The Chilean Labor Market: A Key to Understanding Latin American Labor Markets

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The Chilean Labor Market

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The Chilean Labor Market A Key to Understanding Latin American Labor Markets

by

Kirsten Sehnbruch

THE CHILEAN LABOR MARKET: A KEY TO UNDERSTANDING LATIN AMERICAN LABOR MARKETS

© Kirsten Sehnbruch, 2006. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. First published in 2006 by PALGRAVE MACMILLAN™ 175 Fifth Avenue, New York, N.Y. 10010 and Houndmills, Basingstoke, Hampshire, England RG21 6XS Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–7230–9 ISBN-10: 1–4039–7230–3 Library of Congress Cataloging-in-Publication Data is available from the Library of Congress. A catalogue record for this book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: July 2006 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

To Gus, to my parents, Roswith and Helmut Sehnbruch, and to Chago, with love and gratitude for their presence in my life.


Contents

List of Tables

xiii

List of Figures

xv

Abbreviations and Terms Specific to the Chilean Context

xvii

Acknowledgments

xxi

1 Introduction: Model Performance or Precarious Employment?

3

2 Employment in the Development Context: The Contribution of the Capability Approach

21

1. Sen’s Capability Approach 1.1. Commodities and Entitlements 1.2. Functionings 1.3. Capabilities

22 24 24 26

2. Why the Capability Approach? 2.1. Basic Needs 2.2. Social Exclusion 2.3. Comparison of Approaches

28 28 29 30

3. Applications of the Capability Approach

33

4. The Labor Market in the Context of Development Thought 4.1. Labor Market Policies as a Fallout of Other Development Policies 4.2. The Labor Market as a Vehicle of Development and Expanded Capabilities

34 34 37

5. The Quality of Employment 5.1. Defining the Quality of Employment 5.2. Applying the Capability Approach to the Labor Market

40 40 42

6. Conclusions

44

viii

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Contents

3 The Never-Ending Story of Labor Market Reform

47

1. The Process of Labor Market Reform in Chile

48

2. The Labor Market before 1973

51

3. Labor Market Reforms under the Pinochet Administration

54

4. A Decade of Labor Market Reforms under Aylwin and Frei (1990–2000)

58

5. Legislative Reform under Lagos

65

6. Concluding Remarks

67

4 The Characteristics of Employment in Chile

73

1. Sources of Information 1.1. The National Employment Survey 1.2. The Employment Module of the National Household Survey, CASEN 1.3. Other Labor Market Surveys 1.4. The Politics of Information

74 74

2. Participation, Employment, Unemployment, and Wages

81

3. How Do We Look at the Data on the Chilean Labor Market?

83

4. The Characteristics of Employment in Chile 4.1. The Male and Female Workforce 4.2. Levels of Education 4.3. Age Structure 4.4. Economic Sector 4.5. Levels and Distribution of Income 4.6. Health, Pension, and Unemployment Insurance 4.7. Tenure and Job Rotation 4.8. Size of Employer 4.9. Vocational Training, Additional Employment, and Part-Time Work 4.10. Finding and Leaving Jobs

76 77 79

87 87 91 92 92 93 94 101 103 103 107

5.

What the Data Does Not Tell Us

107

6.

Conclusions so far

110

5 The Development of the Chilean Labor Market

113

1. Unemployment and Underemployment

114

2. The Changing Characteristics of Employment in Chile

117

Contents

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ix

3. The Effects of the 1998–1999 Economic Crisis

120

4. Employment Mobility Within the Chilean Labor Market

123

5. Employment, Poverty, and Income Distribution

129

6. Levels of Unionization

132

7. The Enforcement of Regulation

135

8. Conclusions

138

6 Legislation versus Practical Reality: Chile’s Unemployment Insurance

141

1. How Does the Unemployment Insurance Work?

143

2. Ideological and Theoretical Context

146

3. The Political Context of the Unemployment Insurance Legislation in Chile

150

4. Characteristics of the Employed and Unemployed

153

5. Simulation of the Unemployment Insurance

161

6. Evaluation of the Chilean Unemployment Insurance Scheme and Conclusions

164

7 Vocational Training: Missing the Opportunities

169

1. Theoretical Considerations and the Latin American Context

171

2. The Historical Context: SENCE’s Origins

175

3. Vocational Training under the Concertación: Reforming SENCE’s Statute

179

4. The Evolution of Vocational Training in Chile 4.1. Empirical Evidence on Vocational Training: The Official Data 4.2. The empirical Evidence on Vocational Training: Data from the National Household Survey (CASEN) 4.3. What the Data Does Not Tell Us and Other Conclusions so far

182 182 189 194

5. Targeted Vocational Training 5.1. Chile Joven 5.2. Apprenticeships 5.3. Emergency Employment and Vocational Training: ProEmpleo

196 196 199

6. Conclusions and Policy Recommendations

202

201

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Contents

8 Measuring the Quality of Employment

211

1. The Need for a Quality of Employment Indicator

211

2. Methodological Issues and the ILO’s Decent Work Indicators

212

3. Construction of an Alternative Quality of Employment Indicator 3.1. Description and Composition of the Quality of Employment Index 3.2. Occupational Status and Social Security Coverage 3.3. Income 3.4. Stability of Employment: Tenure 3.5. Training 3.6. Weighting and Other Methodological Issues

217 218 218 221 222 223 224

4. Practical Applications of the Quality of Employment Indicator 4.1. Segments of the Labor Force with Low-Quality Employment 4.2. Individuals in the Index

227 234

5. Conclusion

238

9 Conclusions: Quality and Quantity

226

239

1. The Range of the Quality of Employment in Chile

240

2. Employment Legislation 2.1. Historical Definitions in a Modern Labor Market 2.2. Deregulation: Partial Reform and Flexibility at the Margins

244

250

3. Institutional Capacity and Political Priorities

257

4. Information Policy

262

5. Labor Relations

264

6. Toward a Pro-Employment Development Strategy

267

7. Conclusions

271

Appendix A: Details of the Unemployment Insurance Scheme

244

275

Contents

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xi

Appendix B: Unemployment in Chile

281

Appendix C: Determining Factors of the Quality of Employment

285

Notes

287

Bibliography

319

Index

335


List of Tables

3.1 Characteristics of the three periods of labor market development in Chile 4.1 Basic labor market indicators 4.2 The Chilean labor force by occupational status 4.3 Characteristics of the labor force by occupational status 4.4 Characteristics of the labor force by occupational status 4.5 Characteristics of the labor force by occupational status 5.1 Unemployment and underemployment 5.2 Developments in the occupational status 5.3 Pension system contributions and size of company 5.4 Characteristics of new jobs generated each year compared with those of the labor force: occupational status, pension contributions, and income levels 5.5 Transition matrix: Changes in occupational status, CASEN 2000–2003 5.6 Transition matrix: Changes in type of contract or occupational status from 1997 to 1998 5.7 Transition matrix: Changes in type of contract or occupational status from 1998 to 1999 5.8 Transition matrix: Changes in economic sector from 1998 to 1999 5.9 Transition matrix: Changes in level of income from 1998 to 1999 5.10 Employment, poverty, and income distribution 6.1 Distribution (%) of the employed and unemployed by type of contract and level of formality 6.2 Distribution (%) of the unemployed by the duration of their unemployment 6.3 Distribution of the unemployed and employed by duration of employment 6.4 Distribution of former wage-earners with contracts by reason for loss of employment

49 82 86 88 98 105 115 116 119

121 124 126 127 128 128 131 155 158 158 159

xiv

6.5 6.6 6.7 7.1 7.2 7.3 8.1 8.2 8.3 8.4 8.5 A.1 A.2 A.3 B.1 B.2 B.3 B.4 B.5 B.6

B.7 B.8 B.9

●

List of Tables

Different levels of coverage under the unemployment insurance scheme Coverage of wage-earners Coverage of the unemployed Historical development of the Franquicia Tributaria and other SENCE programs Use of Franquicia Tributaria by subject matter in 2003 The development of participation in vocational training courses Construction of the quality of employment indicator Quality of employment of the labor force Quality of employment by region Quality of employment Classification of workers according to the quality of employment indicator Monthly payments of unemployment subsidy Unemployment benefits paid by the Solidarity Fund Different levels of coverage under the Unemployment Insurance Scheme Distribution (%) of the employed and unemployed by sex Distribution (%) of the employed and unemployed by age group Distribution (%) of the employed and unemployed by level of education Distribution (%) of the employed and unemployed by household position Distribution (%) of the employed and unemployed by economic sector Distribution (%) of the employed and unemployed by contributions to pension and health insurance Distribution (%) of the employed and unemployed by number of hours worked Distribution of the employed and unemployed by level of income Did you receive an unemployment subsidy?

160 161 162 184 186 190 219 228 229 230 236 277 278 280 281 281 282 282 282

283 283 283 284

B.10 Did you receive severance pay?

284

B.11 Why did you not receive severance pay?

284

C.1 Determining factors of the quality of employment

286

List of Figures

2.1 5.1 6.1 9.1

Individual well-being as a trickle-down effect Changes in the use of formal contracts among wage-earners Structure of the unemployment insurance Chile, Brazil, Taiwan, and Malaysia: Changing vertical integration in the processed-timber industry, 1963–2000

38 118 144

270



AFP CASEN CEP CEPAL CIC CIEPLAN

Chile Joven Concertación

CORFO

Administradora de Fondos de Pensiones: Pension Fund Administrators Caracterisación Socioeconómica Nacional: Chilean National Household Survey Centro de Estudios Públicos: a moderate neo-liberal think-tank based in Santiago Comisión Económica para América Latina y el Caribe: UN Economic Commission for Latin America Cuenta Individual de Cesantía: Individual Savings Account that can be accessed during periods of unemployment Corporacion de Investigaciones Económicas para Latinoamerica: a think-tank founded by opponents of the military regime during the 1980s, from which the Concertación governments recruited many of their ministers and policy advisors. Programa de Capacitación de Jóvenes: Training Program for Young People. This is the name by which the coalition government that has been in power in Chile since 1990 is known. Concertación is the short-form of Concertación de los Partidos por la Democrácia. The coalition consists of the Christian Democrat Party, the Partido Demócrata Cristiano (PDC), and two left wing parties, the Partido Socialista (PS) and the Partido por la Democrácia (PPD), and Partido Radical Social Demócrata (PRSD) Corporación de Fomento de la Producción: the Corporation for the Promotion of Production. Originally, this was the main government institution through which the policy of import substitution industrialization was developed. Today, CORFO, which is attached to the Ministry of the Economy, still promotes economic development in Chile through selected programs.

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CPC CUT Dirección del Trabajo

DC (or PDC)

ENE FONASA FONCAP FOSIS Franquicia Tributaria HDI IDB ILO INACAP INE INP

ISAPRE MIDEPLAN Ministerio del Trabajo NGO OMIL OTEC

Confederación de Producción y Comercio: the principal employers’ association in Chile Central Unitaria de Trabajadores: the principal union confederation in Chile Labor Inspectorate: Supervisory body that is in charge of monitoring compliance with labor market legislation and serves as a first point of call for employees with complaints or claims against their employers. (Partido de la) Democrácia Cristiana: Christian Democrats. One of the coalition parties of the Concertación Encuesta Nacional del Empleo: National Employment Survey Fondo Nacional de Salud, public health insurance system Fondo Nacional de Capacitación: National Fund for Training Fondo de Solidaridad e Inversión Social: Fund for Solidarity and Social Investment Tax credit that companies can use to write off vocational training against their taxes. Human Development Indicator Inter-American Development Bank International Labor Office Instituto Nacional de Capacitación Profesional: the National Institute for Professional Training Instituto Nacional de Estadísticas: National Institute for Statistics Instituto de Normalización Previsional, the remaining public pension fund to which workers who did not convert to the private pension system still belong Institución de Salud Previsional, private health insurance companies Ministerio de Planificación: Ministry of Planning Full Name: Ministerio del Trabajo y de Previsión Social: Ministry of Labor and Social Security Non-Governmental Organization Oficina Municipal de Intermediación Laboral: Municipal Employment Agency Organismo Técnico de Capacitación: Technical Training Institution. All institutes authorised by SENCE to impart vocational training are designated as OTECs.


OTIC

●

xix

Organismo Técnico Intermedio de Capacitación: literally ‘Intermediary Technical Organisations for Training’. Organisations formed by employers’ associations to provide vocational training for their members. PASIS Pension Asistencial: basic pension designed to keep the elderly out of indigence Pensión Mínima Minimum Pension, to which workers acquire a right after contributing to the pension system for a minimum of 20 years PET Programa de Economía y del Trabajo: NGO based in Santiago that is dedicated to the study of the labor market in Chile PDC Partido Demócrata Cristiano: Chrisitan Democrat Party. One of the coalition parties of the Concertación PPD Partido por la Democracia: Party for Democracy. One of the coalition parties of the Concertación PRSD Partido Radical Social Demócrata. One of the coalition parties of the Concertación Pro-Empleo Programa Pro-Empleo: Employment Program set up as a result of the economic crisis. PROTRAC Protección al Trabajador Cesante: name of previous proposal for unemployment insurance legislation. PS Partido Socialista: Socialist Party. One of the coalition parties of the Concertación SAFP Superintendencia de Las Administradoras de Fondos de Pensiones: Supervisory body of the Pension Funds SENCE Servicio Nacional de Capacitación: National Training Office SOFOFA Sociedad de Fomento Fabril: one of the most important employers’ associations in Chile, serving the industrial sector UNDP United Nations Development Program UCL Unidad de Competencia Laboral: specified qualification that is part of Chile’s new employment certification system UTM Unidad Tributaria Reusual


Acknowledgments

This book would have been an impossible undertaking if it had not been for the tremendous amount of support I had from a very large and diverse group of people as well as from various financial institutions that contributed to this project. The list is especially long as the book started out as a Ph.D. thesis, for which an original survey was undertaken. First of all, I would like to thank the Economic and Social Research Council (ESRC) in Great Britain and Antofagasta Plc for funding much of this research. The original labor market survey that this work is based on and which is discussed in several chapters of this book was financed jointly by the ILO in Santiago, the Chilean Ministry of Economics and the Labor Office (Dirección del Trabajo). For their help and support in this, I would like to thank Emilio Klein and Ricardo Infante, Álvaro Díaz, María Ester Feres, and Helia Henríquez. I would also like to thank my Ph.D. supervisor at Cambridge, David Lehmann, for his support. Above all, I would like to thank him for his faith in my work and research abilities that he demonstrated from a very early stage of this project, thus supporting me and defending my decisions before an often skeptical Graduate Committee. My very particular thanks go to David Bravo and the Department of Economics at the Universidad de Chile. Without their logistical and practical support in terms of providing me with office space and helping me with all the procedures involved in designing and implementing a survey, I would not have been able to carry out this research. The University also indirectly financed a large part of this work, by agreeing to undertake the survey at cost value. I am equally thankful to Ernesto Castillo and Isabel Jelvez from the department’s survey unit, for all their help and guidance, and especially for letting me observe the fieldwork of their own labor market survey before I undertook my own. I also thank them and their team of survey interviewers for their patience as they let me fuss over every single questionnaire until I was certain that the information it contained was correct. In addition I would like to thank other friends at the Department of Economics who with their very stimulating discussions helped me structure and

xxii

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Acknowledgments

think through my ideas. They include Francisco Arroyo, Ernesto Castillo, Isabel Millan, Javier Nuñez, Dante Contreras, Jaime Ruiz-Tagle V., Jo Ramos, and again David Bravo. I also owe a big thank you to my research assistants, especially Rodrigo Montero and Chris Neilson. Further thanks go to all the labor market experts and government officials from a range of different institutions, who gave up their time so that I could interview them, and who helped me obtain information, documents, and other materials. They (often unwittingly) allowed me to gain a very useful insight into the procedures and operations of the Chilean government, and contributed significantly to my understanding of the survey data through the discussions that followed my presentations of its results. The list of experts includes the former ministers of Labor, Jorge Arrate and Ricardo Solari, the former undersecretary for social security, Marigen Hornkohl, and their respective cabinets. I would like to extend a special thanks to all those who have read parts of this book and assisted me with their very useful comments. They include Alan Angell, William Brown, Flavio Comin, Sebastián Etchemendy, Carol Graham, Marcio Holland, Stefan Küffner, David Lehmann, David Levine, Gus Ozag, and several anonymous referees. Special thanks go to Claudio Santibañez, who at very short notice reviewed the entire manuscript. There is also the small matter of how a Ph.D. thesis got turned into a book. For advice on this process I am very much indebted to Alan Angell, Louise Haagh, and especially Peter Smith, who provided lots of useful advice on the publishing process. As for the publishing process itself, I am indebted to Gabriella Pearce at Palgrave Macmillan and the production team that produced this book. Another debt that I have incurred is with the Center for Latin American Studies at the University of California, Berkeley. In particular, I would like to thank Harley Shaiken (chair) and Teresa Stojkov (former vice chair) for their unquestioning support and generous provision of office space and facilities. They and their staff at the Center for Latin American Studies have contributed to the development of this book in so many ways through the numerous events and encounters that they organized, which provided an extraordinarily rich and varied intellectual and cultural background to my work. I am also grateful to my Chilean friends from the University of Cambridge for their lively and stimulating debates and discussions, which helped form many of my thoughts. They include Jaime Crispi, Pablo González, León Montes, Gabriel Palma, Alfonso Salinas, Claudio Santibañez, Marco Schejtman, and the Villena twins, Mauricio and Marcelo. I would further like to thank my very dear friends María Teresa Ruiz-Tagle and Germán Millan for providing me with a second home in Cambridge whenever I needed it. On a personal level, I would like to thank my parents and Gus Ozag for all their loving support and encouragement in the process of writing this book. The same goes for all my wonderful friends in Santiago, especially the Arican community, who have made my time there so very special and enlightening. And Chago deserves much of the credit for preserving my sanity throughout this research: cheerfully wagging his tail, he insisted I take regular breaks and

Acknowledgments

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xxiii

prevented me from working too hard, either by dropping his toys on my keyboard, knocking my mouse off its tray, sitting himself on top of my papers, and generally being much too cute to resist. And finally, a huge “thank you” to all the people in Santiago who were interviewed for the employment survey that this book originates from and who often invited me into their homes offering refreshments and empanadas. The numerous conversations I held with them in their homes gave me invaluable insights into their lives, something that survey questionnaires could not have done by themselves. They are the real subjects of this book and I hope I have done them justice in the presentation of my analysis.


