
      36 million pesos or USD 75 000 for 2008), they are likely to have had only a
      limited effect on quality improvement.

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            Table 3.2 illustrated that public support for education (and health) has
       a significant effect on the income distribution. Education also affects the
       (future) income distribution through human capital accumulation, and
       public health and education investment since the 1960s has contributed, if
       indeed it was not a precondition (Larrañaga, 2009), to economic growth
       following the liberalisation which took place after 1975. At the same time,
       access conditions to education and training opportunities for adults remain
       different across income groups. Higher income groups in Chile acquire the
       best quality and most expensive education in the private market; middle-
       income groups use public services, but may be able to get a better quality
       service in exchange for a “co-payment”; lower income groups attend free
       public education (Larrañaga, 2009).39 In this sense, the segmentation of the
       “education market” limits equality of opportunities and future reductions
       in income inequality.

       Health
            Some health outcomes in Chile, such as, for example, life expectancy
       (78 years for men and 81 for women) are quite close to the OECD average.
       Infant mortality rates are somewhat worse than the OECD average
       (Chapter 1). The 2008 Chile Crece Contigo programme (see below) is
       geared towards further improving child health outcomes. In view of the
       relatively low public health spending effort in Chile compared with most
       OECD countries (Figure 3.2, Panel B), health outcomes in Chile hold up
       relatively well. Nevertheless, much remains to be done to reduce
       socio-economic, territorial and ethnic health inequalities.
           The Chilean health system is a mix of public and private insurance, as
       well as care provisions. The National Health Fund (Fondo Nacional de
       Salud, FONASA) provides free insurance coverage for low-income
       households. Employees pay mandatory health contributions of 7% of
       earnings to FONASA or to a private health provider (Instituciones de Salud
       Previsional, ISAPRE), which may charge additional contributions
       depending on age, sex, family size and the type of plan. There are about
       1 800 plans with different prices and services. Many ISAPRA clients
       contribute about 9-10% of earnings.



39.          In primary and secondary education, high-income students (10% of total students) attend
             private fee-paying schools, and get the best education as indicated by SIMCE test scores;
             40% of students (mostly from the middle-class) attend private subsidised schools and get
             intermediate educational results; meanwhile the remaining 50% of students (mostly from
             low-income households) attend free public schools and get low results in the same school
             performance tests.

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           In 2007, FONASA clients accounted for just over 70% of the population
      and ISAPRE affiliates for almost 17%. The other 13% were covered by
      not-for-profit mutual plans or had no coverage (about 6-7% of the
      population, OECD, 2007a). With three-quarters of FONASA clients being
      treated in public facilities, and ISAPRE clients mostly using private
      healthcare facilities, the Chilean healthcare market is segmented. The
      current government may wish to merge the two systems into a single system
      with more redistribution of resources among income groups, but so far this
      has proved politically impossible.
          Private insurance plans do not cover all pathologies, but the number of
      covered conditions has tended to increase. They cover a broader range of
      care services and a wider choice of providers, and are perceived to offer
      better quality. The privately insured can use public institutions, but most of
      them opt for private facilities where co-payments are required, depending on
      each insurance plan and healthcare facility. Apart from price strategies,
      ISAPREs can reject applications through a selection mechanism. Hence, it is
      no surprise that ISAPREs tend to cover well-to-do groups, often of working
      age with limited health problems.
           Since 2002, AUGE (Acceso Universal con Garantías Explícitas en
      Salud) supports household expenditure on health care, especially for
      low-income households. AUGE provides guaranteed care for a list of about
      70 selected diseases and is set to cover about 80 pathologies by 2010. For
      each of these, AUGE establishes an entitlement to treatment for FONASA
      and ISAPRE clients, for which a co-payment of up to 20% can be charged,
      though not for low-income individuals. If patients are not treated in a
      prescribed period of time, public authorities have to pay for private
      treatment. AUGE also intends to improve the quality of public services
      (there are considerable waiting lists and absenteeism of medical personnel in
      public hospitals and clinics curtails productivity) through a certification
      mechanism for medical facilities. Comprehensive evaluations on its effect
      on efficiency are not yet available, but at least in theory AUGE provides a
      link between supply and recipients and increases accountability of public
      health providers. AUGE could also contribute to increasing the role of
      disease-based budgeting, rather than “retrospective budgeting” on basis of
      past pay-rolls and fees paid for medical inputs and materials.
          The efficiency of the Chilean health system could be further improved.
      Risk is unduly concentrated in the public insurance system since ISAPREs
      can select individuals through price discrimination, restricted coverage and
      by simply refusing to accept a client. One option would be to extend access
      to the “Solidarity Compensation Fund” (currently only available to private
      insurers) to FONASA, thereby increasing risk-pooling. Another avenue to
      more intensive competition (and efficiency) is to “equalise” the level of

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       co-payments for both ISAPRE and FONASA beneficiaries for homogeneous
       services provided by public and private providers (OECD, 2007a). ISAPREs
       are free to change the cost and coverage of the plans annually, though since
       2005 price increases have been capped. To further improve quality, a system
       of health workforce certification is being established, including a registry of
       health professionals (at present it is not known how many certified doctors
       and nurses there are in Chile). Public and private hospitals will also be
       regularly evaluated, with authorisation of operations subject to review and
       results will be made available to the public.
       Housing
           Chilean housing policy has been rather effective in reducing capacity
       problems. Through direct construction and relocations governments in the
       1990s made a concerted effort (Chile Barrios) to do away with
       “shantytowns” (campamentos). This has had concrete results: of the
       950 shantytowns identified in 1990, almost all have disappeared, although
       some smaller relatively new ones have appeared in which about
       20 000 families live. Different housing programmes financed the
       construction of new housing. There is still a housing deficit, but with a
       housing stock of about 4.5 million dwellings (up from 2.5 million in 1990)
       and 0.5 million households in need of better homes (down from over
       1 million in 1990), progress has been substantial (Navarro, 2005). At a
       national urban level, 71.2% of housing is owner-occupied, and just under
       half of those dwellings have been acquired through public housing
       programmes. Targeting exists but is not particularly tight: the share of
       owner-occupied housing in urban areas that used public subsidies for
       purchase is over one-third from the first to the fourth income quintiles, and
       one-sixth for the highest quintile (Larrañaga, 2009).
            As in other policy areas, the focus in policy development has moved
       towards quality issues. Past housing policies have led to the construction of
       a very large number of houses that were very cheap. The quality problems
       regard materials, designs and neighbourhood conditions. Current policy
       initiatives shift focus from “houses” to “neighbourhoods” to ensure they can
       support sufficient public and private service provision. Policy also aims to
       stimulate “client involvement” (frequently from the planning stage
       onwards), and engage people who receive housing support in the upkeep of
       their dwelling; low-value houses bought with financial support from the
       authorities can now also be sold within the initial five years of acquisition,
       giving owners an incentive to engage in maintenance while contributing to
       the development of a low-income housing market.
           Current housing programmes do not involve the direct construction or
       the provision of mortgages, but instead provide subsidies to different groups

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      of clients. The system is not intended to support those who cannot save, as
      otherwise clients will not be able to pay off private sector housing loans.
      Most of the support towards building new homes concerns households with
      incomes somewhere between poor households and those with
      average incomes.
          In terms of public support which has been around 0.8% of GDP over the
      past ten years (Figure 3.1, Panel B), the most important housing supports in
      2007 were (MINVU, 2008a and 2008b):
          •   At almost 60% of all public housing outlays in 2007, the Fondo
              Solidario de Vivienda (Solidarity Housing Fund) which makes
              grants and loans available is the largest public housing programme.
              Clients have to have completed the Social Protection Record (see
              below),40 and the minimum deposit by clients is UF 10 (about
              USD 400),41 and the maximum subsidy amount is UF 470 for
              construction of new dwellings and UF 420 for the adjustment of
              existing houses (amounts vary across regions). The subsidy covers
              the cost of land, infrastructure and a unit of 38 m2 including a
              bathroom, kitchen, bedroom and at least one other room. The
              innovative aspect of the policy lies in its collective nature: families
              design their own projects and must apply in organised groups of at
              least ten and at most 300 households, and with the (technical)
              support of a managing organisation who also manages the finances
              [a local authority, community group (or other NGO), or a
              specialised firm registered with the ministry]. The ministry
              adjudicates proposals in view of social and urban development
              objectives, as well as design features.
          •   The Sistema de Subsidio Habitacional (housing subsidies worth
              about 15% of public housing outlays) towards buying or building a
              new house: the minimum deposit is UF 50, the maximum
              house-price UF 1 000 (or USD 40 000) and the maximum subsidy
              (which depends on the house price), ranges from UF 90 to 205.42


40.       Applications are also assessed in view of the precariousness of current housing
          arrangements, the space available per person, water access and type of flooring. Excluded
          are those who own or whose spouse owns a house.
41.       The Unidad de Fomento (UF) is the main measure for determining the cost of construction,
          values of housing and secured loans: it is a unit of account which adjusts the value of the
          Chilean peso on a daily basis (www.uf.cl). Here we use the average value for June 2008:
          UF 1 was CLP 20 143 or USD 40.8.
42.       Depending on the characteristics of the house (e.g. if it located in an urban development
          zone or if it concerns a historical building), the accepted house price can double to

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             •    The Subsidio Habitad Rural (rural housing subsidies) constitutes
                  just below 10% of public housing outlays. It is targeted at poor
                  families requiring a minimum deposit of UF 10 with a maximum
                  subsidy ranging from UF 220 to 300.
           Chief quality criteria are location, access to day care, playgrounds and
       community services, and one way of addressing such issues is to build
       additional houses in existing neighbourhoods that already have good public
       and private services. Social housing should not be extended at the margins
       of cities, but as an integral part of urban development. Policy aspires to
       accomplish a greater social mix with subsidies towards housing projects
       providing a better mix in neighbourhoods.

       An integrated approach towards supporting the poor: Chile
       Solidario
            The introduction to this chapter showed that the decline in poverty came
       to a temporary halt in the second part of the 1990s. In response, Chile
       Solidario was introduced in 2002 to promote equity and enhance
       opportunities. It is a targeted anti-poverty instrument, within the overall
       fabric of education, health and pension supports. In contrast to past efforts,
       Chile Solidario is a regular social protection programme granting
       entitlements to the poor (rather than support being dependent and rationed
       on the basis of budget constraints). Its key client groups are low-earning
       couples and/or sole-parent families with children.
           Chile Solidario organises new and old programmes for the poor as a
       co-ordinated package, including a range of possible services such as
       healthcare, childcare, education, income and other family- support services.
       Thus far, cash benefits have played only a limited role. The key to Chile
       Solidario is the provision of “sustained and regular psycho-social support”,
       whereby social workers help clients to assert their rights to a range of
       potentially available services.
           From the government’s perspective, this approach towards poverty
       requires correct identification of clients, sufficient service capacity and
       co-ordination of the different agencies involved. This latter role is assigned
       to the Planning and Co-operation Ministry – Mideplan. Programme-related
       transfers to agencies and local administrations can be made dependent on
       their co-operation (Box 3.2).



             UF 2 000, with maximum subsidies paid through the Sistema de Subsidio Habitacional
             adjusted accordingly.

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            Box 3.2. Anti-poverty policy development and coherence in Chile
    There are many different ministries involved in Social Policy in Chile: Planning (Mideplan),
Labour (which supervises insurance-based arrangements for formal sector employees), Housing,
Education, Health, Culture, and the National Youth Service (SENAME). Raczynski and Serrano
(2005) identified about 400 support programmes that were created by successive governments since
1990 and which involved almost 80 agencies, and included: the Chile Joven programme aimed at
youth without jobs; Chile Barrios targeted at shantytowns (see the housing section); the Origenes
programme targeted at the aboriginal population; the Mujeres Jefes de Hogar programme aimed at
female heads of households; the local funding programmes of the Fondo de Solidaridad e Inversión
Social (FOSIS, see below); and, the Chile Solidario initiative.
     The Mideplan Minister chairs the “social cabinet committee” with ministers responsible for these
different agencies develops new measures and implements some social protection schemes, including
Chile Solidario and Chile Crece Contigo. Mideplan will also take the lead in formulating new anti-
poverty measures in late 2008, following-up on the findings of the Presidential Advisory Council on
“Work and Equity”. This practice is becoming a trend in Chilean policy development: the current
pension reform (Chapter 4) was developed on the basis of findings by an earlier report of a publicly-
appointed group of pension experts.
     Mideplan is also responsible for the national socio-economic categorisation survey (Encuesta de
Caracterizacíon Socioeconómica Nacional – CASEN) which has been held every three years
since 2000 (bi-annual from 1990 to 2000); there also is a panel study which has had three waves so far
(1996, 2001, and 2006). CASEN is used to identify demographic, health, education, housing, earnings
and income characteristics of the population, and evaluate the impact of government policy on the
social-economic situation of the population. CASEN has a large sample size (about 75 000 households
in 2006) and plays a key role in identifying poverty concentrations, to help identify regions/population
groups where policy support is needed most.
      Under the aegis of Mideplan, the Fund for Solidarity and Social Investment (FOSIS) was established
in 1990; it aims to fight poverty by strengthening the productive capacity of the poor. FOSIS has about
800 staffers; it runs about 13 programmes serving about 150 000 clients each year. Broadly speaking
FOSIS has two broad groups of programmes: i) programmes which promote self-sufficiency; for example,
through the promotion of entrepreneurship, including “micro-enterprise” employment; and
ii) programmes to promote social participation including, the Puente or bridge programme (see main
text), but also, for example, initiatives for early childhood support, support for families with children 9 to
14 years of age, support for families of prisoners, and programmes against domestic violence.
     The broad-based approach towards delivery of a wide range of services (health, education, etc.),
as in the Puente programme, involves many different departments and public agencies, which requires
intensive co-ordination at central and local levels of administration. As a result, Chile Solidario and
FOSIS staff have to manage different actors, networks, and programmes against the backdrop of
different institutional cultures and budget rules. They may hold some sway over participating agencies
by linking payments to their co-operation, but this is more difficult when it concerns larger agencies
with their own substantial budgets. The World Bank identified institutional modernisation and training
of central and local government staff, as well as social workers, as crucial to both Mideplan being
successful in carrying out its co-ordinating role, as well the successful implementation of Chile
Solidario in practical terms (World Bank, 2008). Indeed, overall anti-poverty policy coherence much
depends on the ability of Chile Solidario and FOSIS staff and other local social workers to develop
and improve interfaces between the different agencies involved.



