Download the Powerpoint file from week #3

Employment Policy in Latin
America: The Missing Link
between Economic Growth,
Poverty and Income
Distribution
Class 3
Kirsten Sehnbruch
Center for Latin American Studies
UC Berkeley
Feb 11 – March 4, Fridays, 10.00am – 1.00pm
Compliance with Labor
Legislation: de facto or de jure?
• Whenever we assess the impact of labor market
legislation in LA, we have to consider whether it
is really applied in practice.
• eg. a large proportion of severance pay is never
paid
• Employers are likely to avoid complying with
legislation whenever they can get away with it
• Large companies with unions tend to have better
rates of compliance with legislation
Enforcement of Legislation
• requires a labor inspectorate that operates at a
national and regional level (often a department
attached to the ministry of labor)
• requires knowledge of legislation by both
workers and employers
• requires institutionalization of a functioning
complaints procedure
• requires the existence of labor courts who can
adjudicate complaints and enforce legislation
Methods of Enforcement
• Labor inspectors (random or non-random
checks)
• Complaints from workers or union officials
(normally through a labor inspectorate) that
occasion a visit from the inspector
• Accidents or other incidents occasion an
inspection
• Dismissal/resignation of a worker causes a
complaint
• Consequences of non-compliance: accidents,
fines, public denouncements, and press reports
Data on Enforcement
• There is no reliable data in LA on the
enforcement of specific labor regulation issues,
For Example:
• what proportion of severance pay is actually
paid?
• how many companies prevent unions from
establishing themselves?
• how many workers are dismissed because of
intended or actual union activity?
• what is the real rate of accidents?
• what is the rate of compliance with maternity
legislation, including unlawful dismissal?
Poverty is in the definition
• Monetary limits (eg. World Bank)
• Basket of goods (individual LACs and
CEPAL)
• Relative and absolute poverty lines
• Alternative non-income measures to
poverty (HDI and other basic indicators)
Alternative Measures of Human
Development
• HDI (life expectancy, literacy + GDP)
• GDI (same, but segregated by sex)
• GEM (Gender empowerment index: % of women holding:
parliamentary seats, executive positions and prof./technical jobs)
• HPI (Human Poverty Index: % of population unlikely to survive to
40, access to basic services, malnutrition in < 5, income distribution,
% of poverty)
• None of these measures include a component based on
employment
• All of these indicators are much criticised and
controversial: arbitrary, insensitive, summaries,
methodology and technical calculation, etc.
• Their main achievement is that they have shifted
attention away from GDP/capita as a measure of
development
Approaches for thinking about
Poverty
•
•
•
•
•
•
•
•
•
Traditional (utilitarian): income per capita
‘Trickle down’ through growth (neo-liberal)
‘Targeting’ social expenditure (neo-liberal plus)
Basic Needs (mentioned in Franko)
Social Exclusion
Social Capital
Empowerment
Capabilities
There is no employment based approach, but all
of these approaches can focus on employment
Economic Growth and Poverty
• Economic growth generally reduces poverty
• The question is, to what extent?
• The extent depends on the employment it
generates
• You can reduce poverty without economic
growth, but this is more difficult: support-led or
growth-led policies
• The former act through non-employment
dependent social policies, the latter act through
employment dependent social policies
The Trickle-down Effect
Economic
Policy
Social
Policy
Trickle
down
through jobs
Trickle
down
through jobs
Individual
Wellbeing
Components of Social Security
in LA (1): Employment related
• Pension systems (private, public and minimum
guarantees) including disability provisions
• Health insurance (private and public)
• Unemployment insurance (in some LACs)
• Accident and work related illness insurance
• Union related benefits (eg. health, educational
and holiday facilities)
Components of Social Security in
LA (2): state benefits not related
to employment
• Survival pensions (below minimums)
• Emergency and primary healthcare, including
dental care
• Monetary benefits
• Subsidies for food, water, electricity
• Meal programs at schools
• Poverty programs (eg. Contigo in Mexico)
• Housing subsidies
• Credit facilities
Poverty Programs: Chile
Solidario: Programa Puente
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•
•
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Program targeted at the most needy (indigent)
Administered through municipalities
Participants selected based on a score (ficha Cas)
Links beneficiaries with existing social programs
that they are entitled to (eg. pensions, primary
health care, pre-school, material goods)
• Social worker goes to family’s home to discuss
their needs, objectives and to provide psychosocial support
• Subsidy facility (goods not money) with training to
insert participants into the informal labor market
Problems with the Program
• Selection method of families
• Municipal resource constraint (including the time allocated
for social worker visits)
• Most of the families have social and/or psychological
problems that cannot be addressed in the available time
and are not addressed by linking them up with relevant
support groups
• If these problems are unresolved, families cannot function
better
• Institutional disfunctions (central vs decentralised
administration)
• Most of the micro-entrepreneur projects (subsidies) fail
• The program ultimately fails due to lack of employment
opportunities
Poverty and Employment
• Working poor: insufficient earnings from a regular job to
sustain a family (one minimum wage per household will
not lift a family above the poverty line in most countries)
• Working poor: Underemployment of working members of
a family (either hours or income)
• Participation: Inability of all working age family members
to participate in the labor market (either through lack of
available work or childcare facilities)
• Earnings crisis: either through loss of employment,
health problems or other temporary problems ( ex:
Marco’s case)
• Family break-up means main earner disappears or
wages have to be shared between two households
• Poverty through lack of savings during working life (no
pension rights)
Child Labour as a manifestation
of earnings poverty
• Child Labour at the cost of continuing
education
• Child Labour in addition to education
• Enforcing legislation on child labour may
increase overall poverty of a family
• Possible solutions?