Chile, a mine of innovations Bringing together ambitions, experiences, ideas and resources, Chile and the IBD maintain a relationship of mutual collaboration, which has not only resulted in reciprocal benefits, but has also served the progress of other creditor countries of the Bank. Chile has been an instrument for fulfilling the IBD’s mission, as a laboratory country for strategies and incipient programs in the region, such as being the interlocutor country of the permanent international forum on development policies run by the IBD. Chile and the IBD have worked together to find more and better forms of bringing about development. And together they have found formulas for the design and execution of projects, which, supported by the IBD’s financial resources and consultation, have been developed as pioneer projects in Chile, and then have been evaluated and replicated in other countries of the region. Working together, Chile and the IBD have opened new horizons in areas such as multisectoral credit, regional development, social housing, vocational training, and science and technology, among others. To sum up, Chile has served as a mine of innovations that have improved the standard of living of Chileans and, subsequently, of many other Latin Americans and people in the Caribbean. Chile, cantera de innovaciones Aunando aspiraciones, experiencias, ideas y recursos, Chile y el BID mantienen una relación de mutua colaboración que no sólo ha derivado en beneficios recíprocos sino que también ha servido al progreso de los demás países prestatarios del Banco. Chile ha sido un instrumento para el cumplimiento de la misión del BID, tanto como país laboratorio de estrategias y programas incoativos en la región, como siendo país interlocutor del permanente foro internacional sobre las políticas de desarrollo que conduce el BID. Juntos, Chile y el BID han trabajado en la búsqueda de más y mejores formas de propiciar el desarrollo. Y juntos han encontrado formulas para el diseño y ejecución de proyectos que, contando con el financiamiento y asesoría del BID, han sido desarrollados en forma pionera en Chile y luego han sido evaluados y replicados en otros países de la región. Trabajando juntos, Chile y el BID abrieron nuevos horizontes en materia de crédito multisectoral, desarrollo regional, vivienda social, capacitación laboral y ciencia y tecnología, entre otros. En síntesis, Chile ha servido como una cantera de innovaciones que han

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mejorado las condiciones de vida de chilenos y, subsiguientemente, de muchos otros latinoamericanos y caribeños. Excerpt from a presentation held at a conference entitled “Inovando con Chile” (Innovating with Chile), which celebrated 40 years of cooperation between the IBD and Chile, held in Santiago in 2005.

CHAPTER 1

Introduction: Model Performance or Precarious Employment?

S

onia lives in a low-income neighborhood of Santiago called Pedro Aguirre Cerda. She and her husband, Germán, have one daughter. They live in an area where most of the people I interviewed complained that at least one member of their family was unemployed. Sonia had lost her previous job with a cleaning subcontractor two months prior to our interview when they realized that she was pregnant. She shrugged her shoulders and said: “They would have thrown me out anyway. It’s not as though I can take the baby to work with me. Also, the shifts were too long. We sometimes did three or four jobs in a day . . . plus the travel time. You can’t do that with a baby.”1 The subcontractor Sonia worked for employed between 40 and 50 women, whom he sent on different cleaning jobs all over Santiago. Sonia told me that some of the women had contracts, but only fixed-term ones. “Sometimes, they just renewed the contracts, but sometimes they didn’t, and we just continued to work for them anyway. It was very up and down, depending on whether they had jobs to send us on. Some days I would show up and they’d send me home, and there I’d stay for a week or so, until they’d call me for the next job.”2 At work, Sonia was paid by the hour, but the travel time it took her to get from one job to another was not remunerated. Altogether, her monthly income from this job amounted to about 60,000 Chilean pesos, equivalent to 110 US$, or just over half the official minimum wage at the time, although she said she easily worked a 48-hour week.3 The thought of lodging a formal complaint about her employment conditions, and especially the cause of her unemployment with the local labor office that deals with violations of employment legislation, did not occur to her. And, when I asked her about whether there had been a union at her former workplace, she just laughed and exclaimed, “What union?! There’s no union. They forbade it. They’d throw us all out!”4 So at the time of our interview, Sonia was about seven months pregnant and making paper bags from wrapping paper in her home for a small company that sold them on to a large Santiago department store that used it to wrap up

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presents. The paper was delivered at her doorstep, she had to cut it to size, fold it, and glue it into a bag. Every bag took her about five minutes to put together, and she was paid 20 pesos for a medium sized bag, 25 pesos for a large one. Over the course of the month, she earned about 25,000 pesos (US$ 45).5 The job was convenient for her as she was pregnant, but she was earning a pittance, and obviously had no contract, health or pension insurance. And the work was highly dependent on demand: sometimes she was pressured to produce as much as she could, and other times a week went by during which she received no work. Sonia had already enquired at the municipal administration whether she could put the baby into the local childcare center for low-income residents, so that she would be able to go to work again, but they had told her that there would be no available place for at least a year. Her family cannot help her as they live in the south of Chile. So, when I asked her what she would do once her baby was born, she replied, “Go on, that’s all.”6 Sonia’s husband, Germán, is a plumber whose contract at a building site had expired about four months before I interviewed him. He had not been able to find a new contract as the building sector collapsed with the economic crisis. As he had only a fixed-term contract when his contract expired, he neither received any severance pay nor was he entitled to any unemployment benefit. At the time of our interview, he sold ice-cream on the buses in Santiago. He made about 40,000 pesos a month (US$ 73), but with this money he had to buy the goods he sold, and he also expected to lose about one load of goods every week that the police would confiscate when he would be stopped and arrested for trading without a license. He counted this, and the night in jail that resulted from his inability to pay the fine, as part of his trading costs. His net income amounted to about22,000 pesos (US$ 40) per month. Germán was looking for work through his network of friends. He said that in his experience this was the quickest way of finding new employment. His friends and former colleagues would be on the look out for work, and also let him know where new building sites were being set up. Germán said that his best chance of finding a new job would be with foremen who already knew him from the previous occasions that he had worked with them. He blamed his inability to find new work on the economic situation. Normally it doesn’t take this long. Normally, it takes me about a month or maximum two to find something new. Also, it’s different if you know you have something lined up. If I knew I would be able to start a new job in a month’s time, then it would be different. I would just sell the ice-cream . . . knowing that next month there’ll be money again. But with this crisis, the jobs have dried up . . . there’s no work, not even day jobs, never mind with contracts.7

At the time of this interview, Chile had not yet implemented its new unemployment insurance scheme. Under the new scheme, Germán would have been entitled to a one-off payment of just over a sixth of the minimum wage that he would have accumulated in his personal savings account during the seven

Model Performance/Precarious Employment

●

5

months that his job lasted. Even if Germán had had an open-ended contract, he would not have been entitled to unemployment insurance as he worked only for seven months. So overall, the new unemployment insurance would not have made much difference in Germán’s particular case. I relate the situation of Sonia and Germán since they are the sort of people that this book is about, even though their names and faces will be lost in the statistics once the Chilean labor market is discussed in more detail. Sonia and Germán, moreover, are not isolated cases that one could brush off as exceptions to the rule in a generally prosperous labor market. Their situations are in fact rather typical of a certain segment of labor markets in developing countries across the world, particularly of low income, informal jobs with a low skill component. Their cases also serve to highlight some of the issues and questions that this book will raise. For example, both Sonia and Germán considered themselves to be unemployed, but according to official statistics they were employed. Their jobs were unstable, informal, badly paid, and of very low quality; they especially lacked social security provision. Sonia and Germán are rotating between low quality jobs with little hope of achieving a more stable employment situation. In terms of their income level, the official statistics would define them as working poor. And Sonia’s case especially illustrates the issues of unenforced or unenforceable labor legislation. Furthermore, her job of making paper bags by hand is the epitome of unproductive employment. I will consider each of these issues in turn. Since both Sonia and Germán engaged in remunerated activities (during the week or month prior to the time I interviewed them) an official employment survey would consider them to be employed. Germán, however, considers himself to be unemployed, while Sonia considers her situation to be a little bit more ambiguous: on the one hand, she lost her job, but on the other, she realizes that the work that she took on to temporarily tide over a spell of unemployment will probably turn into a semipermanent arrangement as the lack of childcare facilities in the community means that she will not be able to return to her previous job. However, as both Sonia and Germán are officially employed, they are not part of the Chilean official unemployment rate of 9.8 percent that was measured in 1999. This means that official labor market statistics significantly underestimate the extent of the problems with employment.8 While labor market policy focuses on the unemployed, people such as Sonia and Germán are ignored. With their combined income of 55,000 pesos (US$ 100), which has to feed three people, Sonia, Germán and their little daughter fall squarely under the Chilean poverty line. They are part of a significant proportion of “working poor” that persists in Chile despite the country’s remarkable track record of economic growth since the mid-1980s. Their situation of poverty is temporary though: as soon as Germán finds a new job, his income will lift them above the poverty line again . . . until his next bout of unemployment. This illustrates the vulnerability of people such as Sonia and Germán to the economic cycle. They live in the lowest quintile of the income distribution scale. In a recession, they are the first to suffer and in an upswing, the last to benefit.

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In fact, we do not even know for certain that they will benefit during periods of economic growth. They may pass through fewer and shorter bouts of unemployment, and their wages may increase a bit more as a result of economic growth, but, as we will see in chapter 4, their working conditions are unlikely to change, no matter how good the economic cycle gets. Essentially, workers such as Sonia and Germán are rotating between inherently unstable and low quality jobs. They did not finish their primary education and consequently do not have a formal qualification. Germán learnt how to be a plumber through a series of jobs he held on building sites “when the times were good” (in the early 1990s). However, he has worked on construction sites not only as a plumber but also in all sorts of capacities, often only as a day laborer. Sometimes he has had formal written contracts, although these have never been open-ended, but he often works without a contract. As for Sonia, she has never held an open-ended contract either, and the subcontractors that she has worked for mostly do not give her a contract, not even a fixed-term one. As a result of their lack of education and formal skills, neither Sonia nor Germán is in a position to argue with their employers, as they are easily replaceable by a host of other unemployed people looking for work. Thus, they rotate from one precarious job to another. Of their own account, it is unlikely that they would be able to break out of this vicious circle. They lurch from one unemployment crisis to another and are always obliged to take the first job that comes along, which explains why Germán often works as a day laborer even though he would earn more as a plumber. Another important consequence of the informality and instability of their work is that they are not adequately covered by the social security system. If Germán has a formal written contract, then his employer deducts contributions from his wages for both his pension fund and health insurance. If he does not have a formal written contract then no contributions are made. If either Sonia, Germán or their daughter then have a health problem, they have to obtain a certificate from their local municipal administration, the so-called tarjeta de indigente, which states that they are indigent, so that they can then go to the local hospital (la posta) for medical care. As for Germán’s pension fund, the irregularity of his contributions and their generally short durations mean that it is impossible for him to accumulate the savings required in the future to finance a pension that will keep him and Sonia above the poverty line. Furthermore, he will not qualify for the minimum pension that the state guarantees either, as he will not have contributed to the social security system for the required minimum period of 20 years, which is a prerequisite for obtaining such a pension. Their future poverty is therefore guaranteed, unless they can continue to work indefinitely. The case of Sonia’s job in particular further highlights the problems of the enforcement of legislation. As she is working informally, even the most basic regulations regarding the minimum wage, social security pay, the working week, and overtime pay are not enforced. In addition, Sonia clearly was fired illegally, her firm does not allow its workers to establish a union and does not provide the childcare facilities that it should.9 Theoretically, Sonia could lodge a complaint


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with the Labor Office regarding all of these issues. She would then have to prove in a labor court that she had an employment relationship with her former employer, a procedure that is time-consuming and costly, but more importantly, that would require a level of understanding that Sonia does not possess—an understanding of employment legislation and an ability to fight her way through a maze of bureaucracy. This is why throughout this book I will emphasize the importance of formal written contracts. Even though workers who were not given a contract can theoretically claim their rights in court, most do not even know about this option or would never attempt to do so, especially since workers without contracts are generally less educated than workers with contracts. Sonia’s situation also brings up issues of work mentality and culture, which are difficult issues to quantify and thus normally avoided by analysts. On the one hand, there is the problem that Sonia obviously would never consider complaining about her working conditions as she knows that she would be fired immediately as a result. On the other hand, she does not consider using official channels partly because she is uninformed as to what they can do for her and partly because she considers that there is no point. Her employer on the other hand is plainly ignoring all employment regulations, to a large extent probably because the firm can get away with it. By no means all Chilean firms treat their workers as Sonia’s employer treated her. But examples do abound of firms that plainly exploit their workers and blatantly disregard even the most basic legislation, especially among smaller firms. These examples are indicative of a mentality that views workers as just another resource from which they can extract profit. As the former leader of one employers’ association, Roberto Fantuzzi, once put it: “there’s a kind of extensive social insensitivity: many employers regard their workers as just another input, and not as people.”10 There are costs associated with these problems. First, they lead to a vicious circle of unproductivity as workers feel exploited and underpaid, and therefore work as little as possible.11 Second, they often lead to higher job rotation, which in the end can cost the employer money, as new workers have to be hired and trained. And a third negative consequence is that if employers shirk their responsibilities or ignore legislation, it is ultimately the state that has to pick up the bill, which increases fiscal expenditures. A typical example of this is that if Sonia or anyone in her family has to get medical care, the state has to pay for this service as her employer did not pay her health insurance contributions. And as she grows older, the same will most likely go for her pension. One of the interesting and rather unexpected findings that came out of my numerous personal interviews with Chilean workers was that I could tell very early on in the conversation whether he or she worked for a Chilean or a foreign owned firm. The latter tended to have better labor relations, invested significant amounts in training their workforce, complied with regulations, and generally even exceeded them, for example, by contracting private health insurance for all workers regardless of their wages. In the words of a warehouse manager who worked for Clorox in Chile and had the same health insurance contract as his manager: “You could offer me a job with a Chilean company at higher pay, but

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I wouldn’t take it. I like working here because everybody is treated the same, and they respect you. As a workplace, it’s tops.”12 It is possible to argue that Sonia and Germán are both exemplary cases of the modern flexible labor market in a developing country. Both work (or in Germán’s case worked) for small subcontractors whose own business situation is rather precarious. When demand for their work slacks, people such as Sonia and Germán are hit directly through loss of income or employment. Not only do they hold jobs with low income and no security or insurance, but they also have to assume the full risk of the economic cycle themselves. Subcontracting is perhaps the most typical example of a flexible employment relationship, but fixedterm contracts are also very much a part of these arrangements, as are piecework and freelance contracts. Many analysts would cite cases such as Sonia and Germán’s as proof of the fact that employment in Chile has become much more precarious than it was before. But you could also argue that informal, low income work without formalized contractual relationships has always existed in Chile and Latin America under different guises, and that flexible modern forms of contracting or subcontracting are merely formalizing what has always existed. While Chile certainly went through a period of state-led industrialization in which the majority of labor relationships were very stable, the International Labor Organization’s (ILO) historical data also shows that approximately a third of the labor force worked informally.13 It is actually rather difficult to establish empirically whether the Chilean labor market has become more precarious or not as a result of Chile’s neoliberal reforms, because there is little detailed data on employment prior to the household surveys that were instituted in 1990.14 But anecdotal evidence, qualitative studies, and the few employment surveys that were undertaken prior to 1990 do suggest that nonstandard forms of contracting, especially subcontracting, have increased in recent decades. So just how typical are workers such as Sonia and Germán? Has all the impressive economic growth that Chile generated during the 1990s together with a declining unemployment rate and a halved poverty rate somehow passed them by? The labor market in any country, especially in a developing one, is the main mechanism through which growth and economic development are passed on to the individual. It is a filter through which wealth either trickles down or does not trickle down, depending on the terms and conditions attached to employment. Whether a person has a job or not is the first key question to ask. And if the answer is affirmative, it is at least relevant to go on to ask what kind of a job it is, as the cases of Sonia and Germán illustrate. But this second question is rarely asked in policy debates, which tend to focus on unemployment rates. When I first arrived in Santiago to undertake research on the Chilean labor market, Chile was reeling from the effects of an economic crisis. The country had become accustomed to growth rates averaging 7 percent during the 1990s, so the economic slowdown and high unemployment rates caused by the Asian financial crisis in 1998 came as a terrible shock. Within one year, unemployment in Santiago more than doubled, from 6.9 percent to 15.4 percent,


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according to the statistics of the Universidad de Chile, which runs an independent labor market survey, or increased from 6.4 percent to 9.8 percent, according to official nationwide statistics. Almost overnight, the streets of Santiago were overflowing with street vendors. The same was true of public buses. An ice-cream vendor would get into the bus just as the man selling shoelaces gets off, while a musician entertained us with hoarse renditions of Violetta Parra, claiming that our donations would allow him to feed his family that night. Every month the headlines of Chile’s main newspapers screamed that the unemployment rate had increased. El Mercurio, La Segunda, and La Tercera, again and again printed the rate in large letters on their front pages and reported on the slowing economic activity. The jitters were palpable in the ministries and government offices. Officials were in a continuous state of nervous anxiety as to whether or not their employment programs were generating enough jobs to keep the official unemployment rate below 10 percent. These jitters turned into widespread panic in the run up to the 1999 election as the rising unemployment rate turned an election that should have been a foregone conclusion into a very close race indeed, almost bringing down the government. Within six months of assuming office, unemployment brought the government of President Lagos to its knees. The left-wing government, which had set out to prove that it could govern Chile without letting the country slide into economic chaos, did not even get a chance to savor its election victory. Electoral promises of instituting an unemployment insurance system and implementing labor reform were put on hold while the government grappled with the economic crisis. Employers accused the government of creating economic uncertainty because it threatened them with labor reform, while members of the government accused employers of refusing to generate jobs in order to sabotage the new left-wing government. While the media was setting the government and the Chilean population into a panic about high unemployment rates, in Greater Santiago I was conducting a labor market survey that showed that official unemployment statistics did not tell even half the story. Perhaps the unemployment rate once was an appropriate measure for assessing the health of the formal labor market in developing economies where most of the economic activity was controlled by the state. But now it is an extremely poor indicator of the overall state of a modern labor market. Can workers such as Sonia and Germán afford to be unemployed if they are not covered by an unemployment insurance system and do not receive other benefit payments either? The interviews I carried out with them and others suggested that they could not. Informal employment has always existed in developing economies. So have fixed-term contracts and subcontracts. Yet, governments have done very little to monitor these issues. It seems that as long as unemployment rates are within limits that are considered reasonable by their electorate, politicians are happy. The Chilean government does not publish official data on how many workers are underemployed. It does not publish official data on how many are employed without formal written contracts. Nor does it publish official data on how many

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are not covered by the social security system. In fact, the questions of whether a worker has signed a contract or is contributing to social security are not even included in the official labor market survey. Never did I see a headline in a Chilean newspaper that proclaimed, “50% of the workforce will end up without a pension!” or “23% of wage-earners without formal contracts!” Headlines, when they referred to labor market issues, were always about the unemployment rate. This means that the quality of employment and its links with economic development, poverty, income distribution, social security coverage, and the overall standard of living are not even part of public debates on the labor market, neither in the media, nor in political discourse. The dilemma of cases such as Sonia and Germán’s—their precarious working conditions and their exclusion from official statistics—attracted my attention when I first began to study the Chilean labor market. Most of all, I was surprised to find how little factual information was available on these situations. Concepts such as precarious employment or low quality employment were not consistently defined in the literature, and therefore not measured. And, of course, since they never made it into the headlines of the newspapers, they did not really make it into mainstream political discourse either. I began to wonder whether what was often portrayed in the literature as an example of a successful, flexibilized labor market was in fact merely a labor market that had achieved a low unemployment rate during the 1990s but generated mainly precarious, informal jobs, which the statistics simply did not mention and which at the first sign of slowed economic growth turned into an explosive unemployment rate. During my initial review of the Chilean labor market in 1999, three issues in particular attracted my attention. Apart from a lack of detail on precarious working conditions and their excessive focus on the unemployment rate mentioned above, policymakers were literally groping in the dark whenever they needed data on specific issues, such as the proportion of child labor or the proportion of the labor force that does not comply with the basic requirements to obtain a minimum pension. Second, I found that opinions of experts and policymakers alike, regardless of political persuasion, were remarkably unquestioning of the current labor market structure in Chile, which means that the policy debate was essentially very limited and highly segmented between unions and everybody else. Third, I was struck by the incoherence between the reality of the labor market that I was observing and the concerns of the policymakers dealing with its legislative reform. I shall address each of these issues in turn by giving examples to illustrate these points. Perhaps the most striking example of limited information is the official National Employment Survey, which does not even ask workers whether they have a written contract, or what type of contract they have, although this is perhaps the single most important determinant of an individual’s status and entitlements under Chilean labor market legislation. Government advisors concerned about the excessive flexibilization obtained information on working conditions from the national household survey, not from the official employment survey. And even though the data from the household survey was relatively widely available, nobody seemed to have undertaken a comprehensive study to