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           From the client perspective, Chile Solidario acts as the gateway to a
       range of networks and services (and some financial support), and helps them
       access the needed services. Client’s active participation is key to success,
       and the contract of participation is signed by family workers and clients
       committing themselves to relevant actions, as for example, participating in
       medical check-ups, vaccinations for their children, ensure that their children
       stay in education, etc.
           The principle of mutual obligations in social policy is not unknown in
       OECD countries. On the one hand, government provides income support
       and services (for example, education, (vocational) training, a work
       placement programme, or childcare subsidies) to people without a job. In
       return for making the income transfer to the client, the government requires
       him or her to make use of the support services, so as to increase the client’s
       labour market opportunities and household self-sufficiency.
           For example, for young people to receive income support they are often
       required to be in education, or participate in training and/or on a work-
       placement programme or be actively engaged in looking for a job. Similarly,
       while providing childcare supports, most OECD countries require sole
       parents whose youngest child is of primary school-age to look for work or
       participate in training programmes to enhance their labour market chances
       and reduce the poverty risk for these families (OECD, 2007e).
           By contrast, in Chile, conditionality in benefit receipt does not involve
       large sums unlike the well-known Mexican “Oportunidades” programme
       (Box 3.3): the payment for participating in Chile Solidario ranges from
       USD 10 to USD 24 per month (see below).43 The Chilean variant of mutual
       obligations in benefit receipt ties participation to access to services, not to
       receipt of financial transfers on a comprehensive basis.




43.          As the “participation-payment” is so low, the effect of the conditional cash-transfers
             component of the Chile Solidario programme (and its predecessor) on reducing income
             inequality is very small: a 0.1% decline in the Gini coefficient over the 1996-2003 period.
             By comparison, “Oportunidades” is estimated to have contributed to a decline of income
             inequality of 2.7 points in the Gini coefficient between 1996 and 2004 in Mexico (Soares
             et al., 2007).

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     Box 3.3. Conditional family support in Mexico and holistic service delivery
                           in some other OECD countries

     Conditional Cash Transfers (CCT) are credited with a positive effects on schooling, health,
child labour, and poverty (e.g. Skoufias, 2000; Rawlings, 2004; Handa and Davies, 2006). However,
as most of these policies are relatively new, the full impact will only be observed in the medium and
long term.

     The Mexican “Oportunidades” programme was introduced in 1997 as Progresa. It aims to reduce
malnutrition, promote regular health checks and enhance participation in education
(www.oportunidades.gob.mx). Benefits to poor families are conditional on children attending school
and undertaking regular health checks. In 2007, the programme covered about 5 million families,
around 25% of the total national households with coverage about 75% among households in rural areas
(INSP, 2006), with an annual budget of over 36 billion pesos in 2007 (about 0.4% of GDP). Cash
subsidies are paid periodically (to mothers rather than fathers) and can reach 22% of the recipients’
total income; education grants are slightly higher for girls than for boys (about 10% in secondary
school); by design “Oportunidades” cash transfers are to have increased participating households’
income by about 20% (INSP, 2006). The “Oportunidades” targeting system consists of three stages.
First, it selects the most deprived communities using census data on human development and basic
infrastructure (56.3% of households taking part in the “Oportunidades” live in the eight states with the
lowest degree of human development). Second, it identifies eligible households using a “proxy means-
test” of each household in the selected localities. Third, in rural areas, a community assembly must
approve the final list of beneficiaries.

    In terms of education, health and nutrition, showed that outcomes improved:

      •    Education: “Oportunidades” has contributed to reduced dropout rates in primary
           education; increased enrolment rates in rural secondary schooling and a marked
           increase in female participation in education; and, has also led to a significant decline
           in child labour (INSP, 2006; and Parker and Skoufias, 2000).

      •    Health: interventions under the “Oportunidades” programme are credited with a
           significant increase in the use of medical services and significant reductions in infant
           and maternal mortality. The evidence on the effects of “Oportunidades” on child
           malnutrition is mixed (Hernández and Hernández, 2003; Huerta, 2005; and
           Meneses et al., 2003).

    Other OECD countries also have integrated (health, education, and social) service delivery
programmes to enhance child development in disadvantaged areas or among disadvantaged groups.
For example, New Zealand recently started various initiatives involving early intervention support
to vulnerable families (Family Start, Early Start). US policy has long developed a range of
investment programmes targeted to reduce child poverty and disadvantage, of which Head Start is
arguably the most important. This is a pre-school programme for disadvantaged children that serves
over 800 000 children in predominantly part-day programmes, at a budgetary cost of over
USD 5 billion. Over time, Head Start has been evaluated to generate long-term benefits with
benefits outweighing the costs (for a recent evaluation, see Ludwig and Phillips, 2007).




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      In the United Kingdom, the Sure Start programme which was initially targeted 250 disadvantaged
areas has evolved into the Children’s Centres programme with widespread coverage, which is planned
to rise to 3 500 centres in 2010. The initiative offers support from pregnancy through to starting school
by offering integrated day care and early learning, health, family and parenting support. The similarity
with the psycho-social support aspects of the Chile Solidario programme and the Chile Crece Contigo
programme is illustrated by the underlying policy of the Children’s Centre initiative: i) increase the
availability and sustainability of affordable childcare places for children, especially those who are
disadvantaged; ii) provide integrated services for health, education and emotional development of
young children; and iii) provide services to parents to support them as parents and to help them
become job-ready.

     However, a preliminary evaluation of the Sure Start and Children’s Centre initiative found mixed
evidence on the positive effect of the programme on child well-being (Belsky et al., 2006). Less
socially-deprived parents seemed to benefit most and the most disadvantaged children and families the
least. This shows the difficulty of targeting and of getting the most disadvantaged families to
participate. Belsky et al. (2006) also found that programmes led by health services (through the
existing network of health visitors) are more effective in serving the most disadvantaged than
programmes led by other agencies.



       Identifying clients
            To increase access to public services efficiently, it is necessary to
       identify potential clients and their most urgent needs. Chile Solidario
       incorporated and superseded the Puente [Bridge (to services) programme],
       and the identification tool used by Chile Solidario originates from this
       initiative. The Puente programme was rolled-out over the 1990s, subject to
       federal (and local) budget constraints, first in regions with many low-income
       households (as identified by CASEN, see Box 3.2) where NGOs and local
       administrations were willing to participate in the programme. Once an area
       was selected, inhabitants were informed about the various projects, and
       social workers/local officials selected families to be invited to participate in
       the programme.
           Family support officers would visit the family at home and during this
       home visit collect information on the household needs in a structured
       manner. This so-called CAS-2 form collated information on family needs
       with respect to 53 minimum conditions along seven main categories:
       residency/location; family situation; health; education; employment status;
       income; and, housing and living conditions (note the similarity to the
       CASEN categories, Box 3.2). This information would then lead to an
       assessment of family needs and those classified amongst the most vulnerable
       in the population (often sole parent families) were invited to sign up to the
       Puente programme.



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          The CAS-2 form has evolved into the Ficha de Proteccion Social
      (Social Protection Record – SPR). This is a similar tool (with the same
      seven categories) for the identification of needs and tailoring support, but
      now for a broader group of clients. Questions within categories have
      changed, for example, the CAS-2 form focuses on earnings of primary
      earners, while the SPR form asks about earnings for all household members
      age 12 and above. The SPR establishes the household or family score by
      adding up individual scores while applying equivalent scales to account for
      household composition. In order to correctly identify the degree of
      long-term vulnerability, the SPR aims to measure income generating
      capacity, of a family/household, not its actual earnings As a result, declared
      earned income only accounts for 10% in the overall SPR-index calculation.
          Key characteristics of the SPR include:
          •   Clients no longer have to wait to be invited to complete the relevant
              form but can do so at their own request. People have a strong
              incentive to complete the form, as SPR scores are now used for the
              assessment of needs in a range of supports, e.g. housing, education,
              health benefits. By 2008 about 2.5 million households with
              8.3 million people (half the population), had completed the SPR; an
              impressive feat which underlies a successful implementation of
              targeted social policy.44
          •   Each of the individual (health, education or otherwise) support
              programmes has its own SPR score thresholds and/or additional
              conditions. For example, housing authorities combine the SPR score
              with other considerations such as current living conditions in order
              to determine eligibility for support. But while in the past benefits
              were allocated on the basis of the available funds, at present
              eligibility (and the number of beneficiaries) is defined by a
              specific rule.
          •   The SPR is valid for two years (in theory scoring rules can be
              revisited each year). Depending on the type of support, households
              may have to be evaluated regularly. For example, the child benefit
              payment to poor households (see below) is revised every two years
              in view of the SPR score. Some other benefits, e.g. disability
              support and housing support, may be re-evaluated less frequently, if
              at all. Clients must inform local authorities of relevant household
              situation changes (moving house, additional children, or change in
              the head of household of the family), but there is no requirement to

44.       A related feature is that scores and client profiles are different than in the past, for example,
          the education profile of clients is now much more complex.

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                  report a change in jobs or income. It is unknown how often
                  households report change in the intervening period between
                  assessments, and it is unclear how local officials react to a
                  re-assessment request if the household income situation takes a
                  sudden turn for the worse.
             •    It is unclear just exactly how the answers to the SPR questionnaire
                  affect the SPR score and thus potential benefit receipt. For example,
                  it is not publicly known how the weights of the seven main
                  categories (residency/location; family situation; health; education;
                  employment status; income; and, housing and living conditions)
                  affect the SPR score. This makes it more difficult for clients to
                  adjust behaviour (shape questionnaire responses). It has been
                  asserted that items that can be verified with relative ease (education
                  level, housing, and household composition) carry a lot of weight in
                  the SPR score while income (which would be much more difficult to
                  verify) plays a limited role (with education being a good proxy in
                  any case). SPR thresholds are discretionary, unless individual
                  programme rules specify otherwise (e.g. linking generosity with a
                  range of different scores). There is no phase out or gradual
                  withdrawal of support.
           The SPR is doing a good job at identifying the targeted population.
       However, the SPR aims to measure income-generating capacity of
       households/families, and how individual responses affect SPR scores is not
       immediately obvious. However, as SPR scores are increasingly being used
       to establish entitlements of clients to services and (prospectively increasing)
       cash transfers, it will become increasingly important that household incomes
       are accurately reported and that the SPR allows for a gradual withdrawal of
       benefits, so as to avoid financial disincentives to work and continue to
       ensure that support is provided to those who need it most.

       Supports, coverage and public spending
           The Chile Solidario package includes the following support benefits in
       three broad groups:
      1.     Psycho-social support (in-kind support by family workers, including
             referral services), as under the Puente programme. Clients so selected
             sign a participation contract with the authorities to set out the actions
             they are to undertake; this could vary from getting an ID card to
             participating in networks, education, local projects, etc. The contract is
             also signed by family workers and commits authorities to provide
             relevant services. Families leave the programme after five years and
             cannot re-enter the stock: this is a transitory programme (there is little

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           point to engage in “psycho-social-support twice). There is a small
           participation or protection payment which declines from a monthly
           starting payment of CLP 12 320 (or USD 24 in June 2008) over a
           two-year period to (CLP 5 393; about USD 10). Upon exit of the plan
           after two years, the exit bonus is paid at the same low monthly rate as
           the Family allowance (CLP 5 393) for three years.
      2.   Five guaranteed minimum payments:
                  a) Financial support to get an identity card;
                  b) The Subsidio Unico Familiar or Family allowance worth
                      CLP 5 393 about USD 10;
                  c) Subsidy to obtain drinkable water (subject to regional
                      variation worth about CLP 8 528 to CLP 22 313);
                  d) PASIS (the minimum pension, see Chapter 4);
                  e) Subvencion Pro Retencion Escolar: Subsidy for schools to
                      retain the child in question in school the following year. The
                      education system in Chile consists of eight grades of primary
                      school and four grades of secondary school, and the aim of
                      the subsidy is to help low-income families and reduce the
                      drop-out rate.45
      3.   Preferential access to other supports that help achieve self-sufficiency.
           Given other conditions, e.g. the state of current dwellings, low-income
           families may receive priority selection for certain housing programmes
           and projects, but also receive health and education supports. Similarly,
           family workers may give priority in referring clients to local
           employment services (OMILs), but this priority is not necessarily shared
           by OMIL staff (see below).
           By design, Chile Solidario focuses on helping clients to access social
      services, rather than provide extensive financial support. As a result, public
      spending on benefits delivered under Chile Solidario is low at 0.15% of GDP
      (if spending on minimum disability and old-age pensions (PASIS, see the next
      chapter) were included spending would amount to about 0.5% of GDP).
          Between June 2002 and April 2008, Chile Solidario contacted over
      300 000 families, of which the vast majority (88.6%) completed or
      participated in the programme. Only 2.6% of the contacted families decided

45.        The detail of payments under the Subvencion Pro Retencion Escolar were in June 2008
           CLP 61 108 (or USD 117) for children in 7th and 8th grade primary school); CLP 97 772 for
           children in 1st and 2nd grades of secondary school; CLP 122 214 for children in 3rd and
           4th grades of secondary school and CLP 146 657 for those in the last period
           before completion.

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       not to participate; 2.3% could not be located at the address given; and, 6.5%
       were taken off the programme because of systematic non-compliance. In
       April 2008, there were just over 270 000 families in the programme:
       95 000 families in the psycho-social support phase (this is scheduled to be
       increased to 110 000), whereas 178 000 families received the exit bonus.
       Benefits are paid to mothers rather than fathers as this is most likely to
       benefit the children (e.g. Woolley, 2004).
           Considering participation in 2008 (budget data), there are 16 000 new
       clients to the psycho-social support phase, 32 500 receiving an exit bonus,
       and 116 000 using preferential access supports. In addition, there are special
       programmes for the elderly living alone (Programa Vinculos) covering
       12 500 elderly people (to be increased to 20 000) and for the homeless
       (Programa Calle) covering 3 750 persons to be increased to 6 000). In all,
       Chile Soilidario focuses on three key target groups: families; the sole
       elderly; and the jobless.

       Other family and child-related support programmes
           Chile Crece Contigo (Chile grows with you) is the most recent Chilean
       social protection initiative. The programme started in August 2007
       (programme spending was around USD 6.2 million). It provides support to
       mothers and children from the fifth month of pregnancy onward until entry
       in pre-primary school (age 4). The plan is scheduled to be fully rolled out
       by 2009 with all mothers and children in the target group to have access to
       primary health care, additional health and nutrition support and psycho-
       social support. The programme provides a wide range, of support touching
       all relevant aspects of the family environment, health, cognitive
       development and education.
            The programme provides supports in a cascading form. Other than the
       20% of children in higher income households who use private medical
       health facilities, all other children are seen by public health authorities in
       their first year. On the basis of SPR scores and health conditions, about 40%
       of children are regarded as vulnerable, and this category gets the most
       intensive form of support: home visits, eligibility to the family allowance
       (Chile Solidario), free access to childcare, preferential access to public
       support programmes (e.g. housing), and additional support for mental and/or
       physical handicapped children. An information guide has been developed
       for (prospective) parents with very young children. Monitoring is mainly by
       health authorities, with local authorities (who operate education and health
       systems) reviewing other development conditions.
           Childcare support has also emerged as a priority on the Chilean social
       policy agenda. To fight poverty, and promote child development, gender

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      equity and equal opportunities (OECD, 2007e), the government is
      expanding childcare capacity. One thousand childcare facilities were created
      from 1990 to 2005, but there are 3 000 new facilities scheduled for the
      2006-08 period. The 2008 budget covered the construction of 900 childcare
      facilities with 18 000 places by local authorities under the aegis of the
      national childcare authority JUNJI (Junta Nacional de Jardines Infantiles) at
      a cost of USD 81 million.46 A similar amount was available for the
      extension of kindergartens as supervised by the Ministry of Education.
      Spending on childcare and pre-school education increased from 0.08 in 2006
      to 0.11% of GDP in 2007 despite the rapid increase of national income. This
      is still a very low amount: in OECD countries, such support often amounts
      to a quarter percent of GDP or more. Given the combined challenges of
      increasing female labour force participation and the quest for adaptability in
      the labour market, a further spending increase on childcare is a sound social
      investment, provided the quality of childcare provision is assured.

