Social protection during recessions: evidence from Chile

Abstract

This article analyzes the main labor market risk management strategies adopted by the Chilean Government during the 1999 recession that was initially related to the Asian financial crisis. Their successes and failures can suggest innovative social protection solutions for other countries. It seems that the 1999–2001 labor reforms and a three-year plan to increase the minimum wage intensified the recession’s effects on unemployment. Probit models indicate that households coped with the recession’s effects by increasing wives’ labor supply but not by withdrawing children from schools. The expansion of employment programs probably helped households to adopt these coping strategies.

Keywords:

• Social protection
• recessions
• private coping strategies
• added worker effect
• Chile

JEL Classifications:

• H53
• J21
• J48

Acknowledgements

I would like to thank three anonymous referees for valuable comments. I also thank without implicating Emanuele Baldacci, Polly Jones, Andrew Mason, and Truman Packard for helpful comments to previous version of this paper. I am also grateful to Maris Goldman, Thomas Marhoefer, Divya Mathur, Kathryn McLellan, Claudio Montenegro, and Heidi Smith. The usual disclaimer applies.

Notes

1. See, e.g. De Ferranti et al. (2000), Holzmann and Jørgensen (2001), Holzmann (2009), Gentilini and Omamo (2011) and Hagemejer and McKinnon (2013).

2. The 1999 Chilean recession was originally associated with the Asian financial crisis and then continued based on internal reaction to its shocks.

3. The Chilean model has been questioned recently because of its inability to deliver inclusive growth and guarantee basic social rights, such as egalitarian and high-quality education (e.g. Contreras 2009; Mayol 2012; Atria et al. 2013; Atria 2014). The current government is promoting structural economic and political reforms to address these issues.

4. Although the monetary policy was focused on an inflation target, it also considered the size of the current account deficit. In contrast to other independent Central Banks, the Central Bank of Chile is also responsible for the exchange rate system and policy.

5. The time series are detrended and deseasonalized using a linear time trend and indicator variables for each quarter.

6. The ENE (National Employment Survey) is a monthly cross-sectional survey conducted by the National Institute of Statistics. It collects official data on Chile’s labor market and is aimed at measuring nationwide unemployment.

7. “Induced” unemployment is defined as unemployment caused by an involuntary termination from previous job (being fired or laid off), not job resignation.

8. The demographic characteristics included for both the wife and husband are age, age squared, years of schooling, years of schooling squared, and number of children under 5 years of age. in levels is absorbed in the θ_rt terms.

9. In general, the AWE measures the increased labor supply of wives in response to their husband’s unemployment. This effect is more likely to exist in countries where wives are less attached to the labor market and are generally secondary earners. According to the CASEN 2009 survey, the earnings of Chilean female workers represent between 49.1 and 68.3% (depending on education level) of male earnings. For further explanation and empirical evidence on the AWE, see Lundberg (1985), Parker and Skoufias (2004), Juhn and Potter (2007), Kohara (2010) and Gong (2011).

10. For example, Stephens (2002) stresses the use of involuntary job loss as an exogenous employment shock and argues that estimates of the AWE that treat all unemployed as the same will likely underestimate the magnitude of the true effect. Stephens (2002), Kohara (2010), Gong (2011), and Hardoy and Schøne (2012) are among the studies that base their estimations on involuntary job loss.

11. Columns (1) to (3) do not include URATE_t and the interaction , whereas Columns (4)–(6) include both of them. Since URATE_t does not vary within quarters, it is absorbed into the quarter dummies in Column 5 and into the region-by-quarter dummies in Column 6.

12. This difference is smaller than what Parker and Skoufias (2004) find for Mexico (the paper that is closest to this one in the literature); the magnitude of the AWE during the Peso crisis period is found to be twice as large as during the period of economic prosperity.

13. The discussion on the degree of flexibility of the Chilean labor market and the effects of the minimum wage is quite ample. See Edwards and Cox-Edwards (2000), Heckman and Pages-Serra (2000), Mizala and Romaguera (2001), Montenegro and Pagés (2004), Bergoeing and Morande (2002), Cowan et al. (2005) and Miranda (2012).

14. The existing income smoothing instruments in 1999 (mandatory severance payments and the unemployment subsidy) had insufficient coverage and lacked effectiveness. See Vroman (2003), Acevedo, Eskenazi, and Pagés (2006) and Escobar (2009).

15. However, the cost-effectiveness of different alternatives should be taken into account. For a discussion about this point, see the evaluation of Argentina’s plan Jefes and Jefas in Galasso and Ravallion (2003).

16. See the references cited in ILO (2014).

17. See Ravallion (1999) for further details.