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find either the number of people working under the same conditions as Sonia and Germán or the extent to which their proportion was increasing, as consistent time-series data is difficult to construct if you have to use surveys that were not really designed to measure this. And data on more complex issues, such as subcontracting, was practically nonexistent, even from unofficial sources. This means that throughout the 1990s, the Ministry of Labor, for instance, has had to design legislation without any knowledge of key data. For example, when a new unemployment insurance scheme was proposed, officials did not know how the average period of job tenure in Chile and the average period of unemployment were related—a crucial fact, given that the structure of the proposal was based on the connection between the two. They had literally designed its structure based on “guesstimates.” Worse, they did not know exactly what proportion of the labor force would be qualifying for a minimum pension in the future, and how many people would fall short of the requirements for even a minimum pension, and thus be likely to become future welfare recipients. A quotation from the work of Alberto Arenas, now the Director of Budgeting at the Ministry of Finance and one of Chile’s foremost experts on the pension system, illustrates the extent to which policymakers were in the dark about the reality of the employment situation, and consequently also about the pension situation also: One of the negative consequences of the lack of concern for the subject of pension coverage during the 1980s and 1990s is the inexistence of databases that can provide information on the type of workers who should be contributing to the pension system . . . .The main obstacle to designing specific and integrated policies that attempt to increase the coverage of the pension system is the lack of records and specific information regarding those workers who stop contributing to the system either altogether or for periods of time.15

Since 2002, the availability of data in Chile has improved. Many of the gaps in the information have now been addressed by a nationwide panel survey and through two nationwide household surveys commissioned by the Ministry of Labor to assess the situation of pension coverage over time. In the absence of time series data, these surveys have had to resort to asking workers about their historical employment situations, a method which reduces the reliability of the resulting data. And a more comprehensive national employment survey, which is the source of official data, will finally be instituted in 2006. However, for most of the last 15 years, labor market data is sketchy. As we will see in chapter 4, the provision of data or the lack thereof is a policy in itself. Apart from this lack of information, the second point that particularly caught my attention during my initial research was that opinions on labor market issues were remarkably homogeneous, both in their unquestioning acceptance of the labor market model as it stands today as well as in the biases of their critiques. This may sound contradictory. It means that the legislation as it stood at the time (and still stands) was a reflection of the reforms implemented by the military administration, which had liberalized the labor market in line with the other neoliberal policies introduced in all areas of the Chilean economy. It was

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generally accepted that generating a highly flexible labor market is the only possible policy option for a country integrated into the globalized world economy. Opinions differed merely as to how this basic model should be adjusted to accommodate the concerns of workers and employers. Depending on their political bias, some experts pleaded for further flexibilization, whilst others pointed out the need for greater protection of the rights of the labor force. So while the overall acceptance of the model was unanimous among experts and policymakers, critiques of its finer details were split roughly along party lines, all of which have their own rhetoric.16 The only vociferous critiques of the model came from the main representative body of the unions, but were based on an insistence on the former status quo rather than on a viable alternative proposal. Above all, in the informational vacuum described above, there was a lot of space for opining on issues of labor market policy based on established prejudices, and for political or historical biases, rather than on facts. One of the most salient examples of such debates is the insistence of the critics of the neoliberal model that greater social equity can be achieved by according the unions more extensive collective bargaining rights. But they discuss neither whether such legislation would have any practical effect, given the low level of unionization in Chile, nor whether this would be the best method for achieving greater equity. And most importantly, they do not ask whether the model is inherently inequitable: do Chilean workers, for example, take home a lower proportion of a company’s sales revenue than workers in other countries? Or is it simply that too many of them are engaged in unproductive activities, and that the Chilean economy is not generating enough productive jobs to absorb the entire labor force? During my initial research, I was further struck, as mentioned in the third point above, by the incongruence between the reality of the labor market that I was observing and the theoretical concerns of the reform proposals made by policymakers. Apart from the issue of unemployment, experts and officials were mainly fighting over the details of collective bargaining arrangements and strike regulations. Needless to say, people like Sonia and Germán did not find that such discussions helped in the least.17 Sonia and Germán were concerned with the security of their jobs and incomes, and the wages they were earning. And if they did not have a job, they were concerned about surviving and finding a new one. During my time in Santiago, I undertook at least one hundred interviews with workers from all kinds of different economic sectors and income levels, with the most varied range of jobs imaginable. In addition, I ran a labor market survey of nearly 1,000 households, which was representative of the Santiago labor market—a survey that I specifically designed to ask all the questions that the other labor market surveys ignored. Throughout this research, I was struck by how critical the employment and income stability of the family’s principal earner were to the entire household’s well-being. Whether the person had a contract, whether this contract was indefinite, whether it paid social security contributions, and whether its income was regular and stable, all seemed to be at least as important as the actual level of income. This became especially obvious in situations where


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the household had to face a crisis, such as unemployment, illness, or disability. These situations showed that families had almost no reserves to fall back on in case of an emergency and produced a sharp and visible decline in the well-being of the entire household, which almost always included the loss of access to basic services of water, gas, and electricity.18 A specific example will help to illustrate this point: one of the first steps in the preparation of my survey was to observe and participate in another labor market survey.19 During a week of incessant interviewing and conversations, in which I was given the most comprehensive and unusual sightseeing tour of the poorer districts of Santiago, I was struck by the difference in the standard of living along the same street, even though the circumstances of the people I talked to were relatively similar, especially regarding their work and earnings. Juan-Pablo from La Granja, a low-income district of Santiago, for example, is a bricklayer with two children. His wife worked as a maid (nana) in one of the richer districts three days a week. He earned the minimum wage and worked the regular 48-hour week spread over six days. His house was shabby with the paint flaking off its outside walls, a wooden plank covering a hole in the roof, and a noticeable smell of damp emanating from the walls. Around the corner of the same block, lived his cousin Mauricio, who worked as a machine operator in a factory, along with his three children and wife, who took to ironing two days a week. His house had recently been extended and repainted, his family was better dressed, and his front yard even sported the odd flower instead of being strewn with bits of building materials and rubbish. Both cousins earned roughly the same wage. The difference was that Mauricio had held the same job for the last three years and felt relatively secure of his position despite the bad economic climate, while Juan-Pablo had been contracted for six months and knew that within the next two months he would lose his job and would have to look for another, just as he has done at least once a year for the last five years. This pattern repeated itself all over Santiago to the point that, by the end of one week of interviewing, I was able to judge by the exterior of a house, often just by its smell, and certainly by the aspect of the people who lived there, whether at least one member of the family held a stable job with regular income or not. It made the difference between poverty and getting by. As the examples described above show, employment is thus much more than a source of income for the individual worker. It impacts the material security and well-being of entire families, it determines their ability to deal with contingencies and their ability to make progress and improve their standard of living. And it defines their ability to plan the future. While this may seem obvious, it is astonishing how little this simple fact is taken into account by policymakers and the so-called labor market experts. Official labor policy is mainly concerned with the number of available jobs and their associated wage levels, as well as with the functioning of the labor market as a component of the overall economy. As the following chapter will argue in more detail, this means that economists are concerned with productivity and growth, and regard unemployment rates as the principal indicator of the labor market’s state of health. Labor is thus seen as a production factor of the economy. Moreover, it is the view of economists that

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we are concerned with here because they undoubtedly wield the most influence on policymakers in Chile. These conclusions induced me to search for a theoretical framework that could be applied to the labor market and break up these standard analytical perspectives, and which would regard workers as individuals and not as mere factors of production or components of a social structure, while at the same time being acceptable to economists. This search led to the capability approach, which I consider to be a multifaceted and comprehensive approach that incorporates the various perspectives mentioned above. As chapter 2 will discuss in more detail, applying Sen’s approach to the labor market will show that looking almost exclusively at the unemployment rate (i.e., at the quantity of employment) would be equivalent to considering only the quantity of wealth generated in a country (i.e., income per capita) with complete disregard of what this wealth or employment enables people to do with their lives, and of how it is distributed. Of course, it is always possible to argue that having a job is better than being unemployed, which is similar to saying that having some food, any food, is better than starving. This is obvious. The point is that not all food, or in our case not all employment, allows people to live well. The most salient fact that illustrates this point is that a significant percentage of those who work are poor.20 Therefore, by focusing solely on the availability of food or employment, we find out nothing about their distribution or the freedoms they generate to live a fulfilled life. In the case of the labor market, Sen’s approach implies that other variables should also be considered in the context of the employment scenario. In the same way that human development cannot be based on income per capita alone, an appropriate indicator of employment cannot be based entirely on the number of jobs available. Such an indicator would also have to include other variables in addition to the unemployment rate and levels of income. Good information systems and appropriate measurement of labor market variables are at the heart of good labor market policy. Without comprehensive and reliable statistics that allow analysts to make accurate projections as to the future development of their labor force and their employment patterns, policymakers cannot make informed decisions. This is why this book will return again and again to the discussion of the quality and availability of data. Many of the issues raised in this chapter so far are not at all unique to Chile. Almost all countries have a percentage of the labor force that is poor, low skilled, unproductive, unemployed or underemployed, and often excluded from economic growth.21 And most countries, especially in Europe, have had to debate issues of labor regulation and measures to bring down unemployment rates that appear to be stuck at historically high levels.22 Some of these countries, such as Ireland, the Netherlands, and the United Kingdom, have gone further than others in deregulating their labor markets. But deregulating a labor market in a developed country that has over time achieved a high standard of living for a majority of the population and has established a comprehensive social security system is a very different matter from deregulating a labor market in which only


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a relatively small proportion of the population has achieved a high standard of living, where a large proportion of the labor force works informally for low wages and where there is no comprehensive social security system. For all its progress during the last decades, Chile is nevertheless part of the second group of countries: it deregulated its labor market without having achieved a sustainable high standard of living for the majority of its population and without having implemented a comprehensive social security system for all its workers. So Chilean workers have had to rely on economic growth to improve their standard of living. Their employment opportunities have constituted the principal vehicle of these improvements. Yet the country’s highly unequal income distribution also means that most of its economic growth accrues to the highest income decile. Despite its inequitable income distribution, Chile nevertheless became the development model for the rest of Latin America during the 1990s. The country successfully turned itself from one of the many unstable and crisis-ridden Latin American economies into a politically and economically stable, high growth economy. It achieved this by turning itself into the model student, first of neoliberal structural adjustment policies and then of Washington Consensus policies. During the 1980s (after a Wagnerian economic crisis in 1982), policy focus was on macroeconomic variables so as to lay down the prerequisites for stable economic growth. Since its structural adjustment policies and subsequent neoliberal reforms were carried out under a military dictatorship, they went further and deeper than in other countries. Chile also began its reforms in the mid1970s, much earlier than other Latin American countries. When the country transitioned back to democracy in 1990, the economic policy framework was essentially maintained. However, although the democratic government of Patricio Aylwin took over a relatively healthy economic environment (by Chile’s historical standards), it also inherited a country in which poverty rates had increased among at least 40 percent of the population, and in which the distribution of income had deteriorated to a point where the top decile had accumulated over 45 percent of the country’s wealth.23 It is the fact that Chile averaged growth rates of 7 percent in the period leading up to the economic downturn in 1998 together with halving the poverty rate that turned the country into a model case study for the rest of the continent. In particular, Chile’s social security structures have been copied elsewhere. Its pension system, for example, has served as a basic model for many other countries, including the United States, which were also looking at privatizing their own systems. More recently, Chile has devised an unemployment insurance scheme based on individual savings, which is also being touted as a model for other countries. The same goes for Chile’s vocational training system and its specific social programs that target vulnerable groups, such as young adults, in the workforce. The Chilean labor market underlies all these policies. It is therefore essential for other developing countries to understand the Chilean labor market if they are to assess whether similar reforms make sense in the context of their own country. Bolivia, for example, implemented a private pension system based on the Chilean model. However, the Bolivian labor market is even more

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informal than the Chilean one. So if Chile is now discovering that the pension system it implemented in 1981 will not adequately cover half of its contributors because their employment histories are too unstable how many Bolivian workers are likely to be adequately covered by a system based on individual savings?24 We need to understand the characteristics of the Chilean labor force, the nature of employment in Chile as well as the institutional structures that shape its labor market, and the political processes that have gone into determining its legislation and institutions, if we are to be able assess whether its social policies will work in other countries. In addition, we have to consider that Chile’s labor market is the most flexible in Latin America.25 Although its Labor Code shares the same origins as other Latin American countries, it is also the Labor Code that has undergone the most extensive reforms. While it shares the regulations on severance pay that are typical of Latin American Labor Codes, for example, it appears to be much easier and less costly to dismiss a worker in Chile than in other Latin American countries. The military dictatorship severely repressed Chile’s unions in the 1970s, decimating both their numbers and influence. Despite the country’s return to democracy, the unions never recovered their former positions of power, which means that employers in Chile dominate labor policy more than their counterparts in other countries do. And as the development institutions in Washington are continually urging Latin American countries (including Chile) to flexibilize their labor markets further, specifically to abolish their severance pay legislation, it is important to look closely at the type of employment that is being generated in the Chilean labor market, since it will give us an idea of what increased deregulation and flexibility look like in practice. For other countries in the region, the bottom line is that if Chile with all its economic growth and targeted social policies did not manage to generate quality employment during the 1990s, then they may want to come up with an alternative to the Chilean model. This book hopes to make a contribution to this debate. First of all, it places labor policy firmly at the center of the development policy agenda and human beings and their well-being at the center of labor policy. Second, it hopes to break up some of the clichés associated with the debate on labor market deregulation, simply by applying a different theoretical approach to the issues, an approach that is clear and objective in its aims and is not tarnished with the ideological fervor of either neoliberalism or its opponents. Third, this book intends to divert the traditional focus of labor market analysis away from simplistic measures, such as the unemployment rate, to a more comprehensive measure of the quality of employment. To achieve this, it will develop an employment quality indicator that is simple enough to be replicated with the generally limited data available in developing countries, but which is much more comprehensive than the unemployment rate. And last but not least, this book will present detailed information on several aspects of the Chilean labor market: its politics, the empirical evidence, and its policies. This book mainly uses data from Chile’s national household survey (generally referred to as the CASEN), and from my own survey, which I will refer to as


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the “Quality of Employment Survey.” Additional and more detailed data can be found on my Website. Throughout the book, I will discuss the quality of the data presented and its limitations. This will help achieve an understanding of the Chilean case, so that we can better assess the usefulness of the Chilean model for other developing countries. Unfortunately, this book cannot be comprehensive, especially since it was undertaken with very limited resources. On many issues, it leaves more questions open than answered. For all its detailed empirical evidence, it only begins to scratch the surface of the analysis that could and should be undertaken on the Chilean labor market. I have tried to strike a balance between satisfying the interests of policy analysts, policymakers, and, to an extent, also economists, since I consider them to be the most influential policymakers. However, in doing this, I have had to trade off breadth and depth of analysis. Also, I have had to sacrifice the specific interests that certain policy perspectives would demand. For example, I have almost completely ignored the gender perspective in an effort to present a more general overview of the Chilean labor market. Male and female workers in Chile are overrepresented in particular categories of employment. Typically, workers in construction or fishing are male, while women, for instance, are concentrated in domestic service, piecework from home, or temporary agricultural work. A range of studies has been carried out on the employment conditions of these workers, to which I would refer readers.26 They have not been specifically addressed in this book as I am concentrating on providing an overview of a labor market that is trying and largely failing to generate economic growth with equity. I would also like to add that at the time of writing, Michelle Bachelet had just been inaugurated as the fourth consecutive President from the coalition that has governed Chile since its transition to democracy in 1990. Her pre-election discourse and campaign manifesto display a slight shift with regard to the subject of employment, as she consistently professed a concern for the quality as well as the quantity of jobs that are being generated.27 Since a comprehensive reform of the pension system is likely to constitute the principal item on the agenda of the next Chilean government, it makes sense that the subject of the quality of employment acquires more importance as neither the coverage nor the contributions to the pension system are likely to increase if most of the employment that is being generated in Chile is either informal or not permanent. However, it is much too soon to tell whether Michelle Bachelet’s election discourse will translate into a genuine policy to promote the quality of employment. The following chapter begins by asking what the role of employment policy should be in the development agenda and how we must think about labor market issues. The chapter reviews the capability approach and lays out the theoretical framework for this book by examining its relevance to the subject of labor markets. It discusses why the capability approach was chosen above alternative approaches, how it transforms our perspective of the labor market, and defines the concept of “quality of employment” from the perspective of the capability approach.

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Chapter 3 presents the political debate about labor policy in Chile and discusses how this debate has set the agenda for a process of continuous labor market reform. It provides a historical account of the development of Chile’s labor market before moving on to describe recent legislative reforms in more detail. Overall, it not only shows how Chile’s three most recent democratic governments have maintained, but also refined a labor market model they inherited from a structural adjustment process carried out under a military dictatorship. Chapters 4 and 5 present empirical evidence on the reality of the Chilean labor market, both in terms of some historical developments as well as in terms of its current characteristics and structures. Specifically, chapter 4 examines the available sources of information on the Chilean labor market before moving on to the different characteristics of employment itself. It discusses these characteristics according to the type of contract or occupational position of the employed, and shows which types of jobs are being generated. The chapter incorporates the capability approach into the analysis of the data, and shows what this approach would add to a more conventional form of analysis. Chapter 5 presents some historical developments of the Chilean labor market over the last 15 years. It examines basic labor market statistics, such as the unemployment rate, as well as less frequently analyzed statistics such as changes in the types of contracts over time, social security, and size of company. It also discusses the effects of the 1999 economic crisis on the types of employment that are being generated in Chile and employment mobility. The chapter further attempts to draw some links between employment, poverty, and income distribution in Chile. To conclude, it also briefly looks at the issues of unionization and regulatory enforcement. Chapters 6 and 7 look at specific employment policies that recent Chilean governments have introduced in order to improve the situation of people such as Sonia and Germán. Chapter 6 analyses Chile’s new unemployment insurance scheme, which is the most important piece of labor market legislation that has emerged in Chile over the last decade, in detail. It examines the insurance from the perspective of the capability approach and asks whether it will really have an impact on protecting the capabilities of the unemployed. Using the results from a dedicated survey, the chapter simulates how the unemployment insurance will work in practice. Chapter 7 examines Chile’s vocational training legislation and its institutional structure. Using empirical evidence from Chile’s most recent household survey, the chapter discusses how this legislation is working out in practice. In addition to Chile’s main vocational training policy, which consists of a tax credit that allows firms to write off their training costs, the chapter also examines one of Chile’s best-known social programmers, Chile Joven, which has been copied throughout Latin America. The chapter further discusses Chile’s emergency employment program, which was implemented as a result of the economic crisis in 1999, and its apprenticeship program, which, although small, represents an important opportunity for Chile’s young workers. Together, these programs allow us to assess the effectiveness of active labor policy in the Chilean context and its potential lessons and usefulness for the region.


