Protecting the Unemployed in Chile: From State Assistance to Individual Insurance?

The weaknesses of traditional policies for dealing with unemployment shocks have placed the reform of social insurance programs at the center of the public policy debate. Unemployment insurance saving accounts (UISAs) have been proposed as an instrument to protect workers from the loss in earnings associated with unemployment. The idea is to have all workers (and possibly their employers as well) deposit a share of their monthly incomes into their UISA, with the balance in the account accruing market interest rates. During an unemployment spell, the workers who would be eligible to do so could withdraw funds from their individual account. It is only when there would be no or few funds left in the account that complementary unemployment assistance allowances would be provided. The fact that the accounts are individualized helps to solve the moral hazard problem. Moreover, the fact that the contribution system is mandatory also helps to solve another problem, namely the adverse selection mechanisms through which only some workers might choose to self-insure, or through which the private insurance firms insuring workers would try to hand-pick those workers with the lowest risk of being unemployed. Overall, the objective of UISAs is to set incentives right. Recent proposals for replacing standard forms of unemployment assistance by UISAs are being implemented in several Latin American countries. This paper explores some of the implications of replacing in Chile the current job security system with UISAs.