Social Insurance, Informality, and Labour Markets

Most countries implement social protection programs to help individuals manage risks such as unemployment, disability, illness, longevity or death. In many middle income countries, these are often based on a 'Bismarckian model' (named after Otto von Bismarck), where benefits are financed by contributions levied on salaried employment. In countries with a large informal sector, however, only a fraction of the population is covered by this system and non-contributory programs have been added or are planned to increase coverage. This can create distortions in the labor market, and the book is about policies to expand the coverage of social insurance programs to all workers, without reducing incentives to job creation and formal work. While few would argue against the need and social merits of social insurance and social assistance programs there are growing concerns about their unintended consequences on labor markets because of poor design. The programs can distort incentives and individual behaviors in ways that either reduce employment levels and/or promote informality, ultimately affecting productivity and economic performance. For instance, high social security contribution rates can reduce formal employment; badly designed unemployment benefits can reduce incentives to keep, search, and take jobs; and fragmented social assistance programs can become a tax on formal labor and encourage informality. The book reviews the evidence regarding the effects of social insurance and social assistance programs on labor market outcomes and discusses options to improve their design and implementation. The book focuses particularly on middle income countries in Latin America and Asia with a large informal sector and suggests ways to reduce these distortions and better manage and finance the subsidies to make coverage universal, while creating good jobs. The book compiles expert papers from the joint conferences of the World Bank (WB), the Institute for the Study of Labor (IZA) and the Inter-American Development Bank (IDB) on Employment and Development.Overview and Policy Implications ; PART I: SOCIAL INSURANCE, BEHAVIORS, AND LABOR MARKETS ; 1. Evolution of Social Security Systems in Latin America, and Implications for Labor Markets ; 2. Effects of Non-Contributory Systems on Informality: Taking Stock of Eight Years of Implementation of Mexico's Seguro Popular ; 3. Unemployment Insurance, Job Search, and Informal Employment ; 4. Social Insurance Bundles and Formal Employment ; 5. Non-contributory Pensions and Informality in Chile ; PART II: DEFINING THE MANDATE OF SOCIAL INSURANCE PROGRAMS ; 6. How Much Savings or Insurance? The Role of Information, Knowledge and Psychological Factors in Determining the Mandate of Social Insurance Programs ; 7. Inconsistent Time Preferences and Savings: The Case of Chile ; PART III: DESIGNING REDISTRIBUTIVE ARRANGEMENTS ; 8. Redistributing Income while Reducing Distortions in Labor Markets ; 9. Poverty Impacts of Targeted and Untargeted Programs under Budget Constraints ; 10. Assessing Implicit Redistribution in Pension Systems within Social Insurance Systems: The Case of Argentina, Brazil, Chile, Mexico and Uruguay ; PART IV: FINANCING SOCIAL INSURANCE ; 11. Financing Instruments, Behaviors, and Labor Market Outcomes ; 12. Reducing the Tax-Wedge in Latin American Countries ; 13. Financing Health Insurance and Pensions through VAT