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On the basis of the empirical evidence discussed throughout the book and the theoretical framework within which they are presented, chapter 8 then presents a model of a quality of employment indicator, which is simple enough to be replicable in other developing countries. While the indicator does not pretend to provide a full picture of the Chilean labor market summarized in a single figure, it does, however, propose a method for including a broader range of employment characteristics so that debates on labor policy can move beyond the simplistic confines of unemployment rates, whether in Chile or elsewhere. It is intended not as an indicator that would replace the unemployment rate, but as an additional input into policy debates so that they begin to concern themselves with low quality employment as well as with unemployment as such. Chapter 9 concludes by reviewing the empirical evidence and policy analysis presented in this book, and discusses their relevance to other developing countries. Rather than providing a prescription list of policy recommendations, this chapter will concentrate on presenting some ideas that could be useful in the further discussion of the Chilean labor market and the policy options it faces. One final point should be made before delving into the analysis of the Chilean labor market itself. This book is critical of the Chilean case, especially of its status as a model for other Latin American countries. As this critical attitude may surprise some readers who have become used to thinking of Chile as a best-case scenario, it requires some explanation, given Chile’s undeniable success in generating a stable, high-growth macroeconomic environment. First of all, Chile by now outranks almost all other Latin American countries in terms of its level of human development. The country is justifiably the miracle performer of the region. Becoming the region’s best performer on so many counts, however, means that a comparison with its Latin American peers is no longer very useful to the Chilean development agenda. Chile now has to look for models outside of the region among more developed countries in order to further improve the standard of living of its population. This automatically implies a more critical perspective as we raise the standards of comparison. The second reason for my critical attitude is that no model is perfect. And since Chile has become the model for so many Latin American as well as other developing countries, we should make sure that we understand its defects before they are replicated elsewhere. The most obvious and important defect of the Chilean model is that it has failed to generate greater equity for its people. Despite all the economic growth, and despite impressive declines in poverty rates, the distribution of income remains one of the most inequitable in the world. In addition, beyond income distribution, access to quality education and health services remains highly unequal with all the implications that this has in terms of opportunities for the next generation of Chilean workers. This performance stands in sharp contrast to the development of some East Asian countries where impressive economic growth rates have been accompanied by even more impressive declines in poverty rates and by significant improvements in income distribution (especially as regards access to education and the quality of education) and where this greater equity has undoubtedly contributed to the sustained high economic growth rates that have been achieved in the region.

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Finally, the third reason for assuming a critical attitude is Chile’s position in the global economy. While the country is undoubtedly the most successful case of economic development in Latin America, there are other developing countries around the world that have achieved higher, more sustainable, and much more equitable economic growth. Again, many Asain countries spring to mind. Like all other Latin American countries, Chile fell behind the more successful Asian developing countries in the 1960s and the gap has only widened since then. Its investment in human resources in particular has lagged its Asian counterparts. This means that Chile, like its Latin American peers, has a lot of catching up to do if it is to remain competitive in a globalized economy, which is increasingly dominated by an economic giant with cheaper labor, namely China. Closing this gap in competitiveness and productivity requires investments on a massive scale as well as much foresight and careful planning. While Chile has taken some initial steps in this direction, its efforts can hardly be described as massive. Chile essentially faces two choices with regard to its development strategy. It can continue on the same path that it chose to follow for the last fifteen years, which would probably generate a strong economic growth rate averaging around 4–5 percent per annum and then gradually trickle down through the population, thus continuing to improve poverty rates. But this growth would probably be distributed in the same manner. This is the path that the first three democratic governments since 1990 have chosen. It essentially involves administrating the existing development model and allocating more resources to social services and education as they become available through economic growth. Alternatively, Chile can choose to shift gear in its development strategy by changing some of the institutional structures it inherited from Pinochet’s military regime, investing in its human resources on a massive scale, and reallocating some of its budgetary resources according to different priorities. Specifically, its investment should be directed toward sectors that generate employment as opposed to those sectors that contribute merely to GDP growth without generating much employment. This book will examine the options for the second alternative more closely, as I believe that a change in development strategy is required if Chile finally wants to successfully produce both high and sustainable growth with greater equity. So, the criticisms voiced in this book are not meant to belittle Chile’s achievements in any way. They intend to be constructive, and, above all, they intend to break away from a tendency to judge Chile’s development process in the rather simplistic language of economic growth, unemployment, or poverty rates, and instead discuss it from a perspective of the development of human capabilities.

CHAPTER 2

Employment in the Development Context: The Contribution of the Capability Approach

A

nalyzing a labor market based on the development of its unemployment rate is as simplistic as assessing a country’s level of development based solely on its GDP per capita figures. Yet, this is precisely what many labor market analysts do, especially when examining labor market developments in relation to economic growth. This is a particularly serious problem because their work is the single most important input that individuals can factor into their own function of wellbeing and quality of life. This statement is especially true in developing countries, which generally do not have a fully fledged welfare state and where the vast majority of the population has no savings to speak of. Employment and the conditions associated with a job constitute not only the material inputs of individuals and their dependents in the shape of their present disposable income, the stability of their income, their future income (in the form of pensions), and income protection in case of accident, illness or unemployment, but also the extent and coverage of other benefits, such as health insurance or maternity benefits, as well as a broad range of issues related to nontangible assets such as social capital, personal and professional development, or psychological well-being, to name but a few. Very little work has linked the capability approach to the labor market. As we will see below, even Sen, although he recognized the importance of work in determining people’s functionings and freedoms, has not written much about the labor market. With a few notable exceptions, little work has therefore been published on the link between different types of work and their associated capabilities and freedoms.1 Furthermore, the labor market is a topic very much neglected by the development literature in general. This does not mean that the literature is unaware

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of the problems associated with employment in the development context, only that it has not focused on labor market issues as a priority, and has instead analyzed them as a fallout of other policies. This has led to a neglect in the literature of the link between employment and individual well-being. For example, a significant amount of research has been done on privatizations, structural adjustment programs, the liberalization of trade and financial markets, balancing fiscal budgets, on the effects of successive economic crises that have hit developing countries, or on the targeting of social policies, the extent of poverty, and the distribution of income. In all of these cases, employment remains a secondary issue, which is discussed primarily in terms of unemployment rates. Rarely does the literature connect the dots between economic growth, poverty, and income distribution through an analysis of how employment situations transmit both economic and human development to individuals. This book hopes to contribute to filling this gap in the literature in order to draw attention to labor market issues as key factors in the development process of any country, and to highlight the important contribution that the capability approach can make to the study of employment issues. This chapter will show how the capability approach changes our perspective of the labor market by obliging us to divert attention away from the traditional study of unemployment rates to include other employment characteristics, which will be summarized under the term “quality of employment.” The first section of this chapter will situate the capability approach in its context and summarize its main tenets, as they are so fundamental to the analysis that follows in the next chapters, before contrasting it with other approaches in development thought, which could also be applied to the subject of employment. It will go on to explain why the capability approach was chosen as a theoretical framework of analysis for the Chilean labor market over alternative approaches, and as a conceptual framework for the empirical analysis presented in this book. The second half of the chapter then concentrates on explaining what the capability approach adds to our analysis of the labor market in the context of developing economies, how it can be applied in practice by leading us to put an emphasis on the quality of employment, a concept that is then defined according to the parameters of the capability approach. 1. Sen’s Capability Approach The fundamental proposition of the capability approach is a remarkably simple one: it posits that the goal of a country’s development process should be to expand the capabilities of its population to achieve valuable “beings” and “doings,” to use Sen’s own terminology.2 Amartya Sen’s capability approach is precisely an approach. It is way of thinking about the ability that human beings have to live lives that they value. The approach is often compared and contrasted with philosophical approaches, such as utilitarianism, or with comprehensive theories of social justice such as Rawls “A Theory of Justice.” The contrast with rival approaches or his improvements on their ideas is generally thought to be the capability approach’s raison d’être

Contribution of the Capability Approach

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However, by engaging in this comparison, the approach automatically becomes more complex, and even confusing to the nonspecialist, who would have to understand not only Sen’s own work, but also the development of economic thought since Adam Smith.3 This book deliberately avoids these theoretical and often philosophical debates for an eminently practical reason: policymakers do not have time to engage in these debates. They require well-thought-through solutions that can be summed up and presented to the public in simple terms. So, if we are to apply the capability approach to labor policy issues, a straightforward and comprehensible formulation is essential. A short comparison with the basic needs and social exclusion perspectives will nevertheless be presented in the next section, as the comparison is useful in understanding the contribution that the capability approach can make to labor market policy issues. Another reason for emphasizing the inherent simplicity of Sen’s approach is that although Sen is predominantly a theorist, his ideas are intimately rooted in practical reality and personal experience. So, even though the approach does often raise complex philosophical issues, this nevertheless means that we can easily relate to his concerns and understand why they are so relevant. Sen, for example, relates his personal experience of the Bengal famine of 1943, which motivated his research on famines, and also an incident involving a Muslim daily laborer who was knifed in the back while working for minimal compensation in a predominantly Hindu area during a period of sectarian violence. Sen writes: He had to go out in search of work . . . because his family had nothing to eat. The penalty of that economic unfreedom turned out to be death . . . The experience was devastating for me, and . . . also alerted me to the remarkable fact that economic unfreedom, in the form of extreme poverty, can make a person a helpless prey in the violation of other kinds of freedom: Kader Mia need not have come to a hostile area in search of income in those troubled times if his family could have managed without it.4

The story of Kader Mia illustrates that human well-being is the point of departure of Sen’s work. He sees the purpose of development as the expansion of human well-being and freedoms, so that human beings have the opportunity to expand their achievements. This is an important point that highlights the fact that his main focus is on human beings and their welfare, not on theories or economic models, even though he constantly refers to these in order to support or contrast his own ideas. This is exactly the approach that this book proposes, too. Robeyns distinguishes between three different “levels” at which the capability approach “operates”: First, as a framework of thought, second, as a critique of other approaches to welfare evaluation, and third as a formula to make interpersonal comparisons of welfare. She states that for Sen, their order of importance is precisely this ranking.5 This order of priorities is important because it shows that his primary concern is to change the way we think about well-being, before going on to deal with the specifics of the application of his ideas. This chapter reflects this order of priorities. It will first discuss the approach itself and show how it can serve as a framework of thought, second, it will briefly touch on what the approach adds to other theories, and third, it will show how

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the approach can be used to compare the welfare of individuals within the context of the labor market. As a whole, this book will mainly use the capability approach as a framework of thought and as a formula based on which the inputs into personal welfare can be measured. 1.1. Commodities and Entitlements Sen formalized his ideas by defining the commodities that a person can command with his or her given set of resources as “entitlements.” Commodities can be a certain amount of food, an object (such as a car), or also money, as the latter allows us to buy goods.6 Sen makes the distinction between commodities and entitlements because the mere existence of a commodity in an economy does not entitle a person to consume or use it. An entitlement is therefore a commodity that a person can command because he has a right to it, either because it is naturally his (e.g., his own labor), because he has bought or acquired it by some other legal means, or because it was given to him (e.g., a social security benefit). The distinction between commodities and entitlements is important primarily in Sen’s work on famines and poverty. Here he makes the observation that a given amount of a commodity, for example, food, does not guarantee that a country will not suffer from a famine. People have to have access to (to wit, have command over) this food in order not to starve; and access depends on a whole range of different factors, such as infrastructure, logistics, and transportation. It is this access that transforms the commodity into an entitlement.7 Sen points out that the reason why people do not starve in higher income countries is not because of the availability of food, but because their governments guarantee all their citizens a certain minimum standard of living or level of income, which allows them to purchase food.8 Commodities have certain characteristics: a car can serve as a means of transport or a status symbol. Food can serve as a means of nutrition, as well a having a social function (e.g., at dinner parties). But not every individual may value a commodity for the same characteristics or combination of characteristics. The various combinations of commodities that a person may possess (e.g., a car, a house, and food) are called commodity sets or vectors.9 And what a person can achieve with a given set of entitlements (or commodities) depends on personal and individual circumstances, as well as on the individual’s immediate and general environment, such as customs, traditions, laws, welfare transfers, economic and political conditions, among many factors. What is most important about the distinctions Sen makes is that the availability of a good does not necessarily or automatically imply that people achieve an intended act or state of being. This leads to the next distinction in Sen’s terminology—the “functionings.”10 1.2. Functionings Functionings are the “doings and beings” that a person achieves given the input of a particular set of commodities, his own individual circumstances and the


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physical environment that he or she lives in, and all other factors that may impact the conversion of the commodity into an achievement. In this sense, the term encompasses the concept of entitlements because it assumes access to a good, not just its mere availability. Functionings can vary from such elementary matters as being well nourished and disease-free to more complex doings and beings such as having self-respect, preserving human dignity, taking part in the life of the community, and so on.11 The difference between human beings and their individual needs is one of the aspects that play into the notion of functionings. A few examples will illustrate this point: infants, adolescents, breastfeeding mothers, manual workers, or the elderly have different nutritional requirements. The same amount or type of food may not nourish them all equally well. Food is thus simply a commodity, while being well nourished is a functioning. Achieving the same level of functioning (in this case, being well nourished) among different people may therefore require differing amounts or types of commodities (in this case, food). Similarly, the elderly have more health care requirements than the young, large poor families need more income support than small poor families, and people with special needs (e.g., those with learning disabilities or handicaps) will need more resources than the healthy. The resources that they dispose of are thus the commodities, while their abilities to stay healthy given their circumstances (or to have shelter or be educated) are their functionings. However, it is not only the specific needs of an individual that determine whether a commodity is useful to a person or not. Environmental, social, and cultural factors are equally important. People living in warm climates may not require any form of heating to be comfortable, whereas those living in cold climates will require heating, better housing, and warmer clothes. The same goes for the cultural and social standards set by the individual’s environment. A person may own enough money to buy a car, which would have, for example, the characteristics of providing transportation and saving time. Yet, whether the person will be able to make use of the characteristics of a car depends on whether he has a driving license, on whether he can drive or find somebody to drive him, or on whether there is petrol and an adequate infrastructure (roads), among other factors. Actually moving around in the car is thus the functioning. We could go on and consider any number of objects or goods in this manner. The point of the exercise is to show that the characteristics of a commodity combine with the characteristics of the individual (and her environment) to determine what she can achieve with the commodity. This combination of factors and the achievements that they facilitate is what Sen has called functionings. 12 Following the same logic, on a macroeconomic level, the availability of a commodity such as income in a country does not guarantee the well-being of its people. Sen repeatedly emphasizes this fact by pointing out that countries with high levels of GDP per capita do not necessarily achieve high standards in indicators that measure the most basic aspects of their population’s well-being (e.g., longevity, morbidity, literacy, or infant mortality etc.). The same goes for countries with low levels of income. Their relative poverty does not necessarily mean that the basic capability of their population to live a long and relatively fulfilled

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life is that much worse than the standards found in richer countries. One of the most frequently cited examples of this is Kerala—a relatively poor state in India in terms of per capita income, yet one which has some of the highest basic standard of living indicators in the developing world. Conversely, oil-rich states in the Middle East with high GDP per capita averages have very low indicators. Whether a country scores well on these human development indicators depends largely on the policies they pursue with regard to furthering their development and the well-being of their population.13 The important distinction that Sen makes by introducing the concept “functionings” is that it concentrates on what the individual can achieve with a particular commodity given the individual’s circumstances. In this process, they have to make choices and take decisions. A fact that the next concept (capabilities) links with functionings by incorporating this freedom of choice. 1.3. Capabilities While functionings describe what people actually achieve, capabilities consider what people could achieve given a certain set of commodities. Capabilities refer to the ability to do or be something. and are thus a notion of freedom in the positive sense. As Sen puts it, “the capability of a person reflects the alternative combinations of functionings the person can achieve, and from which he or she can choose one collection.”14 So, while functionings reflect the actions or states of people (e.g., being well nourished), capabilities reflect a person’s ability to do or be something. This means that if a person possesses a commodity such as food, she may have the ability to be well nourished, but she may not necessarily achieve the functioning of being well nourished, if she chooses not to eat it. Sen has often referred to the example of somebody who is on hunger strike in order to illustrate this case, although an anorexic person is probably a more pertinent example of our times. The capability of a person thus corresponds to the freedom that a person has to lead one kind of life or another, chosen from a range of options. Sen refers to these options as a capability set or vector.15 This does not mean that capabilities can give a full account of human freedom, but they are an important part of it. Like functionings, the capabilities of a person depend on a variety of factors, including personal characteristics and the circumstances of his social environment. (The same examples as stated in section 1.2 apply.) And also like functionings, capabilities refer not just to what requires material goods (e.g., food for being well nourished), but also to other states or actions that we value, such as literacy, being able to vote, expressing ourselves freely, or participating in the life of our community. This also leads us to the point that some capabilities are inherently valuable, for instance, the very freedom to choose in itself is already a valuable capability. The element of choice incorporated into the capability framework, is often referred to as human agency. Human agency is the ability of a person to make a decision based on her own values and objectives, even if its immediate effect on her own welfare is negative. A mother may have a limited amount of food,


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which she may choose to give entirely to her child thereby going hungry herself. Spending money in order to help out a friend is a similar example. The capability approach can show that with greater freedom or the ability to make certain choices, individual welfare may increase, even if we measure a lower level of material welfare as a result. In fact, the freedom to do or be something is so important a component of the capability approach that in his more recent writings Sen uses the term “freedom” more and more frequently instead of the term “capability.”16 However, Sen does point out that not all increases of choice necessarily enhance a human being’s welfare. One frequently cited example of increased choice would be the launching of the nth brand of washing powder. Once a certain level of functioning and choice is covered, the marginal value of increased choice declines. The choices that Sen talks about have to be valuable to the individual and enhance the quality of life, and not merely increase the range of options available just for the sake of it. As Pressman and Summerfield put it: “development occurs when people can do [and be] more things, not when they can buy more things.”17 So, the capability approach is based on a view of living as a combination of various “doings and beings,” where quality of life is to be assessed in terms of the capability to achieve valuable functionings. Based on this idea, the concept of poverty is thus seen as a situation of capability deprivation. The approach also looks at issues of distribution and equality in terms of capabilities. The capability approach is therefore distinct from approaches that advocate equality of opportunities as it explicitly recognizes that different people require different inputs in order to achieve the same levels of functioning or capability. In fact, the capability approach may advocate unequal opportunities if this condition is necessary for somebody to achieve the same level of welfare as somebody else (this would be the purpose, for example, of positive discrimination policies). In contrast with Martha Nussbaum, who has also elaborated on and applied the capability approach, Sen does not specify a particular list of capabilities that should be considered as the minimum inputs into a particular state of welfare. Nussbaum’s approach is more strictly normative, as she argues for a universalist or essentialist position, saying that some human needs are so fundamental that they apply all over the world, whatever the local or individual circumstances.18 She thus specifies a list of ten capabilities that a person should have in order to be considered as leading a dignified existence. Sen prefers not to define such a list of specific capabilities, arguing that since human agency and freedom are such intrinsic and inherently valuable parts of the capability approach, an a priori specification of a list of required capabilities should be avoided.19 While Nussbaum argues that a lack of such a specification complicates matters when it comes to applying the approach, Sen’s view is that we should not limit ourselves to any one such list, as “the deliberate incompleteness” of the approach enhances its richness and broad applicability.20 In a nutshell, these rather oversimplified ideas are the main tenets of Sen’s capability approach. Before going on to see what kind of analysis we can do with this relatively simple set of ideas, and how they can be applied in practice