      Assessing Chile Solidario
          There are different aspects to the assessment of Chile Solidario,
      including targeting, labour market integration and poverty reduction, and
      capacity challenges:
          •   Targeting. There is general agreement that Chile Solidario supports
              reach the people who need it most. Soares et al. (2007) asserts that
              about 60% of the resources of both the Chile Solidario programme
              and the Mexican “Oportunidades” programme go to the poorest
              20% of the population, which is somewhat surprising given the
              different target mechanisms of the two policies. Contreras et al.
              (2008) found that two-thirds of the Chile Solidario participants
              belong to the very poor population (households who have difficulty
              to meet basic nutritional requirements of household members), and
              another 15% to the poor population (households who have difficulty
              in meeting clothing, transport and housing needs, see Chapter 1 for
              more details on definitions of national poverty lines). As one-third
              of the very poor population is excluded, there are ongoing efforts to
              extend coverage, especially in rural areas.
          •   Labour market integration and poverty reduction. The Chile
              Solidario package seems to have had little effect in helping clients
              get back to the labour market and a small (and lower than expected)


46.       JUNJI (part of the Ministry of Education) allocates childcare support to the poorest areas
          based on CASEN data. Local authorities are involved but NGOs often provide the services,
          making it easier to adjust capacity.

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                  effect on earnings and poverty reduction (Contreras et al., 2008).
                  This is not surprising as public spending on employment support in
                  the programme, and on labour market support more generally is
                  extremely limited at around 0.1% of GDP. In addition, client
                  characteristics are not favourable: clients are frequently not
                  job-ready, face serious skill deficiencies, and are generally difficult
                  to place.47 In view of these client characteristics, local employment
                  services (OMILs) find it difficult to provide supports that help
                  clients become job-ready. In fact, referring clients who are not job-
                  ready is likely to be counterproductive as the referral will raise
                  expectations among clients that subsequently prove beyond reach,
                  causing frustration and loss of motivation. Childcare supports are
                  another issue. Many Chile Solidario clients are mothers with small
                  children, for whom access to affordable quality childcare
                  arrangements is crucial to labour market participation. Although
                  capacity constraints continue to exist, policy measures are being
                  implemented to expand day-care capacity (see above).
             •    Capacity challenges. In addition to the coherence issues (see
                  Box 3.2), the rapid development of new policies poses both quality
                  and capacity challenges to service providers. There is widespread
                  concern about whether local administrations have enough family
                  workers to provide intensive family support,48 and/or professional
                  staff in employment offices to help match jobs and workers.
                  Moreover, even if sufficient resources for staff are available, it is not
                  certain that qualified staff can be found. OMILs already face
                  capacity concerns as staff-to-client ratios of 1 to 300 clients do
                  occur (Chapter 2), while a ratio of around 1 to 125 individuals (not
                  families) is needed to be reasonably effective in helping clients
                  (OECD, 1999). With half of the social/family workers without
                  documented skills for the job, additional investment in the quality of
                  family support and employment service workers will be key to
                  raising the effectiveness of both services.




47.          Training programmes for Mapuche (the largest ethnic minority in Chile) preparing them to
             make traditional handicraft for tourist sales, are likely to be too small-scale to be a
             structural solution.
48.          Chile Solidario services (referrals, benefit payments) have to be delivered in a set time after
             a claim has been put in. There is no clarity on the sanctions in case of failure (by local
             authorities), as “it has not yet happened”. The rules on timeliness are a clear signal towards
             local authorities and providers that they have an obligation to deliver.

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      Further developing supports to the working-age population
          There are many poor families in Chile who have income from work, and
      in addition to health, education and/or childcare supports, there is growing
      pressure on the government to improve the financial position of low-income
      families. Increasing the currently low child allowances would be one option,
      but this does not strengthen the financial incentive structure, and it does not
      help public authorities pursue employment objectives. With employment
      rates among the poorest 10% of households at 30%, compared with 70%
      among the richest 10% of households, and with low female employment
      rates, there is ample scope for mobilising labour supply among groups of
      workers currently under-represented on the labour market.
           In-work benefits that increase the financial reward from being in work
      could be introduced to address employment opportunities of specific labour
      market groups (e.g. young workers or mothers with children) or workers
      with low skills and work productivity more generally. Such in-work policies
      are being used increasingly in OECD countries to help people into work and
      increase employment, and increase rewards to low-productivity employment
      (i.e. reduce working poverty through redistribution). In-work benefits can be
      either employment-conditional benefits and/or tax credits (similar objectives
      can also be pursued through employment subsidies and tax rebates given to
      employers).
          The Chilean authorities are considering proposals by the Presidential
      Advisory Council on “Work and Equity” which involve a general job-entry
      subsidy (with payments to both employers and employees) and targeted
      child benefits:
          •   A job-entry subsidy (Subsidio al ingreso del trabajo, SIT), the SIT
              would target the vulnerable and poor, and would be paid to a
              household member taking up work. The proposed subsidy rate is
              30% for wages of up to UF 7.5 (equivalent to the minimum wage,
              CLP 150 000 per month (or about USD 330), tapering off to zero at
              wages equivalent to CLP 300 000 (USD 660). The worker would
              receive two-thirds of these amounts, while the employer would
              receive a subsidy for one-third of these amounts to stimulate hiring
              of workers under formal employment conditions (with health and
              pension contributions due to the tune of about 20% of earnings).
          •   Targeted child benefits: a conditional child allowance worth about
              UF 0.5 (or CLP 10 000 or USD 22) per child per month. The
              benefit, to be paid to the mother, would be targeted at families in the
              two bottom income deciles, and be conditional on school-attendance
              and health check-ups. Clients would be identified through the SPR.

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                  This procedure was chosen because low-wage workers pay no
                  income tax and because it maintains systemic coherence with other
                  aspect of the Chile Solidario programme (including the family
                  allowance). To avoid fostering dependency, it is proposed that the
                  new child grant would be gradually reduced, to be eliminated after
                  three years or when the child reaches a certain age (no maximum
                  age for this child allowance was cited in the proposals).
            There are many uncertainties surrounding the proposals. For example, it is
       unclear, whether the in-work benefit will be based on household-earnings or
       individual earnings, or how the income testing is going to work if the SPR is
       only re-assessed once every two years and clients need not report changes in
       household income. In addition, with the growing number of income transfers
       that depend on SPR scores may start to affect household behaviour: clients
       will face increasing incentives to obtain low SPR scores.49 The lack of public
       knowledge on how questionnaire responses affect SPR scores may mitigate
       this effect – but it could also have unpredictable effects if clients make more
       or less erroneous assumptions concerning the way SPR works. In all, there
       seems to be considerable scope for unintended payments.
            It is also unknown to what extent introducing these plans will lead to
       changes in behaviour among workers and employers. For example, the
       proposed scheme is intended for job-starters. However, current workers and
       their employers may well change their behaviour, for example via a hike in
       lay-offs and new hires in order to benefit from the subsidies. Some workers
       will wish to formalise their employment relationship as SIT is worth up to
       30% of wages at maximum, which is sufficient to cover the contributions
       that formal workers will have to pay for health and pension coverage
       (approximately 20% of wages). However, the wage subsidy will be
       considerably less than 30% on average across the earnings range (while
       keeping in mind that low-income households have free coverage of basic
       pensions and health care), so other workers may not have enough incentives
       to formalise employment contracts.

       Some evidence on in-work benefits across the OECD
           The government is expected to come up with “response proposals” by the
       end of 2008 for consideration by Congress in 2009. A detailed assessment is
       not yet possible, but there are some general points to consider on the basis of
       the experience with in-work benefits in many OECD countries.


49.          At the extreme, clients who assume that low education gives a high score might well be less
             keen on improving their education if this is thought to deprive them of other
             desirable benefits.

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          The economic conditions and labour market conditions in Chile seem to
      favour the introduction of an in-work benefit scheme, without seriously
      deteriorating financial incentives for existing workers. In-work benefits are
      shown to be most cost-effective in situations where the distribution of
      earnings is wide, when earnings are low (and the wage floor is low) and when
      tax rates are low. Such conditions exist in the United States, where the
      “Earned Income Tax Credit” successfully makes work pay for low-wage
      workers, and are even more characteristic of the Chilean situation (for a full
      overview, see Immervoll and Pearson, 2009, forthcoming; and Pearson and
      Scarpetta, 2000).50 The lower the wage floor, the lower will be the proportion
      of workers covered by a subsidy of a given size, thus reducing the costs of the
      scheme. Moreover, a low wage floor increases the scope for gradual
      withdrawal of benefit payments, keeping Marginal Effective Tax Rates51 at a
      minimum, and financial incentives strong across the phase-out range.52
      Similarly, low tax rates and a wide income distribution also make it easier to
      gradually phase out benefits over a long earnings range without affecting large
      groups of middle-income workers, and increasing the cost of the scheme.
           To reduce the cost of the overall in-work benefit initiative, earning
      thresholds may be set somewhat lower to limit coverage, or be more
      stringently targeted at a specific group, for example women. Such targeting
      is effective in keeping overall costs down, permitting large subsidies to be
      focussed on those who do benefit from the programmes. Apart from a small
      tax credit for singles in the United States, the EITC is targeted at families
      with children. Across the OECD, authorities are reluctant to see children
      grow up in poverty. Targeted in-work benefits for families with children
      increase their incomes both directly and indirectly, by strengthening work
      incentives (OECD, 2007f). Research suggests that in-work benefits that are
      based on household earnings are most likely to increase labour supply of
      primary earners in couple families, and sole parents, but not of second

50.       For example, for US evidence on the positive overall labour supply effects of the “Earned
          Income Tax Credit”, see Hotz and Scholz (2003) and Kneebone (2007); for evidence on the
          labour supply effects of the “Working Families Tax Credit” and subsequent associated
          reforms in the United Kingdom, see, for example, Brewer (2007).
51.       The Marginal Effective Tax Rate (METR) is defined as that part of additional earnings
          which is taxed away through the effect of increasing tax and withdrawal of benefit income
          as earnings rise with increased hours of work.
52.       If a good balance is to be achieved on poverty and work incentives outcomes, conflicting
          aims have to be addressed. An in-work benefit scheme will be most efficient in reducing
          poverty if it provides for exactly the difference between actual earnings and subsistence
          income. But such a design would imply a 100% METR on additional earnings and is thus
          inadequate from an employment perspective. Hence, the programme design has to embody
          a trade-off between equity, employment and fiscal cost objectives.

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       earners (OECD, 2007f).53 For couple families with no earners, an in-work
       benefit strengthens the financial incentive to have at least one adult in work.
       However, eligibility to the in-work payment also increases an income effect
       away from work; it becomes more affordable not to be in work, but e.g. care
       for children, and from a household perspective it is cheapest if the second
       earner (with lowest earnings per hour) reduces labour supply.
           Compared to schemes based on household earnings, in-work benefits
       based on individual earnings will be more expensive (they would simply cover
       more workers at a given income threshold). However, given the extremely low
       rates of female employment in Chile, it seems appropriate to strengthen
       financial incentives to work for women. Despite the extra cost, a system based
       on individual earnings makes more sense in the Chilean situation.
            Expectations of positive effects on formal employment should not be
       exaggerated. In-work benefits have not been tried on a wide scale in
       developing countries, but recent Mexican experience suggests that the effect
       on formalisation of labour could well be rather limited. Mexico’s “Primer
       Empleo” programme subsidies social contributions for 12 months for
       businesses that comply with tax regulations and employ either youths in their
       first jobs or workers who have never been registered for social insurance. The
       “Primer Empleo” was introduced in 2007, and was expected to increase
       formal employment by 300 000 jobs, but results were disappointing as in 2007
       only about 3 000 jobs were registered under the scheme (Revista Fortuna,
       2007). Changes to the programme were implemented in early 2008, but on the
       basis of the 2007 experience it seems inappropriate to expect drastically
       improved results in formal job-creation for 2008.
            In all, in-work benefits should be seen in the context of overall reform to
       improve the functioning of the labour market, including changing the
       strictness of EPL, reform of severance pay and unemployment benefits and
       activation policies, SME development, and measures for training.54
       Furthermore, in-work benefits can reduce financial incentives for second
       earners. Hence, rather than trying to mitigate such effects and complicate
       benefit design, it is probably best to design straightforward benefit rules,

53.          The design of an in-work benefit also affects the number of hours that recipients engage in
             paid work. For example, because of the benefit rules, the “Working Families Tax Credit
             and the Working Tax Credit” in the United Kingdom embodied strong financial incentives
             for sole parents to engage in work for 16 hours per week rather than a full-time working
             week (OECD, 2005).
54.          An unfortunate effect of in-work benefits is that they reduce the financial incentives to
             invest in increasing one’s own skills. Hence, in-work benefits should be complemented
             with policies that help the low-skilled to retain jobs once they find them and to promote
             skill acquisition to find better jobs.

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      accept that these are most likely to affect financial incentives for primary
      earners and adults in sole-parent households, and link benefit support with
      child-care policies that are much more effective in facilitating employment
      among second earners in couple families.