Pension Systems
• Traditional pay-as-you-go
• Company pensions
• Private pension systems (either on their own
or in addition to other forms of pension)
• Latin America: the end of ISI and the debt
crisis (followed by structural adjustment)
required massive pension reforms (much
more extensive than in any developed
country)
The Model for the reforms:
The Chilean Pension System
• Implemented in 1981, first fully privatised pension
system
• Wage-earners contribute 12% of their wages to an
individual account.
• No contributions from employers
• Workers get to chose between several pension fund
managers who are supposed to compete with each other
• Investment of pension funds strictly regulated and limited
to certain investments: have produced high returns since
inception of system
• Upon retirement: worker either buys an annuity or is paid
out regular amounts from savings
• State guarantees minimum pension after 20 years of
contribution (insurer of last resort)
Problems with the System
• Low coverage of total labour force
• Unstable employment patterns: half the labour
force will not achieve minimum of 20 years
contributions, and therefore not be entitled to a
minimum pension
• State has to guarantee pensions of a significant
proportion of the labour force
• The others will receive low pensions
• Significant regulatory concerns that prevent real
competition, and entrenched political interests of
fund managers
Health Insurance
• Public, private and mixed systems (more
diversity in the systems than in pensions)
• Problems with public systems: under-funding
• Problems with private systems: contributions
(generally a proportion of wages) may not be
enough to cover premiums for full insurance
• State has to act as an insurer of last resort
• Regulatory issues (renewal of contracts, amount
of premiums, transparency, competition)
Unemployment Insurance
Systems in Latin America
• Nothing
• Employment Generation Programs (almost all
LACs)
• Unemployment benefits (Ar, Br)
• Severance Payments: approx. 1 monthly
salary per year of service (all LACs, ex Peru)
• Individual Savings Accounts (Br)
• Mixed individual savings account and benefit
schemes (C, P, Ec?)
The New Model: The Chilean
Unemployment Insurance Scheme
• Covers all dependent workers excluding
domestic service, including short term contracts.
• Personal savings accounts are set up for
workers, funded by both the employee and the
employer.
• In case of unemployment (whatever its cause)
withdrawals can be made from these accounts.
• Under certain conditions the unemployed will
have the right to support from a “Solidarity Fund”
financed by the government and employers.
Structure of the new
Unemployment Insurance
Scheme
Government
Employer
Employee
Budget
0.8%
Solidarity
Fund
1.6%
0.6%
Individual
Account
= 2.2%, or
26% of worker’s
monthly wage
after 1 year of
contributions
Factors that determine entitlements
to the benefits of the scheme
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Level of income in previous job
Type of contract held
Job tenure (min 12 months)
Duration of unemployment period
Reason for becoming unemployed
Age of the worker
Potential access to Solidarity Fund
Insurance for workers with
short-term contracts
• Employers contribute 3% to their accounts
• Employees contribute nothing
• After one year’s work, they accumulate
36% of one monthly wage in their account
• They can withdraw these funds if they
have contributed for 6 months
Problems with the Scheme
• Only 31% of the unemployed had an openended contract in their previous job
• 60% of the unemployed worked less than a year
prior to becoming unemployed
• A third of the unemployed earned the minimum
wage or less, another 47% earned 1-2 minimum
wages
• Most of the unemployed will not be covered for
the duration of their unemployment