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despite the obvious lack of specific definitions, it is important to first point out what is innovative about them. 2. Why the Capability Approach? In response to the question “equality of what?” Sen proposes capabilities as the appropriate space in which equality should be assessed. This contrasts with concepts such as income, utility, liberty, or primary goods that have been discussed by many other theorists of economic welfare or social justice.21 To understand the contribution that the capability approach makes to development thinking, it is necessary to contrast it with other frameworks of thought. Sen’s theoretical framework has often been compared to other theories of welfare or social justice. Yet, as discussed above, Sen’s approach deals with very practical concerns that have been formulated specifically in the context of development thought. In particular, his work on human development indicators has led to comparisons with other approaches to development, especially the basic needs approach. The capability approach therefore has to stand up to comparisons with theories of welfare and social justice, as well as to comparisons with other types of approaches to development as they all represent possible alternatives. Only two such approaches are discussed here—the basic needs approach and the social exclusion approach—because they essentially sum up how the Chilean government deals with issues of poverty and other forms of deprivation, as seen in the course of the following chapters. So although not strictly comparable in their scope or objectives, these approaches must be considered when asking why the capability approach, and not some other theory, should be applied to the labor market. 2.1. Basic Needs The basic needs approach became popular in the 1970s and was essentially an attempt to make the best use of development resources by ensuring that the needs of the most vulnerable would be covered. As Paul Streeten, one of the originators of the approach, put it: “its distinct contribution consists in deepening the income measure of poverty by adding physical estimates of the particular goods and services required to achieve certain results, such as adequate standards of nutrition, health, shelter, water and sanitation, and education.” 22 The five variables he names here can be considered as the basic needs that this approach regards as essential. The most elaborate theoretical presentation of the basic needs approach is presented by Doyal and Gough in A Theory of Human Need. (1991) The proponents of this approach argue that any practical application of the approach has to convert its ideas into standards that can be used in measurement. Doyal and Gough argue for such a list of needs, acknowledging that any such list is necessarily arbitrary, but nevertheless necessary as a bridge between the realms of theory and policy.23 This presupposes that it is possible to identify objective and universal human needs, without which people cannot function and contribute


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in society. It is the belief that the satisfaction of basic needs has normative precedence over anything else until such needs are satisfied. The criticisms that the basic needs approach has generated partly center on the approach’s paternalist attitude, which determines the basic needs of individuals, without considering issues of choice, freedom, or human agency. Second, it has been criticized because human need has been viewed increasingly as a subjective and culturally relative concept. And third, satisfying a certain measure of basic needs does not take into account the individual’s personal circumstances, which are partly generated by physical, political, and social environments. The basic needs approach has also been criticized for concentrating too much on goods and services, although its original proponents did make it clear that they viewed commodities as a means to an end, rather than an end in themselves.24 Whatever the criticisms, the basic needs approach must be credited for having expanded the informational basis of the study of poverty and of human development in general.25 The approach could be applied to the labor market, but would restrict interpretations to whether a person’s employment situation allows a worker to cover his basic needs. Again, the same criticisms apply: having a job and a certain level of income is not necessarily sufficient to ensure that a person can develop her capabilities, which depend as much on her personal circumstances, including the number of her dependants, as on her means. Another reason for rejecting the basic needs approach as a theoretical framework for the analysis of the Chilean labor market is that the very term “basic” would limit the scope of the study. One of the reasons why Chile is an interesting case study for the capability approach is precisely that it has achieved a more advanced level of development, which means that policymaking now has to focus on developing the capabilities of the people rather than being satisfied with indicators that suggest that most of the population’s basic needs have been fulfilled.26 The neoliberal reforms implemented by the Pinochet administration in all areas of the Chilean economy established a noninterventionist approach to social policies and labor legislation. Deregulated markets and nonintervention by the state were seen as the prerequisite for successful economic development. Social issues were left to the “trickle-down” effect, except in extreme circumstances where the state guaranteed minimum services and rights that were targeted at the extremely poor. Although Chile’s democratic governments in the 1990s have continuously emphasized their commitment to overcoming poverty and social inequality and have significantly increased social expenditure from the minimal levels of the 1980s, they have not changed the basic tenets of the economic and social policies inherited from the military dictatorship. The social policy reforms since 1990 have hence been modest, and very much subjugated to economic necessities. 2.2. Social Exclusion Originally, the term “social exclusion” was developed with reference to the European labor market and referred to those who were not adequately protected

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by the welfare state. The approach focused mainly on groups of individuals who could not participate in the ordinary activities of society (e.g., the handicapped, elderly, uneducated, or homeless). The term was then also applied to the longterm and repeatedly unemployed, in recognition of the fact that their condition also prevented them from fully participating in society or in enjoying a certain basic standard of living.27 Although the social exclusion approach was soon applied to all kinds of scenarios, and frequently applied also to developing countries, its origins as an approach to labor market analysis makes it particularly relevant in any discussion of approaches for the Chilean labor market. Social networks and relationships are recognized as extremely important by the social exclusion approach, as it is a lack of these that often leads to exclusion in the first place. The approach also looks at a relatively broad range of variables that may be used to measure social exclusion, such as income, consumption activity, or political and social activity. Social exclusion is further associated with the loss of rights associated with work and the welfare state. Precise definitions and methods of measurement obviously depend on the context under discussion, and especially on the level of development of the country it is applied to. For example, what kind of exclusion are we talking about? From having access to clean water or going to the opera?28 Given that the concept has a history of being applied to the labor market and the welfare state, and that several studies that apply the approach to Chile have been undertaken, this might have been the logical approach to analyzing the Chilean labor market.29 However, several criticisms can be leveled against those aspects of the social exclusion approach that makes it inappropriate to our purpose. The concept of social exclusion is in itself exclusive. Applied to the labor market, it would only focus on the lowest segment of jobs, or on those who cannot fully participate in the labor market. It ignores developments in other segments of the labor force, which may be equally worthy of analysis, and it does not consider whether all members of the labor force can develop their capabilities to the fullest extent possible.30 The approach only defines a problem in terms of exclusion from a certain standard, and not in terms of the capabilities that work generates. For example, the working poor may be fully participating in the labor market, but be unable to provide adequately for their dependants if their earnings are inadequate. Also, like the other frameworks of thought that we have seen so far, the social exclusion approach does not incorporate the notions of individual freedom or human agency. It essentially provides us with a top-down analysis of a problem, and does not consider which processes the individual would want to be included in. This book will examine the Chilean labor market from many different angles that range from the broad overview to the discussion of specific employment policies. The social exclusion approach, therefore, would be too limiting a perspective. 2.3. Comparison of Approaches Notwithstanding all the differences between the approaches discussed above, it is obvious that there is a degree of overlap between them. In the development


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context, all of these approaches have to face basically the same issues, to wit, first, which development policies should be given priority in order to enhance human well-being, given that so many people are still poor. Second, how and in which units should human welfare be measured so that we can assess the impact of policies and increases in well-being? While each approach places a different emphasis in its theoretical discussion, once formalized and applied in practice, they are likely to look very similar. As regards practical indicators, we will always have to define a list of variables to constitute an indicator as no direct measure of utility, capabilities, basic needs, or social capital exists. Perhaps measures of basic needs and social exclusion are the easiest to define because they refer to specific issues and not to well-being in general, but we will always be able to criticize these for being arbitrary selections of variables. And utility has to be watered down to either indicators of income, expenditure, or some other measure of preferences, while capabilities have to be reduced to indicators of functionings from which capabilities can be estimated, and at the end of the exercise this list of functionings may not look all that different from a list of basic needs. Saith has pointed out that the basic needs and capability approaches can be seen as very similar, especially when we restrict the latter to a list of “basic capabilities,” and the end of both can be seen as achieving a “minimally decent life” for all.31 Achieved functionings could be portrayed as fulfilled needs. Furthermore, when it comes to practical application, there is often very little difference between the results of either approach as they use very similar variables to measure levels of well-being (e.g., the HDIs could be theoretically backed by either approach). So, if all these approaches have to be watered down, and if none of them offer a perfect solution, we may well ask what the difference is between one or the other, given that what we end up looking at in practice is always a specific variable or list of variables. This question is difficult to answer if we compare the practical applications of these approaches, and this explains why analysts so often ask what the capability approach actually adds to the other approaches.32 The answer to this question lies not with any specific list of variables of human well-being or development that the capability approach may come up with, but rather with the underlying issues it addresses and principles that it applies. There are important fundamental and theoretical differences between the approaches, which lead to differences in the interpretation of their results. The capability approach is the only approach that considers both a commodity and the individual circumstances of a person when asking about his or her welfare. And in addition, the question it asks is neutral and objective: instead of asking how much utility (happiness) you feel, it asks whether an individual can theoretically and/or practically achieve a particular result. Certainly, the basic needs and social exclusion approaches also take into account the general circumstances that form the background to whatever they are measuring, by asking what people are socially excluded from and by defining a line of basic activities that every individual should be able to take part in. Similarly, the basic needs approach defines a list of goods that an individual

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should be able to dispose of in order to live well. But in doing this, they are both defining an a priori level of well-being that cannot take into account the personal circumstances of an individual (e.g., the need for a greater amount of food because of a specific physical need). The neglect of interpersonal variations in the conversion of commodities into functionings can be seen as one of the principal differences between the capability approach and other approaches. Sen’s capability approach is ends based rather than means based, the objective, or the end, being a person’s actual level of well-being, and not the input factors required to achieve this well-being. Another important difference is the absence of the notion of choice or freedom in the contractarian, basic needs and social exclusion approaches.33 Sen’s capability approach is philosophically more sophisticated. This also makes it applicable to a much broader range of situations because it asks after what people are able to do and be, rather than after their relative position in their respective social context. The capability approach allows us to assess rights, freedoms, and poverty within the same framework as it investigates the ability that people have to live fulfilled lives. As these are often interlinked factors, which work to enhance each other (e.g., a better functioning democracy generates more economic growth and well-being, or a free press prevents famines), the capability approach provides a much more holistic perspective of development. Sen has discussed these interlinkages in his work on poverty and famines.34 Of all the approaches that have been developed so far, the capability approach is by far the most complete and comprehensive. It can be used as a framework of thought for any kind of situation, any kind of level of development, and any group of a population. Its formalization can also be adapted to these numerous scenarios. Sugden and many others have noted that the capability approach requires a broader informational base—an issue with important practical implications, which will be discussed in due course.35 It can also be argued that the capability approach naturally encompasses most of the basic tenets of the other approaches, and goes beyond them to include issues of freedom, justice, rights, and the links between them. It is also the most appropriate approach for a country with Chile’s level of development, which has by now surpassed the most “basic” targets in most areas of its citizens’ welfare. As the analysis that follows aims to go beyond the most simple labor market issues, other approaches would be too basic. Alkire has called the capability approach “the most powerful alternative to economic growth as an objective of development” (1997). Sen is like a third way alternative in the context of development thinking as capabilities provide a more satisfactory account of the social and individual good than welfarism or classical utilitarianism. His approach stands out as the most inclusive and comprehensive of all the approaches to development, simply because it asks after a person’s capability and not after the availability of goods, for example, whether a person is well-nourished as opposed to whether food is available to him.


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3. Applications of the Capability Approach Sen’s approach has frequently been criticized for being too complex and too broadly defined to be practically applicable in any meaningful way.36 This kind of criticism can be considered as being too “perfectionist,” in the sense that it considers that capabilities themselves should be the basic measurable unit of the approach. If this had to be so, then the approach would indeed be inapplicable as it is almost impossible to take into account all the possible factors that may influence an individual’s needs in a given situation. As we have discussed above, all theoretical approaches need to be watered down to a large degree in order to make them applicable. Sen himself has provided us with numerous examples to illustrate the capability approach. His examples are drawn from a wide range of scenarios: from famines to the situation of African Americans in the United States.37 The issues considered are typically related to indicators associated with the quality of life: longevity, mortality, education (illiteracy), and health services. The most comprehensive study that illustrates Sen’s thinking is his work on India, where he considers various aspects of Indian development, such as education, social inequality, geographical inequality, and gender inequality, from the capability perspective.38 However, apart from providing illustrative examples, he has never himself applied it in all its complexity.39 Perhaps this is because he sees himself more as a theorist, but it also shows us that the capability approach is exactly that: an approach, a way of thinking about a problem, rather than a ready-made formula that can be applied to any scenario without further considerations. And that is all that any theory of social justice can ever be. Neither utilitarianism, nor Rawls’ contractual position can be applied literally. But both help us to think about how resources should be distributed and managed. A wealth of papers has by now applied the approach to the most diverse range of scenarios, proving that capabilities are indeed a practicable concept. The range of subjects covered by papers presented at various conferences on Sen’s work is testimony to this.40 The papers included work on countries with very different levels of development, various historical periods (e.g., Jewish immigrant communities in New York, early twentieth century), a broad range of topics (e.g., labor markets, trade, poverty, health), and different methods of operationalization (e.g., fuzzy set theory, social choice theory, and indicators of human well-being).41 The capability approach is relevant for any scenario related to the development of an individual, a group of people, a community, a country, a continent, the world. It should be taken into account in all areas of policymaking. Development organizations and governments have not sufficiently incorporated the ideas into their thought. They think about individual issues, but do not link them all together in one single global objective. However, there is no standard recipe for applying the approach, this simply illustrates its flexibility and universal applicability, since social justice and welfare are matters that effect every human being in some way.

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4. The Labor Market in the Context of Development Thought Chile has now reached a relatively advanced stage of economic and human development. This has important implications for how we measure the country’s progress. Indicators such as longevity, morbidity, and literacy have reached levels almost comparable to those of the most developed countries. The potential for further progress in these variables is therefore limited. However, these are average figures that disguise significant differences in terms of the distribution of these indicators. Data from the Ministry of Health’s own epidemiological data base shows that people who live in poor municipalities, and especially in poor rural communities, live between 10–15 years less than those people who live in Chile’s wealthiest municipalities, for example, in Vitacura.42 This shows that, despite all the improvements in the official indicators, the standard of living in Chile is far from comparable to that of developed countries, at least not for the vast majority of the population. Other variables therefore need to be considered in order to monitor the progress of countries in such an “intermediate” phase of development. Often quantitative indicators are no longer appropriate, and one has to turn to variables that consider quality at least as much as quantity, and that consider coverage at least as much as distribution. In the field of education, for example, where Chile has achieved almost universal basic education, this means that the focus has to switch from the expansion of the coverage of education to the completion rates of secondary education and to the quality of the education imparted.43 Or as regards healthcare, where low infant mortality and high longevity rates have been established on average, it means focusing on the quality and equity of access to the services provided instead of merely expanding the coverage of healthcare. And with regard to employment, the same logic means focusing on the quality of employment and not merely on the decreasing unemployment rate. This step, however, is difficult to achieve if development strategies continue to regard employment policy as an issue of secondary importance.

4.1. Labor Market Policies as a Fallout of Other Development Policies Within the area of development economics, the labor market is a particularly neglected topic, especially if we compare it with the attention that other policies have received. Standard textbooks on development either do not include chapters on the labor market at all, or they look only at very specific issues that lead to the typical segmentation of labor markets in developing countries. 44 This does not mean to say that the literature is unaware of the problems associated with employment in the development context, only that it has not focused on labor market issues as a priority and has instead analyzed them as a fallout of other policies. This has led to a complete neglect of the link between employment and individual well-being in the literature.45


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As was mentioned in the introduction to this chapter, a significant amount of research has been done, for example, on privatizations, structural adjustment programs, the liberalization of trade and financial markets, the targeting of social policies, balancing budgets, or the effects of successive financial crises that have hit developing countries. In all of these cases, employment remains a secondary issue. The literature may look at how all of the above have affected employment rates, especially unemployment rates, but rarely goes beyond looking at the quantity of employment and the resulting wage levels. In the context of Latin American development economics, labor policy has been even more neglected than elsewhere, evident in the manner the continent as a whole, Chile included, has lurched from one economic crisis to another. So historically, the literature has focused predominantly on stabilization strategies and different methods of overcoming the region’s vulnerability to external factors.46 Even in the Chilean literature, which has produced extensive reviews of the country’s labor market reforms, the focus on employment rates and income levels clearly predominates.47 Analysts typically discuss employment in relation with the economic crises of 1975 and 1982, showing how a more flexible, deregulated labor market and a liberalized economy in 1982 allowed the unemployment rate to come down faster than it did after the 1975 crisis. The quality of the jobs created in order to bring about this rapid decrease in the unemployment rate is, however, rarely mentioned.48 This type of interpretation is misleading as it leads to the premise that economic growth solves the problems of unemployment. In fact, it may do so only to an extent. One of the main problems with the early development models, especially in Latin America, was that despite the relatively high growth rates that were achieved, not enough employment was created to absorb the rapidly growing labor force, a growth rate that was further increased by the labor migrating from rural to urban areas.49 Nor were the benefits of growth widely spread to the lower income groups. In addition, growth in many parts of the developing world has been achieved through much capital investment. This is particularly true of Latin America given its comparatively high labor cost. The more competitive developing countries have had to become in the globalized markets, the more they have had to make their production more efficient, and, especially in Latin America, this has meant investing in fixed assets and cutting labor cost, rather than investing in human resources that might take longer to develop and pay off.50 As was discussed in the introduction to this chapter, in Latin America economic growth and the creation of jobs are not necessarily correlated, and we should therefore focus on how and whether the benefits of growth are passed on to the individual through employment. The focus in the literature on the link between economic growth and unemployment stems from a preoccupation with labor as an economic production factor. But as Supiot has commented: Labor is not some human material to be molded to the requirements of industry or trade. For the past 20 years, however, it has been considered a secondary issue throughout the world, as the object of some sort of engineering of human

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resources . . . the status given to work is not merely a matter of human resource engineering; it is in effect pivotal to the establishment of a just order.51

Considering its impact on individual well-being and, as Supiot puts it, “its pivotal role in establishing a just order,” labor market policy should be regarded as a core part of a country’s development process and determinant of the standard of living. Often social and education policies are regarded as more important by development experts, but in practice social policies affect the standard of living only at the margins—either in marginal situations or by having only a marginal impact,52 while education, on the other hand, has a more long-term effect on the individual’s standard of living. Labor policy has the most immediate and significant impact on the standard of living, yet it is generally regarded as a consequence of economic policy. It is based on the performance of the economy, and adjusted in order to enhance growth, productivity, and competition. It is not generally conceived to enhance individual well-being, as the latter is still seen as a simple fallout of economic growth. Today, no discussion of the modern labor markets would be complete without at least mentioning the words flexibility and deregulation. This is the Leitmotiv that has driven most labor reforms during the last decades, especially in Latin America, and reflects the long-standing debates between orthodox and heterodox economists with regard to labor markets: the neoliberal view being that greater flexibility is necessary to lower unemployment rates, and that all sorts of labor market regulations prevent this, the structuralist view is concerned about greater flexibility leading to low-quality jobs with higher turnover rates. Broadly speaking these stereotypes are reflections of the North American and European models.53 Latin American countries, especially Chile, have tended to follow the American model in its efforts to flexibilize, although some of these countries have advanced significantly more along this path than others. Yet, in Latin America, apart from unemployment and wage levels, we rarely come across any information or discussion related to the various aspects of labor market policy that affect the quality of employment. One of the problems with the debate on labor market flexibilization or deregulation, as Esping-Andersen and Regini have pointed out, is that it is often conducted with an ideological fervor that reduces phenomena to excessive simplicity.54 In particular, since the recent discussion of deregulation originated from concerns about unemployment in Europe, unemployment rates remain the main point of focus in the literature, even though it has been evident for a long time now that this is not really the main problem that labor market policy in developing countries needs to deal with.55 Already in 1981, Paul Streeten had this to say about the concepts of employment and unemployment: Employment and unemployment make sense only in an industrialized society where there are employment exchanges, organized and informed labor markets, and social security benefits for the unemployed who are trained workers, willing and able to work, but temporarily without a job. . . . “Employment” as interpreted in industrial countries is not the appropriate concept . . . to afford to be unemployed, a worker has to be fairly