3. Conclusions

           With recent strong economic growth, the incidence of poverty has
      declined markedly, but at 10% (according to a national definition) poverty it
      is still high and the income distribution remains wide. This has triggered a
      search for policy options that could generate more inclusive growth.
          In recent history, public social policy in Chile has focused on removing
      shantytowns and helping low-income households to acquire inexpensive
      accommodation, extending primary and secondary education to all children,
      and making health care affordable to all. Policy has moved on from this
      stage, and now there is an increasing focus improving the quality of
      dwellings, neighbourhoods, healthcare, education, and social services.
          With limited spending on income support and little success in raising
      employment, Chile Solidario has not been very effective in reducing poverty
      until now. There has been much emphasis on developing networks which
      help people help themselves. This is an innovative approach that has borne
      dividends, but has its limits. The existing service infrastructure has been
      inadequate to help many of them into paid employment, which is a condition
      for any sharp reduction of poverty. Chile needs to continue its investment in
      the infrastructure of service provision (e.g. training of social workers and
      employment service staff).
           However, the Chilean system is good at identifying needy clients. The
      Social Protection Record – covering about half the population – appears to
      have provided authorities with a good profile of low-income households,
      which is increasingly used to target social, healthcare and education
      services. However, because the SPR scoring formula is not public
      knowledge, potential and actual clients cannot predict with certainty how
      their disposable incomes would change, for example, if a household member
      takes up or quits a job. Moreover, the SPR is intended to measure household
      earnings capacity, and does not focus on current income streams. Therefore,
      it is no surprise, that SPR thresholds are discretionary, and do not account
      for phasing out or gradually withdrawing income support. In the past, when
      support depended on availability of budgets this did not matter that much,
      but as SPR scores now entitle clients to services and increasingly cash
      transfers, this design features will come increasingly to the fore. Policy
      makers are therefore well-advised to either adapt the SPR so as to accurately
      measure current income changes, or design a supplementary tool alongside

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                                    CHAPTER 3. REDUCING POVERTY IN THE WORKING-AGE POPULATION – 137


       the SPR to measure short-term income changes. Policy has to ensure that
       financial support remains targeted on the most vulnerable while avoiding
       unintended effects on labour supply.
            In-work benefits (in the form of cash transfers) are being considered for
       introduction in 2009 as a way of supporting those in low paid jobs.
       Measures based on household earnings improve equity and have proven to
       be effective in raising labour supply among primary earners and adults in
       sole parent families, but the evidence also indicates that such policies can
       reduce the labour supply of second earners in couple families. Compared to
       schemes based on household earnings, in-work benefits based on individual
       earnings will be more expensive, but given the extremely low rates of
       female employment in Chile, it would be unfortunate if incentives for
       women to work were not strengthened. Despite the extra cost, a system
       based on individual earnings makes more sense in the Chilean situation. An
       alternative would be to integrate a household-earnings based in-work benefit
       for low-income workers with other measures such as, for example, a
       differentiated minimum wage and childcare supports: for example, by
       paying higher childcare support rates in case both adults are in employment
       for a specified number of hours per week.
            Chilean social policy is at a crossroads in that, for the first time, policy
       makers from all persuasions are debating how to deal with “in-work
       poverty” that affects large parts of the working-age population. If adopted,
       the recent proposal for in-work benefits could cost as much as half a percent
       of GDP – three times the Chile Solidario spending (not counting the basic
       pension). Compared to an OECD average of just over 20% of GDP, Chile
       spends little on social protection (about 12% of GDP, not including
       education) and therefore the redistribution of resources within the Chilean
       tax/benefit system is limited. There appear to be several promising areas for
       investment with potentially high social returns: Chile Solidario, in-work
       benefits and childcare support. If there is fiscal leeway and if sufficient
       attention is being paid to programme design and implementation issues the
       Chilean authorities should invest more in an integrated package of these
       active social policies which promote labour force participation and
       self-sufficiency.




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                                         CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 143




                                                Chapter 4.


                The Normalisation of Chile’s Pension System




          Chile replaced its Pay-As-You-Go social insurance pension system in
          the early 1980s with a private pre-funded system of individual savings
          accounts which covers old-age, disability and survivor contingencies.
          Pension reform was successful in many ways: it restored public
          confidence in pension saving; pre-funding of pensions has contributed
          to the development of financial markets and economic growth; and
          projected future public pension outlays in Chile are lower than in many
          OECD countries (and far less susceptible to the dynamics of ageing
          populations). However, pension reform failed to achieve its coverage
          objectives, and many Chilean workers, including many women, youth
          and low-income workers with low levels of educational attainment,
          either did not make sufficient contributions to obtain an adequate
          contributory pension or have no coverage at all.
          The coverage problems contributed to a major pension reform in 2008,
          which introduced a basic solidarity pension as of right, and targeted
          measures to stimulate coverage among workers with no or little pension
          saving. Reform also aims to develop a third tier of voluntary private
          pension saving. In all, Chile’s pension system is developing towards the
          three-pillar pension norm, which is often held as an international
          benchmark. This chapter discusses the social policy aspects of the
          reformed pension system and, in particular, the coverage issues which
          in many ways have proven to be the Achilles heel of Chilean private
          pension system.




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1. Introduction

           The bad experience with collective (public) insurance schemes in Chile
      goes a long way towards explaining the choice of the current system of
      private-funded mandatory individual accounts. Chile was the first Latin
      American country to set up a social insurance system back in 1924. By the
      late 1970s, the system had evolved into a pay-as-you-go system (PAYG)
      with 35 schemes, which was deemed unfair and corrupt as generous
      (frequently early) retirement benefits were often paid out on the basis of
      political lobbying to special interest groups (Asher and Vasudevan, 2008;
      Ben Braham, 2007; and Iglesias, 2009). In 1981, a system of individual
      accounts was introduced to avoid such practices and establish clear links
      between contributory records and benefit entitlements. Other arguments in
      favour of private protection arrangements included making efficiency gains,
      increasing flexibility and individual choice and increasing pre-funding
      which deepens financial markets and limits the effect of ageing populations
      on annual financial flows (Pearson and Martin, 2005).
           The 1981 pension reform was successful in many respects, not least
      since it restored public confidence in pension saving. The investment returns
      made by Chilean pension fund operators since 1981 have exceeded
      expectations and the introduction of a capitalised pension system
      contributed to the development of financial markets and economic growth in
      Chile (Corbo and Schmidt-Hebbel, 2003). Moreover, future public pension
      liabilities in Chile are lower than in many OECD countries and far less
      susceptible to the fiscal pressures associated with an ageing society.
          However, the private contributory system has over the years failed to
      meet some other of its objectives, particularly in terms of coverage. Many
      low-income workers without formal contract are not at all covered by the
      private social protection system, while others have paid into the system, but
      their contributory record is insufficient to procure the minimum pension
      benefit, leaving public authorities to make up the shortfall and provide a
      basic pension. In a similar fashion, the arrangements for disability benefits
      that are also covered in the private pension system involve some
      cost-shifting by private insurers to public budgets. In all, the private pension
      system has relied on public authorities to pay for benefits where the private
      system fails to provide adequate provisions.
          Since 1 July 2008, pension reform came into operation to address issues
      such as coverage among the population, including lower income groups,
      women, young people and the self-employed. However, the reform
      addresses a range of issues, including, for example, financial incentives
      towards early withdrawal of pension wealth (OECD, 2006a), but also

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       measures to increase market efficiency and regulatory reform (see, for
       example, Iglesias, 2009).
           The Chilean pension reform of the early 1980s attracted a lot of attention
       and gave rise to a substantial literature (for example, Corsetti and Schmidt-
       Hebbel, 1995; Diamond, 1993; Edwards, 1996; Queisser, 1998; and World
       Bank, 1994). This is not repeated here. Instead, this chapter will focus on the
       social policy aspects of pension policy, and while it does not claim to be
       comprehensive in its treatment of pension market institutions and investment
       regulations, it will briefly discuss the key challenges of increasing competition
       investment regulations and financial risk management. This chapter takes the
       new pension system and its parameters as in place since 1 July 2008 as the
       basis for discussion, but the reader should be aware that, while some aspects
       of the reform have already been put in place, other measures are expected to
       be introduced over the next four years.

2. The Chilean pension system
            With the 1981 pension reform the existing contributory (PAYG) pension
       schemes were brought together under the Umbrella of the Instituto de
       Normalizacion Previsional (INP), while the individual pension accounts that
       were introduced at the time are operated by pension fund management
       companies (Administradora de Fondo de Pensiones – AFP). Many clients of
       the old system changed to the new mandatory private pension system as
       facilitated by “Recognition Bonds” which acknowledge the value of the
       entitlement built up under the old system (Box 4.1). In addition, there was a
       publicly-supported Guaranteed Minimum Pension (Minima Pension Garantia
       – MPG) for those who have contributed for at least 20 years (or 240 monthly
       contributions), but whose contributory record was nevertheless insufficient to
       generate a minimum pension (the MPG was an entitlement). Furthermore,
       those of retirement age without a pension (or a very small one) could apply for
       a means-tested social assistance pension (Pensiones Asistenciales – PASIS),
       but this benefit was not an entitlement, and budget-rationed (if the budget was
       exhausted in a given year, no new claims would be awarded). Finally, there
       are separate pension programmes for the armed forces.
           Since reform started to be rolled out in July 2008, Chile’s pension
       system involves:
      1.     The Basic Solidarity Pension (Pension Basica Solidaria – PBS) and a
             Pension Solidarity Complement (Aporte Previsional Solidario – APS)
             for low-income households without sufficient pension contributions.
      2.     The mandatory capitalised individual pension saving accounts.
      3.     Voluntary private pension saving in individual accounts.

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          The role of private pension saving in Chile has been limited so far, but
      reform aims to develop a significant third tier of voluntary private
      pensions. Since March 2008, employer-sponsored voluntary pension
      programmes allow employers to make pension contributions on behalf of
      their employees which are considered as regular expenses for tax purposes
      (the conditions of such “employer-sponsored voluntary personal pension
      savings schemes” must be similar for all company-staff). In addition,
      through new tax incentives the government also tries to stimulate
      individual private pension saving.55 With the development of a basic
      pension entitlement, mandatory second-tier pension saving and fiscally
      supported voluntary pension saving, Chile’s pension system has moved
      towards the three-pillar pension norm, which is often held as an
      international benchmark.
          Figure 4.1 shows publicly-mandated pension spending across the
      OECD area (including public spending on pensions and benefits accruing
      from mandatory contributions to private funds). In Chile, publicly-
      mandated spending amounted to 5.8% of GDP in 2005, which is just
      below the OECD average of 6%. Figure 4.1 also illustrates how important
      the public role is in the current pension set-up: public spending was 4.8%
      of GDP in 2005, which is high compared with the population age profile
      (Chapter 1), but this is largely of a transitory nature as related to the
      pension reform in 1981 (see Box 4.1).

          Of all publicly-mandated spending in Chile in 2005, about 1% of GDP
      concerned pensions paid through pension payments or “Programmed
      Withdrawals” (see below) and annuity payments derived from the
      mandatory private pension system (though pay-outs often financed by
      government contributions).56 For Chile, the data in Figure 4.1 include
      spending on pension benefits and outlays by pension funds on annuities for




55.       Since the 2008 reform the amount of pension savings which can be deducted annually from
          the income tax base is UF 50 per month (or USD 2 040 as of June 2008). Workers can also
          choose to pay income tax over pension contributions now or when the pension is paid out.
          Workers who choose the former option and who engage in voluntary pension saving to top
          up the mandatory contributions can benefit from a subsidy of about 15% of the amount of
          voluntary savings up to a maximum of about USD 410, or ten times the amount of
          mandatory pension savings in a year, whichever is the lowest.
56.       Of all old-age pensions paid in 2004 (not including early retirement pensions), 81% were
          paid by the INP. AFP paid out 19% of the benefits, which were mainly financed out of
          government contributions to make up the minimum pension payment (Fundacion Nacional
          de Superacion de la Pobreza, 2005).

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       clients which amounted to about 1% of GDP in 2005 (Table 4.A1.1).57 If
       only current outlays on pension benefits and annuity payouts (in a given
       year) were considered, mandatory private pension spending would have
       been about 0.1% of GDP in 2005.

 Figure 4.1. Publicly-mandated pension spending in Chile is close to the OECD average
              Public and mandatory private pension expenditure in percentage of GDP, 2005
        12
                                             Public                Mandatory private
        11


        10


         9


         8


         7


         6


         5


         4


         3


         2


         1


         0




Source: OECD (2008), Social Expenditure database 1980-2005; and Iglesias (2009).

           In 2007, almost 30% (or about 1.2% of GDP) of public spending on
       pensions was on benefits for the military (CAPRADENA) and police
       (DIPRECA). Average pension payments under these schemes are well
       above the average wage and much more generous than those paid by the old
       or new pension systems (OECD, 2003). The Armed Forces pension systems
       run a deficit which is almost wholly paid from the government budget.
       Reform of these pension arrangements is overdue and proposals will be
       considered after the 2009 presidential elections.


57.          This recording practice is consistent with reporting in the OECD Social Expenditure
             database (OECD, 2008a) which includes similar data on spending on pension payments
             and lump-sums through the “Superannuation programme” in Australia.

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                        Box 4.1. Reforming the pre-1981 PAYG scheme
                             into a private-funded pension system

     During the late 1960s and early 1970s, both the Frei and Allende governments, which were of
different political persuasions, had come to the conclusion that piecemeal reform of Chile’s then
PAYG system would be insufficient: a new system had to be put in place. The PAYG system was
widely considered as unfair, as it had been captured by special interest groups; it was also expensive to
run and not targeted at those most in need of support. Widespread and profound dissatisfaction with
how the PAYG system operated was the key driver of reform, not financial pressures arising from
population ageing (Iglesias, 2009). Nevertheless, it was not until 1981 that pension reform
was introduced.
     The introduction of the mandatory pensions system in 1981 only covered those who started to
work in 1983 and contributors to the previous system were not compelled to sign up to the new
scheme. Nevertheless, by the end of 1983, 77% of contributors had switched to the new
AFP programme. To some extent, this was related to widespread dissatisfaction with the old system
and a vigorous public information campaign carried out at the time. Two financial incentives also
played a key role in convincing pension savers to switch regime: i) while employees had to cover
employer contributions (which were relatively low compared with the contribution rates of the old
PAYG programme), they were compensated by a more-than-proportional increase in wages; and ii) the
government issued a state-guaranteed “recognition bond” for the contributions workers made to the old
system (as adjusted for inflation and a real interest rate of 4% per annum). Switching did not always
turn out to be an informed decision; decisions disadvantageous to individual savers largely concerned
specific groups of workers in the public sector (Iglesias, 2009).
     Time-series data on public spending on civilian pensions illustrates how a large part of the cost of
pension reform to the public was borne early on in the reform process. From 1981 to 1984, public
budgetary allocation towards ‘transitory spending commitments’ established under the old
PAYG pension system increased from 1.9% of GDP in 1981 to 6.5% of GDP in 1984 because of the
continued payment of pensions while contributions declined (exacerbated by the economic crisis of the
time), and the payment of recognition bonds to those who transferred to the new mandatory pension
system). By 2007, this had declined to 2.7% of GDP (Figure below). At the same time social pensions
and minimum pensions (see below) are a ‘permanent’ fixture of the government budget and these
outlays increased from 0.2% of GDP in 1981 to just below 0.5% in 2007. The “transitory” part of
public pension spending will naturally decline to a quarter of a percentage of GDP in 2030, while the
minimum pension commitments to those without sufficient contributions were projected to amount to
1.1% of GDP in 2015 and 1.6% by 2030 prior to the 2008 pension reform (Marcel Commission, 2006).
The real cost is likely to be higher in view of the 2008 measures (Iglesias, 2009).
     The pre-1981 pension system was not in deficit, but projected future cash flows foreshadowed
significant future deficits. Available evidence on the implicit pension deficit (the present value of future
pension payments) varies in magnitude (Iglesias, 2009), but all point to a significant reduction of this debt
because of the 1981 reform, which has thus improved the long-term fiscal sustainability of the Chilean
system. In any case, the fiscal effect of the pension reform does not seem to have been an important obstacle
to reform. During the years immediately following reform, the “pension deficit” was largely financed
through public savings (by cutting back on general government expenditure) and increased taxation
(a temporary tax, 3% of salary paid by employers phased out by 1 percentage point per annum over the
1981-94 period). At the same time treasury bonds were sold to pension funds so that their investment
increased from USD 2.2 million in 1981 to USD 864 million in 1986 (Iglesias, 2009).


