Social Insurance and Informality in Latin America

Transcription

1 Social Insurance and Informality in Latin America Tokyo Fiscal Forum 2016 Santiago Levy, IDB* * Author s opinions do not necessarily coincide with those of the institution he is affiliated with.

2 Motivation In most countries in Latin America, the provision of social insurance is not the same for all workers, but depends on their status in the labor market. This creates substantive issues for: The population covered The method of financing The risks against which households are protected (illness, longevity, disability, unemployment, and so on) The fiscal sustainability of social insurance provision, and The behavior of firms and workers in the labor market, with spillover effects on productivity and growth. Although there are relevant institutional variations across countries, there are also some issues that, mutatis mutandis, are common to all.

3 Distinction between salaried and non-salaried labor salaried Workers self-employed non-salaried other Salaried: have a boss (firm) and are paid a salary; there is a relation of subordination; workers receive orders from bosses (effort observed, coordination of tasks, and so on). Unions can be formed and minimum wages may apply; regulations on dismissal. Non-salaried: work on their own, or are associated with a firm but are not subordinated to it; contracts to share risk or elicit effort; payments take the form of commissions, profit sharing, and so on. No minimum wages (no wages!) and no unions with free dismissal (no boss!). 3

4 Bismarck s inheritance: asymmetry in social insurance, CSI and Salaried workers: bundled benefits, usually health, work-risk, death and disability insurance, retirement pensions, and protections against loss of employment benefits paid from earmarked wage taxes, hence the (mis)label of contributory social insurance, CSI benefits may also include labor training (Colombia), housing (Mexico), child allowances (Argentina) regulations on firing bundled as part of social insurance, but instead of unemployment insurance, mostly one-time severance payments at dismissal time. Non-salaried workers: until recently, uncovered by social insurance. But since 1990s unbundled pension, health and related programs benefits paid from general revenues, hence the (mis)label of non-contributory social insurance, benefits targeted to workers not covered by CSI (often regardless of whether they are salaried or not) no costs of firing or minimum wages.

5 Structure of labor contracts under the formal-informal dichotomy Contrat Expected cost to firm Expected benefit to worker Implicit tax or subsidy Legal salaried wf T CSI wf CSI T CSI CSI (1 ) T CSI Formal employment, L f Illegal salaried Non-salaried wi (.) F w i wi wi T T (.) F T T Informal employment T CSI = monetary cost of the bundle of contributory social insurance benefits (including contingent costs) T = monetary value of all non-contributory social insurance programs = worker s valuation of T CSI ; T = worker s valuation of T. CSI CSI T (.)F = expected penalty for violating a salaried contract (usually increasing in firm size). (.) 1 Note: informal employment has a legal and an illegal segment. But under perfect enforcement,, its illegal segment would disappear as long as F > T CSI.

6 Key point: Impact of social insurance in the labor market costs of CSI (including severance pay and transactions costs of compliance) must be internalized in the contract between salaried worker and firm. costs of programs are paid from resources external to the firm-worker contract. Social Insurance T CSI CSI L / T 0 f (Relatively well known. Because of bundling, T CSI is a scalar) tax on formality T 1 L / T,..., L / T 0 f f n subsidy to informality (Less well known. Because of unbundling, T is a vector) The combined impact of CSI and programs on the formal/informal composition of employment (and other dimensions like participation rates) varies from program to program and from country to country, since many parameter values determine the outcome.

7 Ene - Mar 07 May - Jul 07 Sep - Nov 07 Ene-Mar 08 May - Jul 08 Sep - Nov 08 Ene - Mar May - Jul 09 Sep - Nov 09 Ene - Mar 10 May - Jul 10 Sep - Nov 10 Ene - Mar 11 May - Jul 11 Sep - Nov 11 Ene-Mar 12 May-Jul 12 Sep-Nov 12 Ene - Mar 13 May-Jul 13 Sep - Nov 13 Ene - Mar 14 May - jul 14 Sep - nov 14 Ene - Mar 15 May -jul 15 Sep - nov CSI Evidence from CSI programs (i.e., Lf / T ) Reducing the tax on formality: 2012 tax reform in Colombia Health Contributions Share of workers contributing to pensions Reduction in pay-roll tax Two health care regimes : subsidized for informal workers and contributory for formal ones Quality was superior in the contributory regime. In 2008 the Constitutional court ruled that the quality of both systems should be the same; it was completed in 2012 The tax reform in 2012 reduced the health contribution for formal employees from 12.5 to 4 percentage points