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well off. To survive, an unemployed person must have an income from another source. The root problem is poverty, or low-productivity employment, not unemployment. Indeed, the very poor are not unemployed but work very hard and long hours in unremunerative, unproductive forms of activity. This discovery drew attention to the informal sector in the towns. . . . these people often work extremely hard, are self-employed or employed by their family, and are very poor. . . . the problem then was redefined as that of the “working poor.”56

In other words, the quality of employment matters as much as the quantity of jobs. Policy focusing exclusively on unemployment rates is overlooking the “working poor.” In order to fully understand the arguments that follow below, it is necessary to consider the role of employment in the context of developing countries from this perspective. We will then be able to appreciate why labor market policy is so important if people’s capabilities are to be expanded. However, the issue of deregulation will crop up occasionally in this book and will be incorporated into the discussion wherever appropriate. 4.2. The Labor Market as a Vehicle of Development and Expanded Capabilities This book argues that the labor market is in fact the principal vehicle that passes economic and social policy on to the individual and thus helps to generate wellbeing. It should therefore not be overlooked but specifically included in the context of the social policy debate. In order to assign it the importance it deserves, it is indispensable to remember Supiot’s words: “labor is not some human material to be molded to the requirements of industry or trade.” He goes on to argue that a common feature of how labor markets have been discussed in the literature is the dissociation of “work from the person of the worker” (i.e., the subject of law), which makes it possible to treat work as the object of a specialized market, namely the labor market. This institutional definition of work excludes any human activity involving values other than market values (e.g., self-fulfillment, the interest of the family or children, the public interest, personal freedom). He considers a broad range of variables including those aspects of employment that can generate human capabilities and functionings.57 Figure 2.1 illustrates how the labor market functions as a crucial link between economic and social policy and individual well-being. The supposition is that a sensible economic policy generates economic growth, which in turn creates jobs and determines wage levels. And the quality of the jobs an economy creates will determine a range of other factors associated with employment, for instance their level of formality, which in turn determines access to health and pension insurance. Economic growth thus trickles down to the individual in the form of income and other employment conditions, determining her capabilities and thus impacting her welfare. Similarly, figure 2.1 supposes that social policy trickles down to the individual level via the same path: that is, via the job held. This point, however, requires some contextualization. It is based on the limited ability of developing

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Figure 2.1 Individual well-being as a trickle-down effect Economic Policy

Social Policy

Trickle down through jobs

Trickle down through jobs

Individual Well-being

countries to afford fully fledged welfare states, which can support individuals through any personal or economic crisis. Although state subsidies do exist in many developing countries, they are rarely enough for the individual to live on without an additional source of income (e.g., support from other family members or odd jobs).58 So, according to this model, social security benefits only directly impact individual well-being on the margins (represented by the dotted line in the diagram). It is therefore general social policy that has the greater impact on the individual’s well-being, and not social security benefits. While social policy does dictate which minimum set of public services or benefits the individual is entitled to, it also determines the structure of social security in general, for example, whether the pension and health insurance systems are public or private, and under which conditions a person can contribute to them and benefit from them. These conditions generally depend on the employment status or contract of the individual. So, the level of these benefits is therefore clearly linked to his terms of employment. The perfect example of this is the unemployment insurance that Chile instituted in 2002, which will be discussed in chapter 6. Yet, apart from these basic benefits (health and pension insurance and education), the type of job held also determines a broad range of other entitlements that impact the welfare of the individual. These include issues of representation (union membership), childcare facilities, legal protection against unfair dismissals or the contravention of other regulatory concerns, protection against accidents, working hours, and schedules, as well as many others.59 And above all, the type of job held will determine the level of financial compensation the individual is entitled to in the case of dismissal for economic reasons (both under the current legislative system as well as under the new unemployment insurance scheme currently being implemented by the Chilean government). Equally, the level of income or other conditions attached to a job determine the quality and level of education a worker can afford for his children. (Or conversely, the quality and level of education that the individual received determined, to a large extent, the type of job he obtained.) These mechanisms illustrate that the structure of social policy trickles down to the individual predominantly through the labor market rather than through


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the state social security system. This illustrates the important role of employment and labor market policy both as a filter for economic wealth and social benefits as well as a determinant of other factors that contribute to the individual’s well-being. While these are by no means the only factors that contribute to a person’s welfare, these arguments show that the employment factor must form an integral part of the capability approach. If we thus consider the labor market from this perspective, we must consider job characteristics as much as whether a person has a job. This leads us to the concept of quality of employment, which implies a comprehensive and all-inclusive approach to the labor market that considers all aspects of work. Before discussing how the quality of employment should be defined, a few other issues related to the labor market and relevant to the capability perspective should also be pointed out. First, the quantity and quality of employment impacts the capabilities of absolutely everybody in a household in some way: either directly through the job that one has or indirectly through your dependence on someone who works, or historically because your pension depends on the job you had. Second, the quality of employment is important not only due to reasons of individual welfare, but also because of the effect it has on society as a whole: employment is an important “space,” to use Sen’s expression, in which inequality manifests itself, not only through unemployment rates but also through the job characteristics themselves.60 Variations in the quality of employment lead to inequality in wage and in social insurance and benefits. Thus, fostering the quality of employment at all levels of the labor force enhances social equality, which in turn, as Stewart shows, increases economic growth and improves social cohesion.61 Together all of these factors can result in more capabilities for the individual. Third, “good jobs” are generally also the most productive and require a higher level of skills on the part of the workers. This makes them positive contributors to economic growth, productivity, and development, and they can thus help to generate more capabilities for the population. Fourth, to developing countries a labor policy strategy is even more relevant because they are having to adjust to conditions of global competition without ever having reached the standard of living attained by the more developed countries. In terms of employment conditions, this means that they have never reached a certain minimum standard for all of their labor force. A segment has always remained marginalized, in ways that leaves them holding lower quality jobs as well as being excluded from most provisions of labor market and social security legislation. Without a specific effort to integrate this segment more fully into the labor force in general, tougher competitive conditions will penalize it further, thus increasing its marginalization. All these arguments together illustrate why it is so simplistic to think about the labor market in terms of unemployment rates and wage levels, as has indeed been recognized in the literature by some analysts. “To qualify the situation of certain countries as successful because they have been able to reduce their unemployment rates . . . can be a fallacy if we consider that this situation possibly

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doesn’t facilitate social integration for a great number of people, and instead may create a situation of reduced social cohesion and smaller possibilities to plan one’s own life.”62 This leads us to the question of what alternative can replace the traditional indicators and how this alternative is to be constructed. The following section discusses how the capability approach transforms the way employment should be viewed and defines the quality of employment based on this view. 5. The Quality of Employment 5.1. Defining the Quality of Employment Sen himself has discussed employment in terms of capabilities in his work. In his earlier writings, he recognized work as one of the key components of the entitlement exchange (“own labor”). Work and the income we receive in return for “selling our labor power” generate functionings, capabilities, and ultimately utility for the employed person.63 Selling their labor power in one way or another is the only input into the entitlement exchange that a vast majority of people have at their disposal. This is particularly true of more developed economies, such as Chile’s, in which subsistence farming has been virtually abandoned. From the very beginning, employment has thus been considered as an integral part of the capability approach. Aside from the factors that public policy can provide by constructing an appropriate infrastructure (such as health or education facilities), work and the human capital that are its prerequisite are the individual’s principal input factors into his or her function of well-being, as well as into the well-being of any of her dependants. The importance of employment has also figured in Sen’s writings on unemployment and its associated deprivations, particularly in the context of inequality.64 While recognizing the benefits associated with work other than income (e.g., as an opportunity of having a fulfilling occupation), he mainly contrasts having a job with not having a job, and thus considers unemployment as one of the “spaces” in which inequality manifests itself. In an address to the International Labor Conference in Geneva in June 1999, Sen applauded the concept of “Decent Work” launched by Juan Somavía, the current Director General of the ILO.65 This concept considers every aspect of employment, for example, working conditions, rights, social dialogue, personal goals, and self-realization as well as more standard measures such as income. “Decent work” implies far more than just having a job: it implies “opportunities . . . to obtain decent and productive work, in conditions of freedom, equity, security and human dignity.”66 Beyond the quality of work, Somavía therefore also proposes a rights-based formulation of employment, so that the concept of decent work transcends the concerns of labor market legislation to include social ethics. The concept is thus very broad and somewhat related to Sen’s own capability approach as it considers not only the availability of jobs, but also all aspects associated with work that the individual has reason to value. What the capability approach would add to this perspective, however, is first of all a set of those personal and social factors that influence the individual’s


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capability to convert the characteristics of a particular job into a set of achievable functionings. For example, losing one’s job in a European country that has high social security provisions is not the same as losing it in Chile, where there are next to none. Similarly, the capability approach would add the circumstances of the individual into the equation, particularly the number of dependants. The capability approach further adds the freedom that the individual has to convert these characteristics into a set of functionings, so that the element of human agency is introduced into our framework of thought. And finally, it transforms our frame of reference into an ends-based approach rather than focusing primarily on the means of human development. This makes the characteristics of employment important not for their own sake, but for the sake of the individual who can achieve certain functionings with them. In his work, Sen typically mentions some general capabilities that the individual has reason to value, as well as some basic capabilities that are necessary to the individual’s mere survival. Among the former, he categorizes the ability to participate in the life of the community and the ability to appear in public without shame. Among the latter are the capabilities of being adequately fed, housed, and in good health. Work provides us with a set of capabilities very comparable to these examples. Psychological studies of the effects of unemployment on the individual illustrate how work provides us with a series of benefits other than the basic income, which provides the means to our survival.67 Issues such as self-respect and self-worth, personal growth, social integration, and participation are some of the key functionings generated by work. In addition, we must consider the more basic functionings of being fed, housed, and cared for in terms of health and the assurance of future income (job security, pensions, and insurance against unemployment). As the analysis of the data presented in the following chapters will show, these factors are not solely dependent on the income earned from work. If we are to apply the capability approach to the labor market, a specific definition of what we mean by the quality of employment is essential.68 Given the points raised by the discussion so far in this chapter, the quality of employment should be defined as the capabilities and functionings generated by a job, capabilities and functionings that the individual has reason to value. This definition is the direct consequence of applying the capability approach to employment, or, to put it differently, it is the definition that integrates employment into the framework of the capability approach. It is an all-inclusive definition, one that defines employment in a manner that properly reflects its implications beyond income generation in the broadest possible terms and applies a different perspective to the labor market than those habitually considered in the literature. The quality of employment is thus a function of all the characteristics of a particular job, which lead to a given set of capabilities and functionings. The various different functionings that a person could achieve would be defined as his capability set. This leaves us with a clear and simple theoretical definition of what constitutes quality of employment, although this does not mean that such a comprehensive concept is easy to apply in practice.

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5.2. Applying the Capability Approach to the Labor Market Any overview of the literature on labor markets shows that a comprehensive approach to the labor market such as this one is rarely applied in practice, least of all in developing countries. The ILO’s own publications, and also those of other international organizations, show to what extent information on labor markets in developing countries is limited, so that the concepts that examine or require a broad range of employment variables cannot be applied to existing data.69 Apart from the lack of data, however, labor market analysts are also faced with a lack of definition. The ILO’s publication dedicated to the discussion of “Decent Work” contains only a very broad definition of the concept, but no method for how it can be measured. The very comprehensiveness of the concept can thus be seen also as constituting its main weakness: critics can easily argue that it is too general to be practically applicable. The literature on the subject has made many attempts to come to a coherent definition of what has interchangeably been called “decent work,” “quality of employment,” or simply “good jobs,” but so far, it has not found a standardized formula, since these terms not only mean different things to different people, but also vary according to the definition of the respective social actors.70 Bastelaer and Hussmanns (2000) define quality of employment rather vaguely as a “set of characteristics that determine the capability of employment to satisfy certain commonly accepted needs,” while Rodgers specifies the following list of variables that to a large extent are repeated in much of the literature on the subject: ● ● ● ●

● ● ● ● ● ● ●

Income Nonwage benefits Regularity and reliability of work and income Contractual status (e.g., permanent or temporary, autonomous, or dependent) Social protection (e.g., pensions, health, and unemployment insurance) Representation (e.g., through unions) Hours of work (duration, timing) Intensity of work Risks of accident or health problems (working environment) Involvement in decisions concerning the work (autonomy, participation) Possibilities for the application and development of skills and creativity71

Many analysts are reluctant to combine these variables into an index.72 In the words of Beatson, who examined the subject with regard to the British Labor Force Survey and the 1998 Workplace Employee Relations Survey (WERS), “Job quality as a cut-and-dried concept is not feasible unless one is prepared to make value judgments about how important different job characteristics are in relation to each other.”73 This leaves any labor market analyst with a broad range of very detailed statistics, which are almost impossible to summarize in any coherent or concise


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format. It is difficult to refute the arguments reviewed above regarding the impossibility of combining all these statistics in a single indicator, yet, they leave us with the question of what we must look at if we are not experts and want to get a quick impression of the situation of a labor market. At this point, we should remember the situation of Chile during its most recent economic downturn, which is also mentioned in the previous chapter. In the space of one year, between 1998 and 1999, the country’s unemployment rate virtually doubled. Typically, the press looks for a single figure and then stimulates public debate and opinion, which then orients public policy. As discussed in the previous chapter, the only figure that the Chilean press ever commented on during the downturn was the unemployment rate. And consequently, the only figure that public policy seemed to focus all its attention on, especially as this was during an election year, was the unemployment rate. This means that only one facet of the employment crisis was commented on. Other factors, such as underemployment, the sudden informalization of jobs, or large shifts toward short-term employment, were ignored by the commentators. And this in a country where an employment crisis would fill the capital’s public transport vehicles with ice-cream vendors, such as Germán, almost overnight. This type of problem raises the question whether it would not be better to create a more inclusive indicator of labor market developments, even if such an indicator cannot ever be a faithful reflection of all the characteristics of employment and the preferences and circumstances of the individuals employed. The authors who criticize this approach for being impracticable base their criticisms on the very ambitious objective of reflecting every aspect of a job in an indicator. A simpler approach would be more practicable and yet useful. A similar debate emerged regarding the measurement of human development and welfare and has been extensively discussed in the literature, especially with regard to the construction of the Human Development Indicator (HDI), first proposed by the UNDP in 1990. In his preface to ul Haq’s Reflections on Human Development, Streeten writes, Such indexes are useful in focusing attention and simplifying problems. They are eye-catching. They have considerable political appeal. They have a stronger impact on the mind and draw public attention more powerfully than a long list of indicators combined with a qualitative discussion. The strongest argument in their favor is that they show up the inadequacies of other indexes, such as gross national product (GNP).74

Sen’s capability approach has been widely recognized for being instrumental in shifting the debate on development away from measures of income per capita to a broader range of indicators, the improvement of which individuals have reason to value. He has argued his case in numerous papers, and it is now accepted that it is not enough to talk about income per capita when thinking about economic development, it is in fact indispensable to include other variables in the debate, specifically variables that enhance the capabilities of individuals (e.g., education), as well as variables that humans have reason to value for their own sake (e.g., longevity and good health).75

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As employment has an important impact on the quality of life and on individual well-being, Sen’s arguments are all relevant to the debate about how to look at the labor market as well. In the same way that GNP per capita is a very narrow measure of well-being, the unemployment rate is too narrow a measure to capture the development of the labor market as it fails to consider any other aspect of work other than its availability. Moreover, looking at the labor market from the perspective of unemployment rates is as simplistic and arbitrary as analyzing human well-being from the perspective of GNP per capita. These arguments show just how much the capability approach obliges us to focus on a broader concept of employment, and consequently point out that labor market policy is, or should be, part of any development policy that aims to enhance capabilities. It is therefore as simplistic to focus only on unemployment rates when considering the labor market as it is simplistic to focus only on income per capita when considering the development of a country or the well-being of its citizens. A more inclusive approach to the labor market therefore will not only consider the quantity of employment (i.e., unemployment and employment levels), but must also consider the characteristics of this employment. The capability approach forces us to ask different questions about employment that are far wider ranging than those ordinarily asked. We cannot simply observe the participation rate and its development, but must also ask whether all people who want to work are capable of doing so. This includes the inactive in our universe. Similarly, it is not enough to consider the unemployment rate. We must also ask whether the unemployed have the capability to successfully reintegrate themselves into the labor market, without getting stuck in a segment of precarious employment. And rather than simply looking at the employment rate, we must also consider the quality of jobs, that is, the functionings and capabilities that they generate. Most importantly, this approach considers what individuals can achieve with a given set of job characteristics, which means that their needs and personal circumstances are taken into account. This makes the capability approach the only one to focus on human development as an end, not as a means. By defining capabilities as the space of comparison, it asks what the means that we need to foster in order to achieve certain ends are. 6. Conclusions The capability approach thus makes us apply different criteria to the subject of the labor market and establishes different policy priorities. It is, in short a more comprehensive approach within which we set our priorities, depending on the factors that we wish to study. Of course, all of these issues have been addressed at various points in the literature on employment, but often not in a very coherent framework and without emphasizing their ethical importance from the perspective of social justice. This chapter discussed first of all why the capability perspective is a superior approach to development issues. Following on from this view, it would therefore make sense to apply the capability approach to the labor market, a topic generally neglected within the area of development economics and thought. Yet, as a


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closer examination of the effect of this application shows, the capability approach would introduce very different parameters into the debate on labor market policy. This is precisely why the capability approach serves as the best theoretical framework for an examination of the Chilean labor market. The range of unanswered questions mentioned in the introductory chapter of this book underscores the need for a relatively general study of the Chilean labor market. Yet, the capability approach will introduce a particular focus into such a general examination, as it breaks up the parameters that traditionally define the debate on Chilean labor market policy. The following chapter will show us why it is so necessary to break up these parameters, and why it is so necessary to shift the focus of labor market debates.


