Kirsten Sehnbruch “Privatized Unemployment Insurance in Chile” September 22, 2004

Kirsten Sehnbruch, a visiting scholar at the Center, speaks on the privitization of unemployment insurance in Chile in the CLAS Conference Room on September 22.

Chile’s Unemployment Insurance: A Model for the Developing World?
By Daniel Lavelle

In 2002, Chile launched a new unemployment insurance (UI) program, touting it as an alternative to traditional schemes and claiming that it avoided their errors. The plan is considered by many to be a model for the rest of the Third World. But according to Kirsten Sehnbruch, Chile’s new UI, while benefiting those with steady employment, does little for those in more marginal sectors of the economy, who are precisely the people most likely to be affected by unemployment.

Traditional UI programs in Latin America share a number of characteristics, according to Dr. Sehnbruch. The UI coverage rate is low, usually below 15 percent of workers. Monetary compensation is minimal. Benefits only apply to workers within the formal economy and few linkages with retraining or job placement services exist. Also, in Latin American UI schemes, a distinction is drawn between “just” and “unjust” causes of unemployment; “unjust” causes are firing decisions taken by businesses for economic reasons while “just” causes stem from employee misconduct, termination of contract or voluntary resignation. Usually, a worker who becomes unemployed for “just” reasons has no right to unemployment benefits.

Neoliberal reforms in Chile in the 1970s and 1980s left a state that exercised minimal influence over social and economic affairs. Pension plans and health insurance were privatized, and the Chilean government was making only small expenditures on social security. It was against this backdrop of privatization and deregulation that Chile began to recreate its unemployment insurance. According to Dr. Sehnbruch, Chile was looking to avoid both the perceived problems of standard UI schemes in Latin America and the “moral hazards” of traditional programs, such as UI claimants delaying job searches because they were content to remain “on the dole.”

The Chilean UI model sets up individual savings accounts (ISAs) into which workers and employers pay a proportion of wages. If the worker becomes unemployed he can then dip into this personal fund, said Dr. Sehnbruch. ISA-based UI schemes are perceived to have a number of benefits. There is minimal fiscal cost to the government since funds comes from salaries and employer contributions. There is no requirement for an extensive administrative infrastructure. Benefits are unrelated to the cause of unemployment, and the “moral hazards” of traditional UI are largely eliminated.

Under Chile’s UI scheme, all wage-earners are covered, including those with short-term contracts, with the exception of domestic servants, said Dr. Sehnbruch. Chile’s UI scheme also creates a solidarity fund financed by the government and employers. According to Dr. Sehnbruch, unemployed workers are eligible for support from the fund if their ISA benefits are insufficient and if they were dismissed unjustly. The solidarity fund guarantees an unemployed worker will receive benefits for up to five months, although the first month of unemployment must be financed by the worker, and payments are made in decreasing amounts to increase the incentive to find new employment.

Chile’s new UI scheme has many weaknesses, Dr. Sehnbruch noted. Almost 70 percent of the unemployed in Chile did not have an open-ended contract. Sixty percent worked for a period of less than 12 months prior to becoming unemployed, and one third earn the minimum wage or less. Since the benefits of the program depend on the type of contract, the duration of the previous job — with a minimum of one year of contributions required before workers become eligible — and salary levels, low-income workers with precarious jobs, who typically constitute the majority of those who become unemployed, will receive few benefits from Chile’s new UI. Additionally, workers with short-term contracts have no solidarity fund rights.

Chile’s new UI does little to change the main characteristics of existing UI in Latin America, according to Dr. Sehnbruch. Coverage continues to be low at around 10 percent of workers. There are still few linkages with training programs. Monetary benefits are higher than before but remain low overall, and those working in the informal economy are not covered.

Those who stand to benefit most from Chile’s UI are well-paid workers with open-ended contracts. “Workers in the formal sector who are covered by the insurance will be better off than under previous benefit programs,” said Dr. Sehnbruch, but most of the unemployed will not benefit. Those who are most vulnerable to unemployment, short-contract workers and those in the informal economy, will not see improved UI benefits. Chile’s UI “has an insurance component,” Sehnbruch said, “but (it) is mainly a mandatory savings scheme.”

Unless UI focuses on workers in the growing informal economy, the most vulnerable will continue to go without coverage. “A large chunk of the Chilean labor force is not helped by any legislation,” Dr. Sehnbruch said. For UI to reach a wider segment of the population, the self-employed must be included.

An improved UI scheme in Chile would also require deeper structural changes. Institutional linkages to training facilities and job placement services need to be strengthened, employer contributions should be increased and the focus should shift from unemployment to employment quality, which is a more appropriate measure of the state of the labor market, said Dr. Sehnbruch. With large numbers of workers engaged in the informal economy throughout the developing world, any new UI blueprints must center on the marginalized if they are to become an effective social service.

Kirsten Sehnbruch received her Ph.D. from Cambridge University. She has worked as a consultant to the Chilean government on a range of issues related to the labor market, unemployment insurance and the pension system. She spoke at CLAS on September 22, 2004.

Daniel Lavelle is a graduate student in the Latin American Studies program.