8 Growth rate Employers in IMSS Evidence from programs (i.e., Lf / Tj ) Effect of Seguro Popular on the affiliation of employers of firms up to 50 employees to Mexican Social Security Beginning of implementation of Seguro Popular in first group of eligible municipalities. This difference translates into a fall in formal employment of about 6%. It also provides indirect evidence of higher evasion by firms..0 Implemented in Implemented in Source: Bosch and Campos-Vázquez (2010). Reviewing the various papers, Bosch and Pages (2012) find that from 2002 to 2010, Seguro Popular reduced formal employment by between 160,000 to 400,000 jobs, or between 8 and 20% of all formal jobs created during that period.

9 Evidence from subnational programs Effect of the Federal District (Mexico City) Health Program for Women The probability of formal employment fell by 8%. Guadalajara and Monterrey Federal District Source: Juárez (2008). 9

10 More evidence from programs Argentina, effects on labor informality of extending child allowances (AUH) to informal workers (% of informal workers that become formal) The extension of the Asignacion Universal por Hijo (child allowances) to informal workers reduced substantially the rates at which these workers entered formal employment. Source: Garganta & Gasparini (2015)

11 More evidence from programs Uruguay, effects on labor informality of family allowances (AFAM, Plan de Equidad) Workers who do not qualify Workers who qualify In Uruguay, the AFAM reduced registered (formal) employment by In Uruguay, the AFAM reduced registered (formal) employment by 7.5 percentage points, i.e., from 48 to 41.5 percent, over the period Source: Garganta & Gasparini (2015)

12 Share of women enrolled in IESS Evidence from CCTs with benefits conditional on informal status Effect of Ecuador s Bono de Desarrollo Humano (BDH) on Affiliation to CSI (panel data, women 35 to 65 years of age) Base line, 2002, all households without BDH , 6 years of BDH with without TTThreshold to qualify for BDH Source: Bosch and Schady (2013). After six years, the BDH reduced formal employment of working women at the threshold by 15%.

13 Other evidence Econometric studies of pure programs: Camacho (2012 ), Colombia, the Regimen Subsidiado (health) reduces formal employment by 4%. Econometric evidence of CCT programs that may condition benefits on informal status: Amarante et al. (2011), Uruguay, the Plan de Atencion Nacional a la Emergencia Social (PANES) program reduces formal employment among men by 7.5%. Ministerio do Desenvolvimento Social e Combate a Fome, (2012), Brazil, the Bolsa Familia, program reduces formal employment among beneficiaries. Emerging literature on the effects of pensions: Galiani and Gertler (2009), Mexico, the Adultos Mayores de 70 program reduces labor supply of those near retirement. Attanasio et al. (2011), Chile, the 2008 pension reform will reduce the proportion of men and women working formally by 1.7 and 4.3%, respectively, with larger reductions for those aged 50 and older. Todd and Joulbert (2011) estimate even larger reductions. (These two papers are simulation models.)

14 Methodological observation Countries operate many programs in parallel (health, pensions, day care, child allowances, and so on). Further, programs co-exist with CSI programs. What matters is the combined effect of all CSI and all programs, i.e., the combined effect of the tax on formal labor and the subsidy to informal labor. Few papers look at the full impact of [CSI + ], as it is almost impossible to do so with standard econometric techniques that allow proper identification; that is, we want to know: dl CSI d( T T ) f but most papers (like the examples above) measure individual program j: CSI L / T L / T f j or f j vectors Anton, Hernandez and Levy (2012) use a simulation model to capture the joint effects of [CSI + ] programs in Mexico, and find that they reduce formal employment by 26% and increase informal employment by 45% relative to the equilibrium with T CSI = T = 0.