CHAPTER 3

The Never-Ending Story of Labor Market Reform

I

n every survey in which they have participated, Chileans have voiced their concern about employment. Job insecurity, low incomes, and unemployment routinely rank among their biggest worries.1 Before every election, politicians of every color have responded by promising labor reforms that will generate more jobs and lead to growth with equity and social justice. In 1990, labor market reforms ranked second in the priorities of the electorate after controlling inflation rates.2 However, while recent governments have done a remarkable job of reducing official poverty rates from record levels in 1990, it has been much less successful in addressing the justified concerns of the electorate about their jobs.3 The concerns of Chilean workers are reflected throughout Latin America.4 In Mexico and Central America, many workers are expressing these concerns with their feet in a continuous stream of immigration across the border to the United States. Mexico has the lowest unemployment rates in Latin America, not because it generates enough employment, but because it exports its surplus labor over the border to the United States. But for workers in the Southern Cone who are geographically further removed from the United States, emigration is not an option. Actually, of all the countries in the Southern Cone, Chile is considered to be by far the best performer.5 Yet for its workers, this relatively good performance still does not seem to be good enough to translate into a greater feeling of security and well-being. The concerns of the Chilean electorate about employment are justified. Although unemployment declined steadily during the 1990s, it shot up in response to the economic downturn occasioned by the Asian crisis in 1998 and has only come down gradually since (at the time of writing it was 8.1% according to official statistics). And although wages increased substantially during the 1990s, they only regained their 1970 purchasing power in 1997.6 Since the

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crisis, wages are growing at a much slower pace. In addition, the informal sector, which expanded massively during the 1980s, has not declined at all. Changing working conditions and contractual arrangements have led to a general concern that jobs have become more unstable and “precarious.” At the same time employers are viewed as powerful and rapacious profit gatherers who have no concern for their workers or the common good, while unions have not regained anything like their former levels of membership, activity, or influence.7 Perhaps one of the most worrying survey results is that 76 percent of Chileans believe that inequality exists because it benefits the rich and powerful.8 The proportion of Chileans who think that economic growth benefits the rich most has consistently remained around 80 percent during the 1990s and into the new millennium.9 These results reflect Chile’s highly unequal income distribution and the country’s deep divisions that have led Carlos Huneeus, one of the country’s foremost political analysts, to describe it as a “divided country.”10 This chapter explores the political process of labor reforms since 1990 that lies behind the statistics. It is important to look at the debate on legislation now as it sets the tone for Chile’s employment policy, determines the structure of Chile’s employment institutions, and forms the background to the empirical evidence discussed in chapters 4 to 7. Above all, it provides us with crucial insights into the attitudes and mentality of employers, workers, and policymakers in Chile. This is a tale of high expectations for social justice on the part of workers and an almost paranoid fear of regulations on the part of employers, which has led successive Concertación governments to engage in endless negotiations and continuous compromise, but one that has ultimately resulted in the dissatisfaction of all the social actors involved in the process. 1. The Process of Labor Market Reform in Chile In order to understand Chilean labor market policy today, it is essential to view it in its historical context. Like most countries in Latin America, its Labor Code dates back to the first half of the twentieth century and was developed during a period of import substitution industrialization. And while it is the reforms of the late 1970s and 1980s that shape the details of the current Labor Code, it is its historical development that shapes the culture and mentality of work and employment in Chile today and continues to determine the capabilities and functionings that it generates. Before looking at individual periods in detail, a brief general overview would provide a useful preliminary introduction. The history of the Chilean labor market largely mirrors the political and economic development of the country, a development that can be broadly divided into three main periods. The first, prior to 1973, was a period of state led industrialization during which the rights and functionings of the labor force gradually expanded, thus generating a Labor Code that increased the rights of labor at the expense of those of capital investors. The second period began in 1973 with the advent of the military administration and its structural adjustment package, which was implemented in stages during the military regime. During this period a new labor market structure that reflected the changes in the economic

The Story of Labor Market Reform

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structure emerged and swung the balance of power more toward capital. The third period began with the transition to democracy in 1990. Since then, the reforms of the previous period have been consolidated and legitimized. Through a series of reforms, the successive democratic administrations formed by a coalition of centre-left parties, known as the Concertación, have attempted to resolve the legacy of social issues that the military regime left behind, while continuing to respect the instituted economic parameters.11 The Concertación has tried to perform a delicate balancing act between attempting to protect the rights of workers and not being a hindrance to the generation of employment or investment in productive capacity. During these three periods, Chilean labor market policy has also fulfilled very distinct functions. At the risk of oversimplifying, it moved from being a tool of social policy before 1973 to a tool of economic policy until 1990, since when official policies have attempted to combine the two, although economic concerns dominated debates. Table 3.1 presents a simplified summary of the three periods described above. As we will see in the following sections of this chapter, these three very distinct periods have all left their mark on the Chilean labor market, formed the economic and political culture of the country, and planted indelible memories in the minds of employers, workers, and policymakers alike, the colors of which still shade politics and attitudes to this day. In this context, the concept of “acquired rights” (derechos adquiridos) must be mentioned. During the period of industrialization prior to 1973, the proportion of organized or unionized labor gradually increased, so that governments could be pressured to increase the rights of workers. Thus, workers gradually “acquired” more rights, for example, to be protected from dismissal through the institution of severance pay. The priority of labor representatives has been to preserve these acquired rights, and not give up hard won historical gains. And politicians have been loathe to erode these acquired rights as this would also erode their electoral support. Table 3.1 Characteristics of the three periods of labor market development in Chile Pre 1973

1973–1990

Post 1990

Industrialization: sometimes export-led, but mostly import-substitution industrialization

Crises and structural adjustment

Consolidation of the “new economic model”

Formation of labor legislation and worker entitlements. Progressive unionization

Dismantling of the unions and flexibilization of the labor market by means of a neoliberal reform package

Consolidation of a flexibilized labor market with some attempt at protecting workers’ interests and reviving the unions

Labor policy as tool of social policy

Labor policy as tool of economic policy

Combination of economic and social policy (with the former dominating)

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This brings us to another point, which is also characteristic of the legislative process with regard to labor reform in Chile. Governments use official legislation to set standards and send signals to the respective social actors. However, the letter of the law and its application or practical effect often differ widely, as governments try to give their electorate the impression that they are protecting their acquired rights. Under the military administration, for example, reforms were not instituted officially at first, that is, the letter of the law was not changed even though the application of the law changed radically. This was a reflection of the military government’s reluctance to explicitly erode the acquired rights of workers, as such an action would have intensified any opposition to the regime and reduced its support. And when the military regime finally implemented a comprehensive labor reform in 1979–1981, this reform was not nearly as radical as it could have been given the theoretical power of an authoritarian regime. Under the democratic governments that followed in 1990, efforts were made to reestablish the previous status quo of labor market legislation prior to the military regime. However, the changes made in the reforms, though fiercely debated, were often symbolic and had hardly any practical effect on the reality of employment situations, as we will see in the discussions that follow. Since Chile turned its back on import-substitution industrialization policies with the military coup of 1973, the overall aim of all labor reforms has been to increase labor productivity and generate more employment while at the same time preserving their acquired rights as far as possible under the conditions of free market economic policies. The primary concerns of the labor market reforms since then can be grouped into three categories: 1. increasing labor market flexibility 2. defining the rights of union and collective bargaining procedures 3. containing labor costs While the first two issues listed above have generally been the primary contentions of the labor reform packages themselves, the third was addressed by separate reforms, such as the privatization of social security or legislation on wage indexation mechanisms. To understand the process of labor reform, two of the Chilean Labor Code characteristics typical of Latin American labor law in general should also be understood. First, a distinction is made between dependent and independent workers. Labor legislation only applies to the former, while independent workers’ activities are comparatively unregulated. This means, for example, that while dependent workers are obliged to pay social security contributions, independent workers are not obliged to do so. Instead, they can contribute voluntarily. Similarly, dependent workers are insured against accidents at work, whereas independent workers are not. Second, as regards the regulation of dismissal procedures, workers in Latin America are generally protected from job loss through severance pay legislation, according to which employers have to pay a sum related to a worker’s wage and length of tenure. In the absence of any


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functioning unemployment insurance scheme, this payment effectively constitutes unemployment insurance for workers. As part of this regulation, labor codes distinguish between “just” and “unjust” dismissal. Generally, “Just” causes include reasons attributable to the worker (e.g., some form of misconduct), voluntary resignation, and expiration of contract. “Unjust” causes for dismissal refers to economic reasons (necesidad de la empresa) and mainly includes downsizing and firm closures. This distinction is crucial in the context of severance pay as only workers dismissed for “unjust” reasons are entitled to compensation.

2. The Labor Market before 1973 During the 1930s and 1940s, like most Latin American countries after the Great Depression, Chile began to look for alternative ways of development that would make it less dependent on external factors. Although rich in natural resources (especially copper and agricultural resources), it joined its neighbors on a path of protected industrialization, by means of import substitution, and subscribed to the structuralist approach to economic development that later emerged from the CEPAL (the UN’s Economic Commission for Latin America) under the intellectual wings of Raúl Prebisch and other economists.12 As we will see, the development of the country’s labor market legislation within this economic framework would not only characterize the legislation itself, but also the relationship between the three social actors. Chile was the first Latin American country to adopt a coherent Labor Statute in 1931. Its purpose was to ensure the cooperation of organized labor in industrialization and import substitution and is considered the home of Latin America’s oldest labor movement. Ever since the reforms of the 1920s, its citizens have known rights to public healthcare, education, and, to a certain degree, social services.13 While these may have been limited in their scope and coverage, they nevertheless improved substantially over time, especially during the process of industrialization described above. The state assumed a central role in their expansion, often operating through employment policies, price fixing, and subsidies. This explains why the country achieved a relatively high level of functionings as measured by human development indicators in the second half of the twentieth century. However, “through their organizations and political parties, the middle classes, industrial bourgeoisie and urban workers pressured the state with demands that would benefit them, leading to a system of social policies that had increasing coverage but was internally fragmented and stratified.”14 In terms of labor policy, this meant that the labor markets operated through a system of privileges and licenses that became necessary to exercise certain professions. A two tiered structure had emerged within the formal sector of the labor market consisting of a privileged set of “elite” workers and employees, who were employed either by the public sector or in state owned enterprises, and of the “other” employees and workers of the private sector, who were subject to a host of different rules and regulations. Thus work in the mining sector, for example, was governed by a set of rules different from those in the agricultural

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sector.15 The social security system was equally fragmented as its provisions were often negotiated by the unions of a particular industrial sector. An example of this kind of fragmentation is the number of pension systems that used to exist in Chile during the end of the 1960s: there were thirty-five different state run pension funds (Cajas de Previsión), and 150 different regulatory systems (Regímenes Previsionales).16 In addition, an informal labor market consisting of self-employed workers or small businesses not formally registered has always operated in Chile. As discussed above, the self-employed were excluded from labor legislation a priori, while small businesses operated informally, simply ignoring the prevailing labor legislation, as governments did not have the capacity to enforce legislation. During the decades prior to 1973, the ranks of this informal sector swelled as an increasing number of rural laborers migrated to the cities as a result of the industrialization of the economy. Overall, these developments led to a multitiered and highly fragmented labor market in which entitlements and functionings depended largely on the type of job one exercised. To a large extent, the history of the Chilean labor market, shaped and formed by its unions, is driven by the development of its labor movement Legislation, especially on social policy issues, was often instituted as a reaction to the threat of industrial action or other forms of popular unrest. This is particularly true for the period between 1966 and 1973, during which unions significantly increased their membership and political power, which peaked under the socialist government of President Allende (1970–1973). As their role in the development of the Chilean labor market is so important, it is necessary to look at the legislation that governed their operation. Unionization rates increased significantly from 11 percent in the early 1960s to almost 37 percent in 1973, although some economic sectors were much more heavily unionized than others. For example, the mining sector was more than 85 percent unionized and the manufacturing sector 60 percent unionized. Before 1973, a union could be established in a company if 55 percent of the workers approved. All workers of the company then automatically became members of this union. In addition, a system of licenses, the carnés profesionales, had been established, a system that prevented workers from practicing a certain trade or profession unless they were members of its union.17 Unions also enjoyed collective intercompany bargaining rights before 1973. They could decide whether to negotiate at firm or sector level. By 1973, a vast majority of unions negotiated by industrial sector. The government was actively involved as a mediator and arbiter in the negotiation process through the socalled tripartite commissions. Generally, wages were adjusted by amounts greater or equal to the inflation rate of the previous year; and minimum wages, set by the government, applied to everybody but were different for workers and employees. However, due to increasing inflation, the real value of minimum wages declined in the period leading up to 1973, leaving them lower than in 1970. Social security benefits added another 26 to 59 percent to wage costs.18 Having gained their privileges and power during a period of import substitution industrialization, unions


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became accustomed to an environment in which their demands for higher wages could be passed on to consumers by means of higher prices, without any threat from external competition. This led to a situation in which productivity by no means justified the wages that were being paid. Legal strikes could be called if a number of steps—including arbitration— fail. Strikes were not limited in terms of their duration, and workers could not be fired or replaced while a strike was in progress. Strike activity increased sharply between 1970 and 1973, and by 1973 many strikes were made illegal. The conflict between unions and the private sector was exacerbated when many unions seized the companies where they worked, which often led to government intervention and the nationalization of these companies. During this period, labor relations became increasingly strained as unions became more belligerent and politicized, and employers lost control over their production processes. The politicization of unions and the antagonism generated during these three years by labor actions largely explain why the unions became the first and immediate target of repression under the military administration after 1973, while other labor reforms were implemented much later. Another aspect of labor market legislation that increasingly favored workers in the period leading up to 1973 was that pertaining to job security legislation. Before 1966, firms could employ workers at will and dismiss them without express cause. Blue collar workers were entitled to a month’s notice or one month’s severance pay, whereas white collar workers were entitled to severance pay equivalent to one month’s wage per year of tenure. In 1966, however, the so-called Immobility Law (Ley de Inamovilidad) was introduced to ensure job security for workers. It prevented the dismissal of workers without a specific justified cause (causa justificada). Such a cause could be some form of misbehavior on the worker’s part, or an economic reason. Workers, however, had the right to appeal a dismissal in court. If a labor court ruled that a dismissal was not justified, employers either had to reinstate the worker or pay the worker a compensation equivalent to one month’s wage per year of tenure. There was no legal maximum limit to this amount. While on paper economic reasons were considered a “just” cause for dismissal, in practice labor courts were biased in favor of workers and tended to rule otherwise. The position of labor courts made it extremely difficult for firms to dismiss workers under any circumstances so that dismissals became extremely costly for employers. Over time job security had increased to such an extent that it became almost impossible for employers to adjust to external shocks or to changes in relative prices by reducing their labor force, and wage indexation combined with the power of unions prevented adjustments through wage reductions.19 The importance of this law cannot be overemphasized. To workers in the formal sector covered by this legislation, it represented job security and insurance against unemployment and thus came to be seen as their most important acquired right. Conversely, employers viewed it as the root of all their problems, especially during periods of economic difficulties. Labor analysts from the entire range of the political spectrum describe this law as an “employer’s nightmare.”

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The memory of this law is present in labor relations to this day and still colors discussions of pending labor market reforms ranging form unemployment insurance to collective bargaining regulations, as will be discussed below. No conversation about the labor market in Chile is complete without reference to this law, which employers viewed as the “symbol” of labor market rigidity, and workers, as their acquired right par excellence. The main point to highlight about this period of labor market legislation is that the import substitution development model, which effectively isolated companies from competition, led to a certain type of labor market structure and certain acquired rights. And although these rights were by no means commensurate with the productivity levels of Chilean workers, it later became extremely difficult to adjust these rights to conditions of international competition. Much of the labor market legislation that was established during this period withstood later efforts of flexibilization and reform. While other forms of contracting (such as fixed-term or short-term contracts) also existed in Chile from the outset, the open-ended contract came to be viewed as the norm, and labor legislation mostly concerned itself with regulating this norm. The period leading up to 1973 thus generated a certain type of standard job, which was highly stable, based on an open-ended contract (contrato indefinido), paid social security contributions, had regulated working hours, paid at least a statutory minimum wage and other statutory benefits, and offered the possibility of union representation. And the severance pay legislation established after 1966 for all workers (not just white-collar workers as before) came to be viewed as an acquired right associated with this “standard job” that protected workers from unfair dismissals as well as provided insurance against unemployment. 3. Labor Market Reforms under the Pinochet Administration After its period of import substitution industrialization, Chile’s economy ran into the typical problems associated with this development process and its growth began to stall in the 1960s.20 The government attempted to stimulate it by redistributing capital, in particular land. The situation remained unresolved though, with popular discontent leading to the election in 1970 of Salvador Allende, who began a socialist experiment, which economically and politically ended in disaster. The military coup that followed in 1973 under General Pinochet set about reforming the country. Hailed by some as the savior who rescued the country from economic and political chaos, and reviled by others as a bloody dictator, Pinochet has remained a controversial figure to this day. Although this matter has been endlessly discussed in the literature, it is nevertheless necessary to repeat these stereotypical images here as even today they form the background to much of Chilean politics and economic policy.21 The contrast between the Allende and Pinochet regimes, the ongoing human rights issues that they spawned, and the results of their widely contrasting economic policies have


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colored the postauthoritarian democracy in every respect and largely defined economic and political biases. The political positions of the social actors are still closely related to their view of the Pinochet administration.22 The strained relationship between capital and labor that had emerged under the Allende government, now became even more tense as the political pendulum swung toward capital. In terms of its labor policy, the period of the military dictatorship can be divided into two subperiods. The first, from 1973 to 1979, was a time of severe union repression coupled with a basic lack of enforcement of existing labor legislation. The second period, from 1979 to 1990, was marked by a relatively comprehensive labor reform, the so-called Labor Plan (Plan Laboral), which became the basis for its current legislation. It took the Pinochet administration several years to clearly define its labor policy as the military junta was initially unprepared for long-term government. It was first preoccupied with the economic chaos inherited from the Allende administration and then found itself plunged into an economic crisis in 1975 during which unemployment rates shot up. Only after the crisis did the regime bring in a team of policymakers (which later became known as the “Chicago Boys”), who were then charged with the task of elaborating a coherent set of economic reforms for the country.23 Therefore, the regulatory structure of the labor market changed very little between 1973 and 1979, except that all employees of the different economic sectors were now subjected to the same regulations and conditions. The split between blue-collar and white-collar employees was removed, but the split between public and private sector employees remained. All other sector-specific privileges, such as licenses and permits required to exercise certain jobs, were also abolished. During this period, moreover, the labor courts dropped their antiemployer bias, which meant that for the first time since 1966 employers could again make workers redundant again for economic reasons. In accord with this bias, workers also found it impossible to appeal redundancy decisions in the courts and could not insist on the payment of their due severance rights. So although the letter of the law did not change regarding dismissals, its de facto application did, effectively liberalizing the labor market. This meant that the unemployment rate shot up during the economic crisis that hit Chile in 1975. Between 1974 and 1975, the unemployment rate almost doubled from 9.2 percent to 17.2 percent. The Pinochet administration responded to this crisis by establishing emergency employment program in order to reduce the open unemployment rate. 24 During this period, all existing norms of automatic wage adjustment were also eliminated, although, until 1975, wage increases in the public sector led to increases in the private sector. The most important change during this period, however, was politically motivated: the unions, their activities, and their rights were almost completely repressed. These changes included the abolition of automatic union membership, a ban on strikes, and the exclusion of collective bargaining. Political militancy became a legal ground for dismissal. These changes were implemented by means of a series of decrees, which did not amount to a coherent reform package.

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While this left the labor force without a voice or an official representative, it would be wrong to assume that the interests of workers were completely disregarded by the government. The Pinochet administration faced the typical dilemma that all dictatorships have to deal with, a dilemma that Barrera and Valenzuela have described as follows: Labor movements can become one of the most important sources of opposition to authoritarian regimes; after all the capacity to disrupt production constitutes an important power resource . . . consequently, it is not surprising that decisions over labor policies are among the most difficult for authoritarian regimes. Such policies must, on the one hand, try to secure the commitment of workers to production by allowing the necessary space for them to formulate their grievances, but, on the other, they must limit the opening for labor organizations to such a degree that it cannot be used as a platform to launch a political challenge to the regime.25

This is why despite the economic reforms that were being implemented across the country at the time, and despite the complete liberalization of all other markets, the military regime procrastinated over labor reform. It appeared simpler to ignore existing legislation rather than to reform it. It was only when the dictatorship came under international pressure, in particular from the United States, which was concerned about union repression in Chile and the violation of workers’ rights as well as human rights, that the Pinochet regime acted.26 A comprehensive labor reform package, the Plan Laboral, was finally enacted in 1979. The plan reflected the compromise between the desire to liberalize the labor market and the reluctance to wipe out the acquired rights of the formal labor force. In fact, the initial legislation introduced in 1979 was later considered too much of a compromise and further adjustments were made to it after the 1982 crisis.27 The main components of the 1979 reform, that marks the beginning of the second period of labor policy under the Pinochet administration, addressed issues of dismissal regulation, union regulation, and wage policy. Probably the most important measure of the reform, due to its symbolic importance, was the abolition of the “Immobility Law.” Workers could officially be dismissed without express cause again. This realigned the regulation of the labor market with the effective practices prevalent since 1973, and also with the legislation prevailing between 1931 and 1966. The essence of this legislative change is the phrase “without express cause.” Not having to stipulate a cause, meant that employers could not be sued for unlawful or unjustified dismissal, and it also meant that they could effectively hire and fire at will. This reform, however, was ultimately perceived as not going far enough, as it still required employers to pay significant amounts of severance pay, often under economic circumstances during which they could least afford such payments. In 1981, therefore, the administration imposed a ceiling to severance pay, which instituted a maximum limit of five months wages. The 1979 reform also permitted union activity to start again. However, this time, union membership was made voluntary and was no longer automatic.