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     After 1985, debt–financing became less important, while privatisation (the sale of public assets) became
an important source of funding: government assets worth 7% of GDP were sold off over the 1985-89 period
twice the amount of privatisations in the United Kingdom (Niemitz, 2007). Pension reform contributed to an
increase in national saving, but this was largely driven by government saving. The effect on private savings,
though significant, has been relatively small (Iglesias, 2009).

                Public spending on civilian pensions will halve over the next 25 years
    Public spending on civilian pensions as a percentage of GDP (not accounting for the 2008 reform)

                             Transitory spending(1)          Permanent spending(1)            Total
          8.0

          7.0

          6.0

          5.0

          4.0

          3.0

          2.0

          1.0

          0.0
            1981      1986      1991      1996        2001   2006    2011     2016     2021       2026

1. Transitory spending refers to spending on pension commitments derived from the pre-1981 PAYG system;
permanent spending concerns public spending on minimum pension programmes as forecasted prior to the 2008
pension reform.
Source: Based on data from Iglesias (2009) from the Marcel Commission (2006).

     As post-reform contributions were lower than pre-reform contributions, the “tax on labour” was
reduced with reform, which contributed to a small increase in employment (e.g. Schmidt-Hebbel, 1998).
The establishment of funded pension systems, pension funds and the associated life insurance industry has
led to the deepening of local capital markets (in 2005 pension fund assets amounted to two-thirds of
national Income; Ben Braham, 2007), while an improvement in regulations and reporting requirements
generally enhanced capital market transparency and efficiency. Through its effects on, in descending
order of importance, national saving, capital productivity and total factor productivity (a more efficient
interaction between capital and labour), pension reform is estimated to have been responsible for 25% of
economic growth during the 1980s and early 1990s (Schmidt-Hebbel, 1998).




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           Poverty among elderly and redistribution of pension spending
               The increase in prosperity has contributed to the decline in poverty
           among the population in general, as well as amongst the elderly. Minimum
           pension payments may not be high, but they compare well against the very
           low transfer payments to the working-age population (Chapter 3).
           Households in receipt of a pension are unlikely to be extremely poor (only
           1.2% of them), and the poverty rate among the elderly is 7.3% compared
           with 13.7% of the population in general (Figure 4.2).

             Figure 4.2. The income position of the elderly is relatively good in Chile
                 Poverty rates for the general population and the elderly (65+), 1990-2006

                       Extreme poverty - Elderly                Extreme poverty - General population
                       Poverty - Elderly                        Poverty - General population
      45
      40
      35
      30
      25
      20
      15
      10
       5
       0
              1990       1992          1994        1996        1998          2000         2003         2006

Source: Based on CASEN, various years. For definitions of poverty thresholds, see Chapter 1.


                In 2006, about 75% of men and 60% of women aged 65 and over
           received benefits accruing from contributory pensions (including the
           MPG),58 and 70% of these “contributory” pensioners received less than
           CLP 114 000 (USD 242, about 80% of the minimum wage, Larrañaga,
           2009). The 2006 CASEN survey showed that about 14% of men and 17% of
           women over 65 years of age received the minimum pension, and that in all,
           public pension payments constituted around 6.2% of household income.
           However, their distributional impact is low. Public pension payments are
           still dominated by the entitlements established under the old system
           (Box 4.1) and relevant amounts are related to contributory records. Hence,


58.           Two out of five women who received pension payments in 2006 were widows receiving
              survivor pensions.

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       the distribution of pension payments is relatively similar to the earnings
       distribution in terms of household income quintiles (Chapter 1). The Gini
       coefficient of the distribution of old-age and widows’ pensions paid by the
       state is 40.7%, only a few points below the Gini coefficient of the wage
       distribution, and the Gini coefficient of the household income distribution
       with and without pensions paid out by the state, is 55.9% and 58.1%
       respectively (Larrañaga, 2007).
           Preliminary estimates of the effect of the introduction of the basic
       solidarity pension suggest reform may lead to an increase of 11.5% in
       average income of the first household quintile and 9.5% in the first two
       quintiles, as well as a reduction of around 2 percentage points in the
       proportion of poor households.

       The basic solidarity pension
           Since 1 July 2008, the Chilean pension set-up includes the basic
       solidarity pension (PBS) and its supplementary payment (APS), which
       superseded the previous system of PASIS and MPG payments. The
       generosity of the basic pension system has increased significantly:

      1.     Unlike PASIS which was potentially subject to budgetary rationing, the
             new PBS system establishes individual entitlements.
      2.     Coverage of the first-pillar scheme will also increase because the
             supplementary APS-payment will also cover those who have not
             contributed for 20 years to the second-tier pension system
             (a precondition for receiving the MPG), although some women may lose
             out since there is no “survivor PBS”.59 Currently, about one-third of the
             65-year-olds do not have pension coverage, and nearly 70% live in
             households with a family income below the minimum threshold.
             By 2012, about 23% of all senior citizens will be eligible for the PBS,
             and about 70% of the clients will be women, in view of their limited
             access to contributory pensions (see below) and their longer average
             life expectancy.

      3.     In 2007 the MPG was about CLP 96 391 (about USD 180) per month,
             about twice as high as the PASIS payment (see Figure 4.A1.1 in the
             annex for a historical overview). The PBS system pays the poorest
             elderly (65+ for men and women) a minimum pension of CLP 60 000


59.          Since the July 2008 reform survivors will only receive a temporary pension financed out of
             the funds accumulated in the account of the spouse prior to his/her decease. On depletion of
             these funds survivors will have to wait until age 65 before claiming an “old age PBS”.

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            (or USD 122), which will increase to CLP 75 000 (USD 152) in
            mid-2009 (Table 4.1). Disabled individuals between 18 and 65 years
            of age can receive a “disability PBS” payment of the same amount.60

         Table 4.1. The Basic Solidarity Pension (PBS): evolution of payment rates
                                   and expected coverage

 Date (1 July)         PBS benefit              Threshold up to which APS-      Estimated coverage of PBS/APS
                                                 supplement can be paid           pensions among the elderly
                                                                                          population
2008              CLP 60 000 - USD 122            CLP 70 000 - USD 142                         40%
2009              CLP 75 000 - USD 152            CLP 120 000 - USD 243                        45%
2010              CLP 75 000 - USD 152            CLP 150 000 - USD 304                        50%
2011              CLP 75 000 - USD 152            CLP 200 000 - USD 405                        55%
2012              CLP 75 000 - USD 152            CLP 255 000 - USD 517                        60%

Source: Based on data from the Chilean government; exchange rate as applicable in June 2008,
USD 1 = CLP 493.61.

           Eligibility to the basic pension is established with reference to the Social
       Protection Record (SPR); the 40% poorest elderly households correspond to
       a SPR score below 11 734 points, while the 45% threshold corresponds to
       12 185 points. The system aims to cover the 60% poorest elderly households
       from 2012 onwards (Table 4.1).
           The 2008 reform has improved systemic coherence by establishing clear
       links between the basic pension and the income-dependent supplement
       (whereas PASIS and MPG payments were unrelated). Low-income
       individuals receiving AFP pensions (or a pension paid by the INP) can get a
       supplement. The amount of this “old age APS” (there is a similar
       supplement for disabled clients) depends on the “Base Pension” the
       individual receives from the other (second-tier) pension programme:
            Old age APS = PBS – Adjustment Factor * (Base Pension)
           Thus, for a client with no income from another pension programme, the
       APS payment is equal to the PBS. At the other extreme, the Maximum Base
       Pension threshold has been set at CLP 255 000 per month in 2012
       (approximately USD 517, but it will be inflation-indexed), and above this



60.         “Disability PBS” payments are made to poor disabled individuals (within 60% of lower
            income households from 2012 onwards), aged between 18 and 65, who do not receive a
            pension from another social security programme and who lived in Chile for at least 5 out of
            six years before being declared disabled.

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       income threshold no supplements can be received.61 Table 4.1 shows that
       the maximum amount to which pensions will be topped up will increase
       significantly from 2008 to 2012. Also, in 2012 the value of the “adjustment
       factor” will be 0.294; in other words the implicit effective marginal tax rate
       on contributory pension will be 29.4% in 2012 (in 2008 it was as high as
       85.7%).62
            In the old system, the MPG involved weak incentives to save for those
       who had established their 20-years of pension contributions and who had not
       saved enough to obtain a pension higher than the MPG. These clients faced
       an implicit tax rate of almost 100% on the contributions they paid towards
       the MPG threshold (such saving up to MPG level did not help to increase
       individual entitlements, but only reduced the cost of the MPG for the
       government). Under the new rules, making new pension contributions
       always increases the value of the future (second-tier) pension payments,
       while the implicit marginal effective tax rate on contributions is reduced to
       29.4% in 2012 (low-income workers may well face a lower rate after
       introduction of an in-work benefit, Chapter 3). Nevertheless, the implicit tax
       rate may prove to be too high a hurdle for many workers to start making
       contributions to the mandatory pension system (OECD, 2007a).
           Until the recent reform, eligibility to means-tested benefits depended on
       household income as determined by all household members. The PBS is
       different in that eligibility is determined by the spouse and dependent
       children up to the age of 24 living in the same household; the authorities
       have assumed responsibility for senior citizens who do not generate enough
       income, independently of the resources of relatives other than the spouse,
       whether they reside in the same household or not. This change in conditions
       preserves the many extended families that exist in Chile. Often different
       generations of one family are included in one household and, if the
       significantly increased (minimum) pension payment were made contingent
       on the income of all other household members, it would not have been
       unlikely that many extended households would have split (or not be eligible
       for payment). The effect of the PBS on household formation is uncertain:
       the increase in family resources may lead to a break up in households (who
       now have enough income to do so), while in other cases families may invite
       grandparents into the household.

61.          Design of the APS supplementary payment (see below) will also leave most current
             MPG recipients better off. However, under certain conditions some part-time workers, of
             which there are not many in Chile, with a contributory record of 20 years may be worse off
             (Iglesias, 2009).
62.          In 2012, the PBS is scheduled to be CLP 75 000 and the maximum income threshold is
             CLP 255 000; the adjustment factor will then be 0.294 (75 000/255 000 = 0.294).

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      The mandatory private pension system
          Key characteristics of the mandatory private pension scheme AFP
      include:

     1.   The system covers old-age, as well as general (not employment-specific)
          disability and survivorship contingencies (see below Section “Disability
          and survivor coverage”).

     2.   Contributions are deposited (by employers) in personal (individual)
          accounts operated by the pension management fund (AFP) chosen by
          the employee.

     3.   The (monthly) contribution rate to old-age benefits is a proportion of the
          wage and was 10% in 2008 up the maximum monthly contribution of
          UF 60 per month (about USD 2 448). Pension contributions are
          deducted from the income tax base, and any pension received at
          retirement is added to it. The contribution toward the disability and
          survivor risk amounted to an average 0.95% of the wage in
          December 2007, with on average another 1.45% being paid in
          administrative fees (Iglesias, 2009).

     4.   The “defined-contribution” old-age benefit depends on: i) the balance
          accumulated in the account of each worker at retirement; ii) his/her life
          expectancy and that of his/her family members; and, iii) investment
          returns. By contrast, the disability and survivor pensions are “defined
          benefits”; their amount is set in proportion to the historical average
          wage of the contributor.

          International comparison on pension replacement rates based on a full
      contributory record at average wages (World Bank, 2007), show that at a
      gross replacement rate of about 55% the value of pension benefits in Chile is
      about 15 percentage points below the OECD average (Figure 4.3).




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     Figure 4.3. Replacement rates in Chile are relatively close to the OECD average

              Gross and net (after tax) replacement rates for mandatory pension programmes,
                                     Men, percentage of average wages

                               Gross replacement rate               Net replacement rate

    120

    100

     80

     60

     40

     20

      0




Source: OECD (2007b), Pensions at a Glance; and World Bank (2007), Pensions Panorama.



          Pension market characteristics: lack of competition and individual
          choice in investment
              The state plays a regulatory and supervisory role in the private pension
          set-up and provides guarantees to fund members in case an AFP (or the life
          insurance company which pays annuities) goes bankrupt. Government
          regulations also affect market competition as well individual choice in
          investment options, and financial risk management. The 2008 reform also
          aims to increase competition by getting agents to compete for rather than in
          the market, and to allow the use of new forms of financial tools to further
          increase yields, even though in view of the financial crisis, current markets
          are not the ideal investment environment (Annex 4.A2 provides an overview
          of the Chilean pension market with a focus on competition and investment
          issues in Chile; see Dayoub and Lasagabaster, 2008, for an overview across
          Latin America).
              There is little competition among AFPs in terms of price (user charges)
          or yields (rates of return on investment). Competition was fierce during the

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      mid-1990s when AFPs used (expensive) direct sales efforts and marketing
      campaigns to attract clients, but with a tightening of the rules on switching
      between funds in October 1997, the number of salesman fell from 17 448 in
      1997 to 6 343 in 1998. Entry to the pension market is free except for
      commercial banks, mutual funds and insurance companies that cannot hold
      shares in AFPs, which helps shield pension-fund managers from competition
      by other financial intermediaries. Economies of scale effectively dictate an
      AFP needs about half a million clients to survive in the market (Iglesias,
      2008), and the lack of competition has contributed to a concentration of
      AFPs in the market from 21 in 1993 to five in 2008.
          On the whole, the operation profit margin of AFPs was on average 18%
      from 1983 to 1998, but with the shake-out of salesmen operating profit
      margins have exceeded 25% (Figure 4.A2.2). Initially, the increased profits
      were at least partially passed on to clients, but since 2001 administrative
      charges have stopped falling (Figure 4.A2.1), while operating profits have
      been fluctuating around 30%: almost twice as high as during the first
      15 years of the Chilean pensions system. This suggests there is room left to
      reduce user charges in the AFP system.
           The experience with financial management of PAYG funds prior to
      reform led to strict public regulation of AFPs in terms of portfolio selection,
      investment rules and market behaviour. However, over the years the Chilean
      authorities have gradually relaxed rules to increase both individual choice
      and increase yields.63 Since 2002, each AFP can offer five different
      portfolios and risk profiles to their clients ranging from “risky” (up to 80%
      of capital in the individual account is invested in equity) to a risk-averse
      portfolio which mainly invests in fixed-income instruments. AFPs are
      legally required to guarantee a “minimum return”, which contributes to AFP
      pension-fund managers taking a relatively careful, with little difference in
      investment behaviour as smaller AFPs copy behaviour of larger ones. Since
      1981, the annual average of real pension fund yield has been in excess of
      10%. This result is comparable with pension fund returns in European and
      North American OECD countries, where the real rate of return (net of
      management fees) are typically around 7% (Antolin, 2008; and D’Addio
      et al., 2009).