15 The formal-informal dichotomy and firm/worker behavior Firms and workers respond to the asymmetry in the regulation of labor. These responses depend on: for firms, differences in expected costs of a salaried vs. non-salaried contract, possibilities of substitution between them, possibilities of evading regulations on salaried labor (enforcement and fines) for workers, the expected utility of each contract (earnings, social benefits, other dimensions of the job). Given all other taxes, credit regulations, and so on, these responses impact: the type and size distribution of firms: w/wo salaried contracts, legal/illegal, family firm, one-person firm the efficacy of social insurance (who is covered against what risks, and how often) the fiscal costs of social insurance investments in labor training, adoption of technology and innovation, rotation of workers, tenure, etc. The informal sector ( informality ) consists of economic activity where regulations on CSI are not observed, regardless of whether this is a legal or illegal act.

16 Average cost of labor contract Average cost of labor contract Two distortions in the formal-informal dichotomy: firm type and firm size Costs of Labor Contracts in Mexico, 2008 Note: these estimates exclude the contingent costs of firing. In fact, the gap is larger than 24%. Source: Antón, Hernández and Levy (2012) A 14% 10% (tax on formality) (subsidy to informality) Number of workers CaCost of salaried labor to firms CSI w [1 (1 ) ] salaried labor: CSI + salaried and non salaried labor: USI Cost of labor to all without the formal informal dichotomy non salaried labor: CSI + f w i Informales Cost of non-salaried bajo SSNC labor to family firms and oneperson firms 24% The upward sloping line captures the costs of the profit maximizing combination of legal and illegal salaried contracts, given the fines in Mexico s laws, and a function (.) that reproduces the legal/illegal composition of employment observed in the 2008 Economic Census. 16

17 Size and type distribution of firms and employment, 2013 Firms Formal Mixed Informal Total [0-5] [6-10] [11-50] [50+] Total Workers [0-5] [6-10] [11-50] [50+] Total

18 Informal firms are less productive than formal ones Mexico, TFP in informal vs. formal firms Number of employees Other evidence Fajnzylber, Maloney and Montes Rojas (2009) with Mexican data, and Fajnzylber, Maloney and Montes Rojas (2011) with Brazilian data, both find that increases in formality increase productivity. Pages [IDB (2010)] scattered data from other Latin American countries Informal firms with salaried workers (ilegal) Informal family firms (legal) Jung and Tran (2012) simulate the effects on pensions in Brazil, and find a reallocation of resources from the informal to the informal sector that reduces output by 4%. -70 Comparisons of firm-level TFP for a universe of 3.6 million firms grouped at 6-digit level, Source: Busso, Fazio and Levy (2012). However, data for proper measurement is very scarce in many LA countries. 18

19 The policy problem Stop promoting informality Improve social welfare We need to increase productivity and wident the tax base! We need to expand the coverage of social insurance to all households! (.with whatever combination of programs and sources of revenue) The nature of this trade-off varies from country to country and program to program, and while more research is needed, it is clear that a dual social insurance architecture can hurt productivity and growth. 19

20 Conclusions Many factors stand behind the large informal sector in LA: taxation, registration costs, credit frictions, and so on. However, CSI and programs matter. The combination of CSI and is bad social policy (lowers the efficacy of insurance) and bad economic policy (hurts productivity and the tax base). Debate centers on the architecture of social insurance, not on individual programs. The region needs to escape from the dilemmas created by the CSI- dichotomy. Broadly, it needs to transit in the direction of unified regimes ( universal social benefits ): risks that are common to all workers should be financed from the same revenue source. This is a tall order, as it inevitably involves tackling fiscal issues (with what taxes should we replace CSI contributions?) and challenging long-held paradigms (don t CSI contributions redistribute income from firms to workers, or from capital to labor?). But the issue needs urgent attention, as LA may be attempting to construct a Welfare State in economies characterized by permanent informality and low productivity growth.

21 Thank you.