63.       Berstein and Chumacero (2003) estimated that in 2002/03, total assets managed by AFPs
          could have been at least 10% larger in the absence of stringent regulation of investment
          limits.

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       Benefit payments: pay-out options and early withdrawal of pension
       wealth
           In a strictly regulated environment, AFP clients have basically three
       pay-out options:
      1.     Life annuities sold by life insurance companies involving a monthly
             income until decease of participants, with survivor payments to
             beneficiaries afterwards. When a worker buys a life annuity, he/she
             transfers the financial risks attached to both longevity and the rate of
             return on investment to the life insurance company, and the contract is
             irrevocable. Life insurance companies hardly existed before the
             1981 pension reform, but they have quickly developed since: in 2007
             two-thirds of the pension payouts deriving from mandatory saving
             concerned annuities (Table 4.2).
      2.     Programmed withdrawals (PW): the worker keeps the funds in his/her
             personal pension account and draws a regular pension subject to the
             AFP rules. Benefit rates are set for one year only; and new rates are set
             each year: about 25% of clients receive their pension benefit in
             this manner.
      3.     Temporary income with a deferred life annuity. This is a hybrid of the
             two previous payment methods: it involves an agreement with a life
             insurance company to pay the client a life annuity from some future
             specified date; until that time clients receive a monthly pension financed
             out of funds in his/her personal AFP account. This method covers less
             than 5% of all pay-outs.

                   Table 4.2. Distribution of pensioners by payment methods
           Stock of number of pension-payments (percentage of total) paid out, December 2007
                            Programmed withdrawals            Annuities      Temporary PWs       Total
      Old age                       27.7                        14.0              0.8            42.7
      Early withdrawals             5.6                         50.7              1.0            57.2
      Total                         33.3                        65.0              1.7            100
      Source: Superintendencia de Pensiones.

            Programmed withdrawals (PWs) and annuities both have a gradual
       withdrawal profile, but they provide a very different time stream of benefits
       and risks. Programmed withdrawals have the advantage that they allow the
       retiree to: i) get his/her money out of the system more quickly than an
       annuity would, due to the required mortality and interest-rate assumptions;
       ii) choose and vary the AFP and investment portfolio, selecting a (risky)
       portfolio with a higher expected return than annuities; iii) leave a bequest to
       his/her heirs if he/she dies early; and iv) switch to an annuity later on, if

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      desired, whereas the choice of an annuity is irreversible. These advantages
      might seem to make PWs attractive to retiring workers, especially those with
      high discount rates (short life expectancy), bequest motives and investment
      experience. However, with PWs there is no investment and longevity
      insurance, and annual payouts can vary with the rates of returns on
      investment. The annual income stream will diminish over time and will
      become very small if the worker lives long enough. To risk-averse workers
      the latter is a strong incentive to annuitise.
          The choice of payout method also depends on the value of
      accumulated capital in the individual account. In general, those with
      limited pension savings (generating a benefit just above the MPG and
      PBS) will choose PW as personal savings will be used relatively quickly
      while a minimum pension is guaranteed. However, the government also
      guaranteed 75% of the annuity value in excess of the minimum pension
      (and 75% of the annuity in excess of the PBS up to a maximum of UF 45
      or USD 1 836 in June 2008) to cover insurance company insolvency, and
      this public back-up of annuitisation affects the pay-out choice for workers
      with medium and large accumulations.
          In addition, there exist regulatory incentives and constraints, which lead
      insurance companies to compete (in contrast to AFPs who operate PWs) to
      offer a present value of annuity payments which is relatively high compared
      with the present value of future PWs. Moreover, for many workers it is
      easier to withdraw their pension savings through annuitisation as they are
      marketed by insurance company sales agents who prepare calculations,
      process the paperwork and sell annuities to clients (rather than guiding them
      to AFPs delivering PWs), often before the normal retirement age.
          The normal retirement age in Chile is 65 for men, 60 for women, but
      early withdrawal is allowed once a specified minimum amount of pension
      saving has been accumulated (the term early withdrawal seems more
      appropriate than early retirement, since the initial withdrawal of pension
      wealth often does not coincide with retirement from the labour market).
      Since 1988, workers have been permitted to stop contributing and start
      withdrawing once their replacement rate is 50% of their own wage and
      110% of the MPG. With recognition bonds considered as part of the
      accumulated amount, and high rates of return to retirement accounts during
      the 1980s and 1990s (on average in excess of 10% per annum in real terms),
      a high proportion of workers met the early withdrawal conditions once they
      reached their 50s. For those who qualified, it is rational to withdraw early,
      stop contributing, and either consume or save in a more flexible form. In
      order to reduce the incidence of early withdrawal, the benefit formula is
      being tightened to make early withdrawal less attractive: the replacement
      rate was raised to 70% of the average wage and 150% of the MPG (and

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       since July 2008: 80% of the APS threshold, see Table 4.1), and the reference
       wage now refers to an average over the last ten years with a maximum to the
       number of months without contribution that can be included (Iglesias, 2009).
           Hence, it is no surprise that so many clients opt for annuities. Workers
       with small accumulations retire at the normal age and take PW pensions.
       But the majority of workers withdraw early and almost 90% of them
       purchase annuities (Table 4.2). This large percentage – which is far greater
       than in other countries – seems to be explained by incentives and constraints
       imposed by guarantees and regulations, as well as by the limited information
       available to AFP members. One of the aims of the 2008 reform is to
       improve the information stream to AFP members and help them make more
       informed choices on their withdrawal decision.64

       Low coverage: the Achilles heel of private protection arrangements
           Coverage of the AFP programme increased markedly during the
       1981-86 period because of the many workers who switched from the
       PAYG system to the individual private AFP programme (Box 4.1),
       particularly in the period 1981-86. After this initial period, coverage in
       terms of the working-age population in employment increased from about
       40% in 1987 to 60% in 2007 (Figure 4.4, Panel A). By OECD comparison,
       coverage is low: when measured against the labour force, pension coverage
       in Chile was about 54% in 2005 (Figure 4.4, Panel B), well below the
       OECD average of 83% (OECD, 2008b).
           Coverage of pension schemes is also linked with national income. In
       countries where significant parts of the working-age population are in low
       productivity (e.g. small-scale agriculture), low-wage (and/or informal)
       employment, coverage of pension systems is relatively low. In recent years,
       Chile’s employment growth has mainly been in the low-wage employment
       sector (Chapter 1), and there is no reason to believe that such workers will
       be more able to finance their health and pension contributions than in the
       past. The 2008 pension reform increased generosity of minimum pensions is
       financed out of general government (tax) revenue, which is tantamount to a
       redistribution of wealth from stronger growth sectors (e.g. the mineral
       sector) to low-productivity ones. Financing pension reform out of general
       government revue seems to be the best of available options, but the strategy
       is not without risk. For example, the cost of the 2008 reform is projected to

64.          The reform will establish a fund for pension education that provides information on all
             aspects of the Chilean pension system, including information on yields, returns, annuities,
             etc. across different AFPs. This includes projections on future pension payments based on
             current assets and different contributory profiles (e.g. a full record or none at all).
             A network of accredited pension advisers will also be developed.

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      amount to 1.3% of GDP per annum in 2025. However, if plans to extend
      private pension coverage among a greater group of workers (see below)
      were not to have the desired effect in terms of mandatory individual pension
      saving, the total cost of the 2008 pension reform may well be higher than
      originally envisaged.
Figure 4.4. Pension coverage is increasing but remains low in international comparison

  Panel A. AFP contributors as a proportion of the working-age population (15-64) in employment,
                                            1986-20071

         65

         60

         55

         50

         45

         40

         35




     Panel B. Coverage of mandatory pension schemes as a proportion of the labour force, 2005

         100
          90
          80
          70
          60
          50
          40
          30
          20
          10
           0




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Figure 4.4. Pension coverage is increasing but remains low in international comparison
                                        (cont’d)
  Panel C. Coverage of mandatory pension schemes related to national income per capita (log scale),
                                             20052




1. Contributors refer to contributors in December of a given year who have not yet retired and who
made the contribution in the month for the wages they earned that month.
2. Australia, Austria, Belgium, Canada, Finland, France, Germany, Ireland, the Netherlands, Sweden,
the United Kingdom and the United States are the countries included in the box in the figure.
Source: Panel A: Contributors, Superintendencia de Pensiones; Employment data, both sexes, 51-64
(avg. November year x to January year x+1); INE; Panel B: OECD (2008b), Pensions at a Glance:
Asia/Pacific; and, Panel C: World Bank Pensions database.

           There may be fewer female than male AFP members and contributors,
       but, ever since the introduction of the AFP programme, coverage among
       females as a percentage of female employment is higher than for men, by
       about 4 to 5 percentage points (Iglesias, 2009). However, men are more likely
       than women to have a full contributory record during their membership period
       (Figure 4.5). Almost half of the female AFP members and one-third of the
       male members made no pension contribution from January 2004 to
       September 2006 (Figure 4.5); over the same period half of the men who
       contributed to an AFP fund contributed in full (as opposed to one-third of the
       women, with no discernible gender difference in contributory behaviour of
       those with a partial contributory record over the period). Contribution
       densities are also considerably higher among groups of workers with higher

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      income and education levels, and workers who are at least 45 years of age –
      women often defer affiliation until middle age (Asher and Vasudevan, 2008);
      contribution densities among low-income workers and workers with low
      educational attainment are limited (see also Cox, 2006).

      Figure 4.5. The contribution density1 among female workers is relatively low
     Distribution of members by gender along the intensity with which they have made pension
                   contributions during the January 2004-September 2006 period

                                            Women          Men
    60

    50

    40

    30

    20

    10

     0
              0        0-20%         20-40%        40-60%        60-80%        80-100%         100%

1. The contribution density is the number of months in which an individual has made pension
contributions as a proportion of months of membership in the AFP scheme.
Source: Based on data provided by the Government of Chile.


           Another key aspect of AFP coverage is the low participation by self-
      employed workers. Coverage for this group of workers is not mandatory and
      is historically very low. In December 2007, only 60 000 out of 1.8 million
      self employed made pension contributions, and self-employed contributors
      accounted for 1.6% of all AFP contributors, whilst self-employed workers
      represented 27% of total employed people in the country (Iglesias, 2009).
      Workers with low contribution densities are unlikely to achieve the
      replacement rates shown above, and (without public coverage) are
      particularly vulnerable to the poverty risk in old age.




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       Policy initiatives to increase coverage
           There are different reasons why different groups do not save (enough)
       for retirement. Often young people are simply not (yet) concerned about
       their retirement. Mothers who provide full-time care for their children have
       withdrawn from the labour force (and stopped making contributions). Other
       workers, including many of the self-employed, are unlikely to make
       voluntary pension contributions unless the relevant returns are considerably
       higher than returns to market saving. Otherwise, they will prefer liquidity,
       especially if it concerns cash-constrained, low-income households.65
           Recent reform therefore tries to expand coverage through a mix of
       compulsion and financial incentives to make pension savings more attractive
       for groups with a low contribution density:
      1.     The introduction of mandatory coverage of pension contributions for
             self-employed workers who pay income tax (this measure is scheduled
             for gradual implementation over the 2012-18 period). The Internal
             Revenue Service will take over the collection of pension contributions
             (paid monthly or yearly based on the individual income declaration).
             The contribution rate will be the same as for salaried workers (with the
             same maximum threshold) and determined over 80% of declared
             income. Mandatory coverage will not be extended to some other groups
             of self-employed workers who are not obliged to declare income,
             e.g. artisanal fishermen and taxi drivers.
      2.     To encourage pension saving among young workers and increase formal
             employment: employers of contributors aged 18-35 with an income
             below 1.5 times the minimum wage (about USD 430), will receive a
             subsidy for their first 24 months of employment equal to 5% of the
             minimum wage (around USD 14). In addition, these participants will
             receive a similar bonus (USD 336 or 24 times USD 14) in their personal
             account from 2011 onwards. Some 300 000 young workers may be
             covered in 2009.
      3.     To encourage female pension saving, the state will pay contributions for
             mothers corresponding to 18 monthly MWs per child (about USD 518).

65.          Evidence on non- or under-declaration of income for pension contribution purposes
             suggests this is not the major issue (again, the self-employed are not obliged to contribute):
             accumulated unpaid contributions, both declared and undeclared, are equivalent to less than
             0.7% of the pension funds (Iglesias, 2009). The low non-compliance rate is also related to
             penalties for employers who do not pay contributions on behalf of their workers or who do
             so late. AFPs are legally obliged to recover outstanding contributions and have strong
             financial incentives to do so, as they can only charge management fees if contributions are
             registered in personal accounts (Iglesias, 2009).

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          This bonus will then receive a rate of return equal to the one obtained by
          pension fund “C” from the date the child is born until the mother
          reaches 65 years of age (despite a standard pension age at 60 for
          women). Also, in case of divorce, women can receive up to 50% of
          spousal pension entitlements, depending on their employment history.
          However, it is unclear as to why reform did not increase the normal
          withdrawal age for women to 65 years of age in view of the life
          expectancy trends and the recommendations of the Marcel Commission.
          Thus far, the success of financial incentives to increase pension saving
      among the self-employed has not been very effective, and it remains to be
      seen to what extent these new initiatives will be more effective.
      Furthermore, the self-employed who are currently charged income tax on
      the basis of their VAT invoices may well change their behaviour faced with
      an increase of almost 20% of contributions (including towards health
      coverage) on their income. Because of this, reform may well lead to a
      decline in reported income for this group of workers, and much will depend
      on the effectiveness with which the tax authorities can implement the
      scheduled reform.

      Disability and survivor66 coverage: reduce cost-shifting while
      maintaining efficiency
          In Chile, workers who fall ill, in the first instance can claim a sickness
      cash benefit at 100% of gross earnings up to a maximum of UF 60 (about
      USD 2 445) per annum. This benefit is financed by health insurers without
      specified maximum duration, so that health insurers are responsible for
      alerting clients to apply for a disability benefit, if they have not initiated
      such procedures themselves already.
          If incapacity is employment-related clients may have a choice to apply
      for a benefit deriving from occupational accident and diseases legislation.67
      This scheme involves an employer contribution of 0.9% of wages and an
      additional contribution which varies with occupation and is reassessed
      annually, but which cannot be higher than 3.4% of wages, for example, in
      glass and ammunition industries. Contribution rates concern all workers in a
      company regardless of their specific task.


66.       Survivor pensions can be received by widows (and since 2008 reform widowers), children
          (legitimate and biological), the mother of the biological children, and if there are no such
          beneficiaries, entitlement passes to the parents of the deceased AFP member.
67.       Someone who applies for an employment-related occupational accident and diseases
          benefit cannot simultaneously apply for a benefit under the AFP scheme; claimants can
          apply for the other benefit if the initial application to either scheme was not successful.

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           AFP contributors not yet of pensionable age are entitled to a disability
       benefit in case of a “non-employment” related accident or illness. The
       defined-benefit payment is financed out of the capital in the AFPs members
       account and (if necessary) a supplement (“the additional payment”) which is
       paid by the AFP and funded out of a group-policy the AFP takes out for its
       members with a life insurance company.68 Compared with the average wage,
       the defined-benefit payment generates a gross replacement rate of around
       60% (the benefit is 70% of the individual’s average historical wage in case
       of total disability and 50% of that wage in case of partial disability).
       Figure 4.6 shows this is on par with gross replacement rates in other OECD
       countries; net (after-tax) replacement rates in OECD countries are often
       about 10 percentage points higher.
              Figure 4.6. Disability benefit replacement rates in Chile are on par
                                   with other OECD countries
Gross replacement rates for disability benefit payments paid under the mandatory pension programmes,
                                  percentage of average wages, 2005
      100
        90
        80
        70
        60
        50
        40
        30
        20
        10
         0




Source: Chile: Iglesias (2009); other countries: OECD, Breaking the Barriers - Sickness, Disability and
Work (various issues).



68.          When a worker covered by the contract becomes disabled or dies, the so-called “additional
             payment” is deposited into the individual’s pension account. This additional payment is
             equal to the difference between the “necessary capital” to finance the legally prescribed
             level of pensions (in other words, the present value of estimated future pension payments)
             and the balance accumulated in his/her personal account at the time of disability or death.

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           For a client to be recognised as fully disabled, he or she must have lost
      as least two-thirds of his/her earnings capacity (the system classified those
      with a loss of half to two-thirds of earnings capacity as partially disabled).
      Initial claims are assessed along defined disability criteria by 21 regional
      medical commissions of three doctors appointed by the Superintendencia of
      AFPs. Clients who were declared to be disabled were re-assed three years
      later. During this three year period, AFPs could not use the capital in
      personal accounts to fund the claim, but they had to pay do so out of their
      administrative fees (with which AFPs bought a group-insurance policy for
      their members).
          Because of this, AFPs had financial incentives to curtail the costs of
      disability by limiting the number of successful claims. Assessment
      procedures include participation by AFPs and insurance companies and both
      agencies pursue a strict application of the rules, fighting applications before
      they even get to the medical commission on technical grounds and appealing
      assessment outcomes where possible. Even when the system allows it,
      public officials may have limited direct financial incentives to appeal against
      successful disability claims, so that in many countries with public systems,
      appeals are only actively pursued by unsuccessful claimants. In the Chilean
      system, both AFPs and unsuccessful claimants have financial incentives to
      appeal and the number of successful appeals by both parties approximately
      cancels each other out, which contributes to a relatively low incidence of
      approved disability cases. James et al. (2008) show that the hazard rates of
      workers becoming disability pensioners in the AFP programme are 65-80%
      lower than under the previous public system, and that the reduction in
      disability hazard is related to systemic targeting of those with the most
      severe medical conditions.
          The low hazard rates in Chile’s private disability programme suggest it
      has chosen to minimise the chance of incorrectly granting claims, at the risk
      of turning down many deserving clients. However, this has been done at the
      cost of public budgets, as unsuccessful applicants sought to receive a
      minimum pension (to be eligible to the MPG clients who have been declared
      disabled need ten years of contributory record as opposed to the 20 years for
      old-age claimants) or a means-tested PASIS benefit.69
           Abstracting from the cost to the public purse, the cost of the private
      insurance of disability and survivor risks is low in international comparison
      at less than 1% of wages, about a quarter of what it would typically be in
      many European OECD countries (e.g. Andrews, 1998). However, this

69.       It is unclear to what the assertive approach of AFPs in disability-assessment procedures has
          had an upward effect on the number of claimants of the occupational accident and disease
          programme.

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       outcome should be put in context with the limitations in AFP coverage and
       the fact that disability is concentrated among poor families who are least
       likely to be covered by the AFP scheme.

       Changes to disability and survivor insurance
           The 2008 reform with respect to disability and survivor insurance
       included the following items:
             •    The disability and survivor insurance premium will be differentiated
                  across genders: at present women are cross-subsidising men as the
                  actual costs are about 45% lower than for men.70
             •    Mandatory re-assessment of certified totally disabled clients after
                  three years was abolished as claims are not frequently reversed, so
                  that in these cases the insurer can now fund the disability claim out
                  of the personal account from the outset (partially disabled continue
                  to be re-assessed).71
             •    In future, rather than competing against each other to select clients
                  whose disability risk is relatively low, a consortium of all AFPs will
                  use a public auction mechanism to buy a common disability and
                  survivor insurance contract for two-year periods from a life
                  insurance company (or a group of such companies). The resulting
                  disability and insurance fee will then be applied to existing members
                  regardless of the AFP to which they belong. Furthermore, the
                  disability and survivor insurance fee will no longer be part of the
                  administrative fee (see above), but will be separately identifiable,
                  and from July 2011 onwards will be paid by employers (rather than
                  workers).72
           It is too early to assess the overall effect of these reforms, but experience
       with reform of disability programmes in OECD countries holds some
       lessons. From a narrow assessment-procedure perspective, it is desirable to
       avoid the cost of a procedure which seems to have little effect on disability

70.          In 2004, the average cost of disability and survivor insurance was 0.86% of wages; while
             the cost for women was 0.57%, the cost for men was 1.01%. Because of the reform, men
             and women will start paying the cost of the insurance for men, but the difference between
             this cost and the cost for women will be deposited in women’s pension’s accounts.
71.          James et al. (2008), report that out of 100 initial applicants, 42 claimants were re-evaluated
             after three years, of which 40 were declared permanently disabled.
72.          The notion of employer responsibility for paying disability and survivor insurance will be
             phased in gradually; the fee will be charged to employers with 100 or more contracted
             workers as from 1 July, 2009, to be extended to all employers from 1 July 2011 onwards.

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      status. However, if re-assessment procedures were abolished to reduce costs
      for AFPs this could also have been achieved by allowing the AFP to charge
      back the costs of the initial three years temporary payment to the clients
      personal account, if the full disability status of the client was upheld after
      three years. The drawback of this measure is that it suggests that “once fully
      disabled, always fully disabled”, and as policy messages go, that is a bad
      one for different reasons. It provides incentives to potential applicants (and
      perhaps in future some AFPs) to apply for a steady stream of future income
      payments under the programme; and, it ignores the capacities of persons
      with disabilities.
          It is also unclear as to why employers are made responsible for disability
      contributions. Employers are likely to pass on the cost of this to their
      workers in future. Furthermore, experience in OECD countries shows that
      increasing the transparency of disability costs in this way has little effect on
      employer-behaviour. Experience-rating of disability premiums is likely to be
      more effective in terms of the preventive measures by employers, as the
      experience in the Netherlands shows (OECD, 2008c). In fact, the Chilean
      system involves sectoral experience-rating in its employment-related
      occupational accident and diseases scheme. Policy may consider to extend
      experience-rating to enterprises for both the employment-related and private
      disability schemes.
           The recent reform may well increase the costs of the private disability
      scheme significantly, perhaps by as much as 25% (Iglesias, 2009). In
      particular, this increase in cost would be related to the increased coverage of
      the disability and survivor insurance (more self-employed low-income
      workers with an elevated disability risk) as well as new institutional
      arrangements. In future, individual AFPs will not have incentives to actively
      follow disability assessment, as this no longer affects their operations. In fact,
      individual AFPs may well help their clients with the administrative procedures
      to obtain a permanent disability benefit at the expense of the insurance
      company (or a consortium of insurance companies) which won the tender. The
      insurance company will in any case try to pass on costs to employers, who in
      turn will pass on cost to workers. In any case, since the tender-period only
      concerns two years; the relevant insurance company has limited incentives to
      invest in the quality of their assessment procedures, and the ensuing higher
      incidence of disability payments is likely to increase premiums.
           To the extent that the rise in costs of the private disability programme
      reflects the expansion of worker coverage73 (and reduce public sector


73.       The coverage of some groups of workers may increase costs, while the tightening of
          early retirement regulations will increase coverage among older workers. On the other

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       coverage), this is understandable. However, Chile should avoid the
       experience of some OECD countries which found that cost of disability
       benefit schemes are hard to cut back once the inflow of new claimants into
       these schemes has increased significantly (OECD, 2004, 2006b, 2007c and
       2008c). Recent reform involves a risk that less assertive application of
       assessment procedures may lead to a growth in the number of recipients. It
       is of course too early to assess the effect disability reform will have, but it
       needs to be closely monitored to ensure that the right people receive the
       assistance to which they are entitled.

3. Conclusions

           More than 25 years of experience with mandatory private pensions has
       restored confidence in pension saving in Chile. One can argue that
       individual pension schemes may involve relatively high administrative costs
       compared with collective voluntary occupation pension saving as in the
       Netherlands, or that a system of individual accounts involves little
       interpersonal redistribution (a sine qua non for being classified as a social
       programme). However, such caveats need to give due account to the fact
       that Chile, unlike most OECD countries, had a very bad experience with
       corrupt pension schemes.
            The pre-funded Chilean system has performed well over the years. It has
       deepened Chilean capital markets and helped economic development.
       Furthermore, it is not very susceptible to the dynamics of ageing populations,
       and in that way the Chilean system is ahead of many OECD countries which
       are still grappling with the issues of necessary pension reform in view of
       prospective increases in public spending commitments. The rates of return on
       investment have been higher than originally envisaged. However, competition
       is limited in the pension market, and recent reform aims to generate price
       competition by having AFPs compete for a share of the market (new entrants)
       rather than trying to stimulate competition within the market. At present,
       operational profits of AFPs seem to be at a structurally higher level than prior
       to the late 1990s, and this does not seem to be related to a change in cost
       structures. There seems to be room to reduce user charges beyond the changes
       generated by reform of disability insurance.
           The 1981 pension reform failed to achieve one of its key objectives:
       ensure adequacy and coverage for the vast majority of Chilean workers. As
       in most OECD countries, the density of full-time earners with a full
       contributory record over 30 years is diminishing and there are increasing

             hand, the projected increase of coverage among younger workers will off-set these
             effects to some extent.

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      numbers of workers with patchy employment profiles. Contribution
      densities are particularly low among low-income workers with low levels of
      educational attainment, young workers, female workers, and the self-
      employed. Recent reform targets increased coverage among these groups.
          Public intervention is needed if a predominantly private pension system
      wishes to be successful in term of adequacy and coverage, and the Chilean
      authorities deserve to be commended for their introduction of a basic
      solidarity pension as of right. In addition, new measures have been
      introduced to stimulate private pension saving, so that Chile is moving
      toward the international benchmark model of a basic public pensions,
      mandatory second-tier pension saving, topped up with third-tier pension
      savings for those who want to save more.
           The Chilean authorities started to improve benefit support to the elderly
      well before recent initiatives to support the working-age population
      unfolded (Chapter 3), and as a result the poverty rate among the elderly is
      relatively low. However, there is no room for complacency and the success
      of recent reform cannot be taken for granted in the future. Reform, rightly,
      aims to increase coverage of pension contributions to groups to low-income
      households and the self-employed. However, there are concerns that these
      initiatives may not be successful. For example, the implicit tax rate of up to
      30% may be a deterrent for many low-income workers to save for retirement
      and some of the self-employed may stop reporting income to the tax
      authorities rather than pay contributions towards pension insurance.
          The private AFP scheme has managed to limit access to its disability
      provisions. This has been at the public expense, since unsuccessful
      applicants are likely to seek recourse to publicly-financed minimum income
      benefits. Recent reform is likely to increase cost of the private disability
      programme as coverage is extended to groups of the self-employed, and cost
      may rise further because of institutional changes with AFPs no longer
      having incentives to keep costs down. It is too early to assess the disability
      reform will have, but it needs to be closely monitored to ensure the right
      people receive the assistance to which they are entitled.
            Finally, it is not immediately obvious why employers have been made
      responsible for disability contributions, and experience in OECD countries
      has shown that increasing the transparency of disability costs in this way has
      little effect on employer-behaviour. Experience-rating of disability
      premiums is likely to be more effective in terms of the preventive measures
      by employers, and the Chilean authorities may wish to consider introducing
      this principle in the private disability scheme.




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                                                    CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 171




                               Annex 4.A1.
              Background data to Chile’s private pension system


               Table 4.A1.1. Most outlays on pension payments are through annuities
                              rather than programmed withdrawals
                      Pension benefits receipts and outlays (billion of pesos, current currency)
        Mandatory      Pension       Regular pension                          2
         pension     fund outlays       payments
                                                           Temporary payments     Annuity payments       Other3                    Total

       contributions   towards
                                1             Invalidity             Invalidity             Invalidity   Invalidity             Invalidity
                      annuities
                                                 and                    and                    and          and                    and
                                    Old age   survivors    Old age   survivors    Old age   survivors    survivors    Old age   survivors      All
2000    1 409 850                    8 404     3 982        2 645       159       19 868     3 854         1 978      30 917      9 973      40 890
2001    1 538 635                   9 483      4 556        2 910       204       23 880     4 419        2 002       36 273     11 181      47 454
2002    1 604 635      525 580      9 753      4 826        2 130       306       27 340     5 243        2 038       39 223     12 414      51 636
2003    2 347 658      590 455      10 985     5 338        2 327       295       30 286     5 483        2 035       43 598     13 151      56 750
2004    2 651 485      640 680      11 473     5 843        2 547       369       42 713     8 638        2 093       56 733     16 943      73 675
2005    3 077 100      620 329      13 090     6 424        2 672       512       46 892     9 821        2 135       62 654     18 893      81 547
2006    3 512 688      627 279      15 291     7 693        2 717       566       50 142     11 224       2 239       68 151     21 721      89 872
2007    4 014 014      743 060      19 587     9 351        3 995       734       55 971     13 078       2 375       79 553     25 538      105 091

1. The present value of annuities bought that year (equivalent to capital transferred to life insurance
companies to buy annuities).
2. A pensioner can buy a “deferred annuity”, with pay-outs starting “n” years from the moment a
person ceases to make contributions. From that moment until annuity payments start, the person can
receive a temporary benefit financed out of the personal balance which was not used to buy the
“deferred annuity”.
3. Other payment as covered by insurance, e.g. benefits arising from accidents, illness and death.
Source: Estados Financieros AFP and SAFP (www.spensiones.cl/safpstats/stats/).
Table 4.A1.2. AFP portfolio characteristics and yields and default age rules for clients, 2008
  Portfolio         Average             Limit on investment in equities, as a                         Default age designation
                                                                                                                                   2

                     yield
                          1               proportion of balance in account
                                          Minimum                Maximum                          Men                      Women
  A                   18.2%                   40                     80                      Not applicable              Not applicable
  B                   13.1%                   25                     60                           < 35                        < 35
  C                    9.9%                   15                     40                         36 - 55                     36 - 50
  D                    7.5%                    5                     20                           56 >                       50 >
  E                    4.3%              Largely fixed income instruments                    Not applicable              Not applicable
1. Annual average real rate of return by type of portfolio over the 2003-07 period (www.safp.cl, download
12 September 2008). Each year each AFP must guarantee that the average real return in the last 36 months
is not lower than the lesser of i) the average real return minus 4 percentage points for the funds A and B
(with a higher equity exposure), and minus 2 percentage points for the funds C, D and E (with a higher
proportion of fixed income securities) or ii) 50% of the average real return of all the funds.
2. Older clients (men over 55, women over 50) cannot choose portfolio 1 in any case, while
beneficiaries of PWs in the same age group cannot choose portfolios A and B. Switching among
portfolios is allowed, but only the first two changes within a single year are free of charge.
Source: Estados Financieros AFP and SAFP (www.spensiones.cl/safpstats/stats/).

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172 – CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM

Trends in minimum payment rates

           The Minima Pension Garantia (MPG) was about CLP 96 391 (about
      USD 180) per month in 2007, but this varied with age (Iglesias, 2009).
      In 2007, the PASIS payment amounted to about one-third of the minimum
      wage, while the MGP was equivalent to two-thirds of the minimum wage.
      Average wages of contributors to the mandatory pension system were about
      eight times as high as the PASIS payment (Figure 4.A1.1). Since 2004
      minimum pension payments increased relative to (minimum) wages, and
      this trend continued with the July pension reform: the PBS payment in 2008
      was almost 25% higher than the 2007 PASIS payment in nominal terms.

      Figure 4.A1.1. Evolution of the minimum wage, average wage of contributors
        to the mandatory pension system (AFP) and minimum pension payments
                                  In Chilean pesos of December 2007

                  Minimum wage             Average wage AFP           MPG(1)            PASIS(2)
 450000


 400000


 350000


 300000


 250000


 200000


 150000


 100000


  50000


      0




1. Minimum pension guarantee payment for retirees less than 70 years of age.
2. PASIS payment for retirees from over 70 to less than 75 years of age.
Source: Iglesias (2009).




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                                         CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 173




                         Annex 4.A2.
                The Chilean pension market:
competition, individual choice and financial risk management


           In 2008, there were five Administradora de Fondo de Pensiones (AFPs)
       – Capital, Cuprum, Habitat, Planvital and Provida –, which operate pensions
       saving accounts and in this process fulfil a record-keeping, investment and
       benefit-payment function. Since 1981, the importance of the pension market
       industry has grown spectacularly: from about 1.4 million clients and
       pensions assets worth about USD 0.33 billion to almost 8 million clients by
       the end of 2007 and assets amounting to USD 111 billion.

Competition and the lack of it

           AFPs charge fees on the payment of contributions, payment of
       programmed withdrawals (PWs) – usually a proportion of 1.25% of the
       pension payment –, and on management of voluntary pension savings
       accounts (AFPs could charge fees on transfer of client´s accounts to a
       different AFP, but this does not happen in practice). AFPs have to charge
       identical fees across their clients, and since there are no substantial
       differences in services, operational costs (or fees) between clients,
       high-income workers are financially most interesting to AFPs.
           In December 2007, administration fees amounted to about 2.4% of
       wages, which included a 0.95% fee on disability and survivor fees; two
       AFPs also charged a flat amount in addition to the variable fee (in future
       AFPs will no longer be allowed to charge flat fees to increase market
       transparency). Administrative charges as a proportion of the taxable wage
       were highest in the early 1980s when APFs charged high fees to recoup part
       of the their income losses due to low wages and employment, but from 1984
       to 2005 administrative fees fell from 3.6 to 2.25% of the average taxable
       wage in 2001, to increase to 2.4% in 2007 (Figure 4.A2.1).
           International comparisons of administrative charge ratios are fraught
       with difficulties, because of systemic differences such as, for example,
       different types of charges and contributory periods. Gomez-Hernandez and
       Stewart (2008) consider 40-year charge ratios across 21 countries, and find
       that this charge ratio of the Chilean (and Israeli) systems are below average
       and below charge ratios for (in ascending order) Polish, Slovak, Hungarian,

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174 – CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM

       Czech and Turkish defined-contribution pension systems (the result has to
       be interpreted with care as the chosen methodology favours a system which
       charge fees on wages, rather than on assets). Administrative fees may not be
       overly high in international comparison, but that does not mean they could
       not be reduced in view of market and cost structures in Chile.

                  Figure 4.A2.1. Administrative charges declined until 2001
                                   As a percentage of client earnings1

     4.0



     3.5



     3.0



     2.5



     2.0




1.   In 2007, two AFPs also charged a flat fee.
Source: Iglesias (2009) and the Superintendencia de pensiones (www.safp.cl).


           Different AFPs charge different fees, but differences are small. Many
       clients also find it difficult to obtain and understand all relevant information
       about pension options and their implications for future pension wealth. The
       mandatory nature of the system may also contribute to a certain degree of
       apathy among clients, as many of them seem to be unaware or uninterested
       in the relatively small differences in fees across AFPs (Asher and
       Vasudevan, 2008). The low price elasticity of demand limits price
       competition (e.g. Berstein and Cabrita, 2007; and Valdés, 2005).
           In the absence of price competition (and “yield competition”, see
       below), competition among AFPs mainly concerned (expensive) direct sales
       efforts and marketing campaigns. Indeed, in the mid-1990s, AFPs competed
       aggressively on the basis of marketing strategies, with sales agents luring in
       clients with more or less expensive presents and gifs. At peak, marketing

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                                         CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 175


       expenditure amounted to one-third of fee income in 1997 (up from about
       10% in 1990; Iglesias, 2008), but with a tightening of the rules on switching
       between funds in October 1997, the number of salesmen fell from 17 448 in
       1997 to 6 343 in 1998 (Asher and Vadusevan, 2008; and Iglesias, 2009).
       The increase in sales and marketing activities, reduced profit margins
       (which increased again since 1998) and contributed to a concentration of
       AFPs in the market from 21 in 1993 to 5 in 2008.
           Entry to the pension market is free (subject to fulfilling basic conditions),
       but economies of scale effectively dictate an AFP needs about half a million
       clients to survive in the market (Iglesias, 2008). There are few restrictions on
       AFP ownership except, significantly, for commercial banks, mutual funds and
       insurance companies that cannot hold shares in AFPs, which helps shield
       pension-fund managers from competition by other financial intermediaries.
            On the whole, the operation profit margin of AFPs was on average 18%
       from 1983 to 1998, but with the shake-out of salesmen operating profit
       margins have exceeded 25% (Figure 4.A2.2). Initially, the increased profits
       were at least partially passed on to clients, but since 2001 administrative
       charges have stopped falling (Figure 4.A2.1), while operating profits have
       been fluctuating around 30%: almost twice as high as during the first
       15 years of the Chilean pensions system. This suggests that there is room
       left to reduce user charges in the AFP system.
          Figure 4.A2.2. AFP profits seem to be at a higher level than in the 1990s
                                    AFP industry operating profit margin1

               50


               40


               30


               20


               10


                0


              -10


              -20

1. The operating profit margin is the difference of operating income and expenses as a proportion of
operating income.
Source: Anexo Estadistico of the Sistema Chileno de Pensiones as published by the Superintendencia
de pensiones (www.safp.cl).

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176 – CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM

Increasing individual choice and the rate of return on investment

          The experience with financial management of PAYG funds prior to
      reform led to strict public regulation of AFPs in terms of portfolio selection,
      investment rules and market behaviour. There is, however, a balance
      between regulation and individual choice as well as regulation and rates of
      return on investment, and over the years, the Chilean authorities have
      gradually relaxed rules to increase both individual choice and yields.
          In terms of portfolio selection, originally each AFP offered only one
      portfolio to clients. Since 2002, AFPs can offer five different portfolios and
      risk profiles to their clients. Portfolio A invests 40 to 80% of capital in the
      individual account in equities: portfolio B, 25 to 60%; portfolio C, 15 to
      40%, portfolio D, 5 to 20%, while portfolio E mainly invests in fixed-
      income instruments. In order to avoid clients who are close to retirement or
      those who are already retired taking considerable risks, they are not allowed
      to choose the more risky portfolios depending on their age (Table 4.A1.2).
      Furthermore, if clients upon joining an AFP for the first time do not reveal a
      preference, they are allocated a portfolio according to their age (portfolio B
      up to age 35; portfolio C for middle-aged workers; and portfolio D for older
      workers, see Table 4.A1.2). By the end of 2007, almost 3 out of 8 million
      clients had chosen a portfolio other than the default one, and 75% of these
      clients had opted for portfolios A or B; younger clients are more likely to
      take more risky investments (Iglesias, 2009). In the end, portfolios B and C
      cover about 40% each of all AFP clients while the interest for both very
      risky and risk-averse portfolios is limited (Figure 4.A2.3).
 Figure 4.A2.3. Most AFP members have investment portfolios with intermediate risks

                 Distribution of AFP members by investment portfolio, 30 June 2008

                                               Portfolio E
                 Portfolio D                                                         Portfolio A
                                                 0.6%
                    8.4%                                                               13.9%

  Portfolio C                                                                                   Portfolio B
    37.3%                                                                                         39.8%




Source: Superintendencia de pensiones (www.safp.cl/safpstats/stats/)


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                                         CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 177


           AFPs are legally required to guarantee a minimum return for each of the
       five portfolios (Iglesias, 2008), and to this end they must constitute a
       “reserve for variations of return” and a “mandatory reserve” of at least 1%
       of the value of pension fund assets (if these reserves are not enough, AFPs
       have to use their other assets, and if that’s not sufficient the government has
       to provide compensation towards the guaranteed return). The minimum
       return regulation seems to have contributed to pension assets homogeneity,
       because the formula determining the ”minimum return” is such that the
       minimum return changes with average annual pension fund returns. This
       creates a moral hazard issue in that rather than competing to achieve the
       highest rate of return, AFP fund managers take a more careful approach and
       as smaller AFPs copy the investment behaviour of larger ones, this
       contributes to “herding behaviour in the pension market”.
            Relatively cautious investment behaviour is also related to the strict
       regulations concerning AFP pension investments, with maximum limits by
       type of investment and investee also depending on pensions fund size; some
       investments are subject to approval by the Risk Rating Commission. Over the
       years both capital markets developed and investment rules were gradually
       relaxed to achieve a more efficient combination of risk and return: for
       example, since 1985 AFPs are allowed to invest in private stocks, and since
       1992 they can make foreign investments. As a result, since 1981 the pension
       fund investment in public debt has declined from almost 50% at peak in
       December 1986 to 8% in December 2007. Investment in financial instruments
       (largely term deposits and mortgages) still amounts to about 30% of all
       pension fund investment, but foreign investment has grown rapidly since 1996
       and is now the largest investment area of pension funds (Figure 4.A2.4).
   Figure 4.A2.4. Foreign investment by AFPs has grown rapidly over the last decade
                    Distribution of investment by economic sector per year (total = 100)
                                State         Financial         Corporate          Foreign
          80
          70
          60
          50
          40
          30
          20
          10
           0




Source: Superintendencia de pensiones (www.safp.cl/safpstats/stats/).


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178 – CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM

           Since 1981, the annual average of pension fund yield has been in
       excess of 10%, subject to considerable variation. During the mid-1990,
       some negative rates of return were recorded, but since foreign investment
       took off yields have trended upwards again (Figure 4.A2.5). Investment
       returns are comparable with pension fund returns in European and
       North American OECD countries, where the real rate of return (net of
       administration charges, Figure 4.A2.1) are typically around 7% (Antolin,
       2008; and D’Addio et al., 2009).

   Figure 4.A2.5. Real rate of investment returns have trended up since the late 1990s
                      Real annual rate of investment returns AFP sector pension funds
               35


               30


               25


               20


               15


               10


               5


               0


               -5


Source: Superintendencia de pensiones (www.safp.cl/safpstats/stats/).


Reform to increase price competition and financial risk management

           Following on to proposals by the Marcel Commission (2006), the
       following measures are being introduced to increase price competition and
       improve financial risk management:
           •        From 2010 onward, there will be competition for the market rather
                    than in the market. The AFP which offers in a public auction to
                    charge the lowest fees will provide coverage to all new contributors
                    over for a two-year period. The market is substantial: the regular
                    inflow of new members has been about 200 000 per annum in recent
                    years and this will double during the 2012-15 period as about
                    800 000 self-employed workers will also have to be brought into the
                    system. However, all members of an AFP must be charged the same

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                                         CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM – 179


                  level of fees; so, the AFP concerned will also have to charge that
                  reduced fee to its existing clients. Workers so allocated to an AFP
                  have to remain with the AFP for at least for 24 months, unless they
                  switch to an AFP which charges a lower fee (or to an AFP with a
                  better net result, i.e. returns minus fees).
             •    The reform may also increase the number of AFPs in the market.
                  Newly formed AFPs may win the public auction, though existing
                  AFPs may well offer low fees in order to keep newcomers out. In
                  any case, the new AFPs may well find it difficult to lower
                  operational costs below the level of the larger incumbent AFP´s
                  which have benefitted from economies of scale for some time.
                  Another scenario is therefore, that after some years new AFPs may
                  well be taken over by one of the existing companies. Pension reform
                  also introduces tax incentives to AFPs to sub-contract some of their
                  back-office operations, so that operational costs and user charges
                  can be reduced.
             •    In future, AFPs will be allowed to invest in new financial tools
                  (although great caution seems appropriate in the “post
                  credit-crunch” investment environment), while maximum limits for
                  different investment instrument will be increased (notably, foreign
                  investment may make up 80% of a pension funds investment
                  portfolio). For each of the five investment-portfolios, AFPs will
                  have to make explicit their investment policies, which will be
                  subject to approval and supervision by an investment committee of
                  experts within the AFP.




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180 – CHAPTER 4. THE NORMALISATION OF CHILE’S PENSIONS SYSTEM




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OECD Reviews of Labour Market and Social Policies

ChiLE
Chile has enjoyed rising living standards over two decades of strong economic growth.
The incidence of poverty is now much lower and there is better access to adequate
housing, education and healthcare. Nevertheless, Chile’s income distribution remains
disturbingly unequal by OECD standards. This is partly due to Chile’s relatively low
employment rate, especially for women, but it also reflects a segmented labour market,
where much of the recent job creation has occurred in relatively low-productive sectors.
Moreover, despite the existence of an internationally renowned pension programme,
Chile’s social protection system as a whole has still a relatively long way to go before
reaching the standards of developed countries in terms of effective coverage and
capacity to assist needy households.
Chilean policy makers have begun to develop and implement a series of ambitious
reforms, intended to promote the twin goals of work and equity. This report analyses in
detail the implications for labour market and social policy and considers the available
policy options from the perspective of OECD countries’ experience.




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                                                    iSbn 978-92-64-06060-9

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