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Collective bargaining was reintroduced, but was limited to within companies. Intercompany or industry-wide collective bargaining remained prohibited. Strike activity was also legalized again, but was restricted to sixty days and companies were allowed to replace striking workers on a temporary basis. Nonetheless, the unions emerged significantly weakened from the initial Pinochet years as their membership had been reduced to approximately 12 percent of the workforce, and most of their activities were still severely restricted by the authoritarian regime.28 In 1982, Chile, like most of Latin America, was hit by a debt crisis, which brought on the worst economic collapse in the country’s history, and in turn provoked an employment crisis of stunning proportions. The unemployment rate, which had hovered around 17 percent during the 1970s and dropped only as far as 15.6 percent in 1981, shot up to 28 percent in 1982, and reached 30.3 percent by 1983 (including emergency employment programs).29 In response to this rise, the government expanded the emergency employment programs to generate more jobs, but the wages of these jobs remained extremely low. Analysts of the Chilean economy have repeatedly argued that the labor market provided the main adjustment mechanism in the economic stabilization and restructuring processes of the 1970s and 1980s, and that its more flexible regulation after 1982 enabled the unemployment rate to decrease more quickly than after the 1975 crisis. However, there is also agreement that the employment crisis after 1975 was much more structural than the employment crisis after 1982, which was more cyclical.30 Within four years, the unemployment rate dropped to 16 percent and did not cease to decline until the economic downturn in 1998. The economic crisis of 1982 also brought about a change in wage policy. Until 1982, wage increases in Chile were linked to the previous year’s consumer price index, as a result of which real wages increased rapidly as inflation was gradually being brought down after the crisis in 1975. After 1982, however, wage indexation regulation was abandoned for the private sector, so that employers could fix their own wage levels. This meant that wages decreased significantly in the period following 1982 and continued to decline until 1987 even though economic growth had resumed in 1984. During this period, the Pinochet administration also pursued a policy of depressing minimum wages and public sector wages. As a result, these declined by 41 percent and 24 percent respectively between 1982 and 1987. The other important reform that took place during the 1980s and had a significant impact on the functioning of the labor market and the entitlement structures it generated, was the privatization of the pension and health insurance systems. A pension reform in 1981 introduced a system of individual accounts to which workers contributed 12 percent of their salaries. And a health reform established private insurance companies that competed with the state’s insurance provider, both these were also financed out of a contribution from workers’ salaries. Employers therefore were no longer responsible for paying the social security benefits of their workers, which considerably reduced their nonwage labor costs from approximately 60 percent to almost nothing.31 Together

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with the downward wage flexibility that the changes in legislation instituted, the reduction in nonwage labor costs is frequently cited as the main reasons why the Chilean unemployment rate decreased more quickly after the 1982 crisis than it did after the 1975 one. It is difficult to describe in detail how the profiles of jobs changed during this period due to the limited data that exists on the period prior to 1990.32 There is virtually no data on any other variables other than wage increases and unemployment rates. However, we do know that the informal sector remained relatively stable throughout the period.33 It is likely that the economic crisis together with the reformed regulation on dismissals would have shortened the duration of jobs, expanded the proportion of workers hired on a short-term basis, and generally made employment conditions more precarious. Also, it is likely that employers simply disregarded the existing legislation as they were unlikely to be prosecuted for noncompliance by the military regime’s courts. Unfortunately, no coherent data exists to prove or disprove these suppositions. Yet it is evident from this simplified account that these reforms significantly changed the entitlement structure of the average Chilean worker. The main change was the loss of job security, a factor that introduced greater labor market flexibility and in turn led to the extraordinarily high unemployment rates in 1981–1983. The new legislation also markedly shifted the balance of power from workers to employers. Subsequent democratic governments attempted to redress this balance slightly, but essentially accepted the fundamentals of the labor market model that they inherited from the Pinochet administration. It is interesting to note the limitations of the Pinochet administration’s labor reforms. First, the 1979 regulation on dismissals was not made retroactive, that is, it only applied to workers hired after 1979. Workers hired earlier were still protected from redundancy by severance pay related to their tenure without an upper limit. Second, the military government maintained the concept of severance pay, never questioning its suitability as an insurance against unemployment and also never seriously contemplating the possibility of either abolishing it altogether or replacing it with functioning unemployment insurance. Third, the public sector underwent no reform leaving the government’s administrative body with completely antiquated laws that hindered the firing of workers with longer tenures as well as the hiring of new workers.34 Fourth, no legislation was introduced that encouraged or favored short-term or other types of nonstandard contracts, or more flexible working relationships such as domestic work or subcontracting.35 4. A Decade of Labor Market Reforms under Aylwin and Frei (1990–2000) In 1988, Pinochet was voted out of office in a plebiscite that he was confident he would win. Although the elections were manipulated by the dictatorship, 54.6 percent of Chileans voted for a return to democracy. Following the plebiscite, the political parties reconstituted themselves and elections for a new government were held in 1989, which were won by Patricio Aylwin, a veteran


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leader of the Christian Democrat Party, which had formed a center–left alliance with the Socialist Party (Partido Socialista, PS), the Radical Party (Partido Radical, PR) and the Party for Democracy (Partido por la Democracia, PPD). Aylwin was a widely respected politician who had been the leader of the opposition for many years, and who had played an important role in negotiating a transition to democracy with General Pinochet. One of the first priorities of President Aylwin’s transition government after Chile’s return to democracy in 1990 was to implement a comprehensive labor reform. The survey results mentioned in the introduction to this chapter show how highly the electorate ranked such a reform in its priorities. The discourse of the Concertación parties in the run up to the hand over had led to widespread expectations of social improvements. Their election discourse had been based on a commitment to overcoming the “social debt” (deuda social) that the military administration had left Chile with, while maintaining the economic growth and the macroeconomic equilibria that the latter had achieved during the final years of its administration. The idea of overcoming the social debt was an extremely important motivation of the policies of the Concertación under both the Aylwin and Frei governments. In 1988, an independent NGO had estimated that in Greater Santiago the percentage of the population living under the poverty line was 50 percent, almost half of which were considered to be extremely poor.36 The combined effects of two monumental economic crises and a structural adjustment program had thus left their mark. Income inequality had also deteriorated during the period of the military dictatorship to the point where the richest quintile accumulated 60.5 percent of the country’s wealth.While the military government had expended considerable effort in targeting its social policies at the extremely poor the standard of living of the slightly less poor had deteriorated significantly, and the state run infrastructure, especially public schools and hospitals, had suffered consistent underinvestment. In addition, wage levels had not yet recovered their purchasing power from before the economic crises. Labor policy thus became an important part of the strategy to address the social debt, and Aylwin’s labor minister, René Cortázar, enjoyed a high political profile. The Concertación considered its five principal tasks in terms of labor policy to be first, the generation of social agreements (acuerdos sociales) which would stimulate cooperation between employers and workers; second, the reform of labor legislation; third, the enforcement of legislation and the labor inspectorate; fourth, professional training; and fifth, the improvement of the social security system.37 Like all reforms, the labor reform that was implemented in 1990 must be viewed in its historical context. Five main factors influenced the reform and the process of negotiation that led up to it. Some of these factors are not unique to labor policy, but these apply to the entire policy-making agenda during this period. First of all, the existing labor market legislation was perceived as lacking legitimacy because it had been decreed by a dictatorship. Cortázar, wrote: “It appeared fundamental to undertake an integral reform of the Labor Code, as the rules of the game it defined did not result from democratic legitimacy, which in an open society is

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indispensable, to ensure stability over time.”38 A new reform, negotiated with all the social actors under democratic conditions, was therefore supposed to ensure that workers and employers alike would accept the new regulations. Second, the unions had been severely repressed under the dictatorship, but despite this they played a fundamental role in paving the way for a return to democracy through the demonstrations that occurred from 1982 onward. They therefore hoped that a return to democracy would restore their former rights and reward them for their cooperation with the political parties of the Concertación in the process of pressuring the military dictatorship to hand over power.39 This contrasts with the attitude of business, which generally supported Pinochet and did not really desire a return to democracy.40 At this point it is useful to remember that for the unions, not only the labor legislation inherited from the military dictatorship lacked legitimacy, but the entire free-market oriented model of economic development lacked legitimacy. After all, the socialist experiment of Allende’s government, which the unions had so strongly supported, had not run its natural course. Unions could argue that it had been obstructed by both internal and external opponents, and that it had therefore never been given a chance to prove itself, especially since it was aborted through a bloody coup. Campero writes that “the trade unions, in particular, modified their positions as a gesture of goodwill. They justified these concessions in the name of the transition to democracy and the need to give ground to achieve consensus. Their biggest shifts were in recognizing the value of the private sector in economic development, as well as acknowledging the necessity to take the requirements of an open and competitive economy into account when formulating social and labor policy.”41 Campero’s remarks illustrate just how wide the gulf that separated the thinking of unions and the business sector was, and how far the unions would have to modify their approach in the negotiations that followed. This means that unions and employers in Chile in 1990 were separated not just by the inherently different interests of labor and capital, but also by deeply rooted political differences and the memory of brutal violence and repression. Much of the Concertación’s policy has therefore been directed at trying to bridge this gap. Although the leaders of unions, government, and employers associations knew each other well and enjoyed a good working relationship, the general atmosphere between workers and employers was tense.42 The leaders of the principal union confederation had to convince their members that they had to tone down their demands for higher wages and legislative reform in the short-term to protect the new and still fragile democracy. Third, employers were terrified that a return to democracy would augur a return to the same chaotic economic policies that had preceded the dictatorship. The finance minister, Alejandro Foxley, had to go out of his way to convince business leaders that a democratic government was capable of administering the country’s economy responsibly.43 The leader of the main employers’ association had to convince its members that an agreement on labor policy would be beneficial to them as it would help stem the unions’ demands for a rapid recuperation of their former wage levels, which would not have been commensurate with


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economic growth.44 Nevertheless, the business sector’s deeprooted distrust of the government produced a fierce rejection of any policy that smacked of a recuperation of the rights that unions had enjoyed during the years preceding the 1973 coup. The fourth factor that significantly influenced the process of labor reform under the Concertación is the academic debate that had emerged in Chile before 1990 (and even more strongly since then), which recognized the trade-off between labor market regulation and employment generation.45 In part, this debate is based on research that shows that the high unemployment rate after the 1982 crisis decreased more quickly than after the 1975 crisis, a finding that can be attributed to the more flexible labor market regulation that was in place after 1982.46 This view had always been and still is the basis of employer opposition to labor market regulation, while it is a reality often ignored by the official union discourse. For the democratic government, however, accepting this argument was the result of much soul searching and debate about the dismal failure of the socialist experiment of the Allende years, which contrasted so sharply with the successful economic growth of the later Pinochet years. Nevertheless, labor policy debates since 1990 have rarely been based on empirical evidence and rational argument alone, but are more generally “tinged with prejudices and ideological disqualifications” (descalificaciones) as Meller and Vial (1990) have described them. And finally, although the Concertación enjoyed a working majority in Congress (despite an electoral system that favored the political right), it did not enjoy a majority in the Senate, where the political right held a majority based on a number of designated senators that the Pinochet administration had saddled the new democracy with.47 The Senate could thus block any reform that the new democratic government wanted to implement, which prompted the latter to pursue a strategy of consensus politics that avoided mooting any form of radical change. A policy was therefore established under the Aylwin administration and broadly maintained by subsequent Concertación governments to negotiate broad social consensus on labor market issues before sending a reform proposal to parliament for voting. This strategy became known as consensual democracy (democracia consensual) or social concertation (Concertación social).48 Expressions of this social concertation were the tripartite agreements between employers associations, unions, and the government that were concluded during the years of the Aylwin government. The first such agreement (Acuerdo Marco) was signed in April 1990 and expressed a “joint vision” regarding the challenges facing the country under the new democratic regime.49 It also agreed on significant increases in minimum wages, supplementary benefit payments, and basic minimum pensions as these had lost much of their purchasing power and had been pretty much frozen after the recession of 1982. Further, such agreements (there were four in total) followed in each of the following years during the transition period. These agreements were very significant in terms the history of Chilean labor reforms as it was the first time it had come to such agreements. However, somewhat typical of Chilean labor relations, the agreements were more important in

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terms of their symbolic value than in terms of their content, which did not even touch on the specifics of labor reform. It is interesting to note the different assessments that analysts have made of these reforms depend on how closely they are related to the government. Chilean analysts tend to emphasize their positive contribution to labor relations, in that they prevented extensive labor conflict and also generated the social agreement that helped heal the profound divisions in Chilean society immediately following the transition.50 Foreign analysts, from the perspective of critical distance, however, have seen them as largely symbolic, “a show of goodwill instead of an opportunity to make progress on substantial issues.”51 Frank, for example, writes that “it was the Concertación government that benefited most from subsequent Acuerdos Marco in 1992 and 1993. In bringing employers and workers to the bargaining table, the Aylwin government was widely perceived as the actor sine qua non of redemocratization. This added to the almost unprecedented popularity the government enjoyed among . . . the vast majority of Chileans.”52 Both of these points of view are in fact legitimate. The agreements were important positive contributions to the process of democratic transition but lacked specific practical content and therefore contributed little or nothing to the ambitions of labor reforms except as a demonstration of goodwill. Their most important characteristic was perhaps that they established a pattern for future labor reforms: they constituted dialogue between the social actors, but they also set the limitations of this dialogue both in terms of the range of matters that were dealt with as well as their depth by drawing clear lines as to how far any changes could go. Above all they established the absolute predominance of the business sector over the labor policy agenda. It seems that the debate about labor market reform was initially quite friendly, until more conservative sectors of the business elite rebelled, and José Antonio Guzmán was appointed as president of the principal employers’ association, the Confederación de Producción y Comercio (CPC). Then the discourse changed, and became more hardline. The reforms that were implemented by the Aylwin administration concentrated on the two main issues of regulating the termination of contracts and union rights. Perhaps their most important element was that employers were again obliged to justify dismissals. On paper this meant that they could no longer hire and fire at will as the 1979 labor reform had stipulated, but in practice, this clause had no impact whatsoever as the clause “reasons of the firm” (necesidad de la empresa) remained a legitimate justification.53 This means that employers can still fire workers without any major complications. This is a classic case of “symbolic” reform: the letter of the law was very similar to the legislation that had been established in 1966, but without the labor tribunals that had turned the previous legislation into an immobility clause the letter of the law had no practical effect. The 1990 reform also raised the ceiling on severance payments, from five months’ earnings to eleven months, in cases of dismissal for “unjustified” reasons such as economic necessity, thus increasing dismissal cost for employers. Again practicalities limit the impact of this reform. First, it is applicable only to


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contracts that postdate 1990. Second, the proportion of employees who work with the same company for eleven years is ever declining, so fewer people will benefit from this change (see chapter 4). Third, such a stipulation is not very effective if it is not backed up by labor courts that can act promptly and order the immediate payment of these indemnities. As we will discuss in more detail in chapter 9, this regulation is one of the least complied with in Chile. The reform also marginally strengthened the position of the unions: intercompany collective negotiation was permitted provided all parties concerned agree to it (in practice this almost never happens). It was made easier for unions to be founded, particularly in smaller companies, the sixty-day limit on strikes was abolished so that the duration of strikes could again be unlimited (but with the provision that employers could hire replacement workers),54 and other aspects such as the financing and negotiation rights of the unions were strengthened. Again, most of these provisions were symbolic concessions to the unions and had little or no practical impact on how they could function.55 One reform that was part of this package and that most analysts pay little attention to but is nevertheless important as it foreshadowed the Concertación’s future way of thinking about job security issues is the institution of individual savings accounts for domestic workers and the possibility that employers may do the same for their workers. In both cases the idea is that 4.11 percent of the worker’s wage is paid into an individual savings account, from which they can withdraw funds if they become unemployed or stop working. These withdrawals are not bound to whether a worker was dismissed for justified or unjustified reasons, but were specifically designed without this provision so that there would be no perverse incentive for workers to try to get themselves fired. For domestic workers, the individual savings accounts replace the right to severance pay, and for other wage-earners, the accounts can be set up after seven years of tenure and their savings would be deducted from future severance pay liabilities. In practice, employers almost never made use of this option, but the reforms are nevertheless illustrative of the ideas underlying the discussions of how to design an appropriate unemployment insurance for Chilean workers. While this discussion was already under way in 1990, an insurance would not actually be implemented until 2002 (these issues will be discussed in more detail in chapter 6). As discussed above, the reforms introduced by the Aylwin administration were effectively a compromise between union and employer demands, but, being a compromise, they did not entirely satisfy anyone, especially not the unions, which viewed labor relations as authoritarian rather than participative and fought for a return to their rights as they existed prior to liberalization. Criticism from within the union movement also became more vociferous, as some segments considered that the previous strategy of consensus had not achieved the legislative changes that were hoped for.56 For their part employers were still seeking more measures that would allow them a more flexible use of labor. Once he assumed office President Eduardo Frei therefore proposed a new set of reforms in 1995 in order to resolve those issues that had been left outstanding. The new reform package intended to reestablish obligatory collective intercompany bargaining and permit collective negotiation for temporary and

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short-term contract employees. It proposed to broaden the issues that collective bargaining could address to include matters such as working conditions, productivity, and incentive pay, and to abolish the right of companies to hire replacement labor during strikes. In return for making these concessions to the unions, further measures to flexibilize the labor market were to be introduced. These included the possibility of temporarily suspending contracts and lowering wages in circumstances of economic difficulty and the introduction of a more flexible working week. The catch was that all of these measures had to be negotiated with the company’s union, which had to have more than an 80 percent affiliation. First, critics of the government have asserted, that the reform package came too soon, at a time when the evidence of the impact of the 1990 reforms was still nonexistent and that it would therefore have been better to wait before proposing a new package.57 To some politicians in the Concertación, proposing a new reform so soon after the last one was perceived as a loss of face that seemed to imply that the previous one had not been successful. Second, the proposed reform was intended to strengthen the position of the unions and was therefore fiercely opposed by the business community, which considered that it had made enough concessions during the negotiations in 1990. This had a negative impact on the official dialogue between the social actors and led to accusations by employers that the government was trying to reinstate the “Immobility Law.” The discussions created an opportunity to both unions and employers to sharpen their discourse, and communication broke down into an aggressive slanging match in which employers proclaimed that unions had become obsolete. (Espinosa and Mizala refer to this as a “hardening of the political dialogue” (“endurecimiento del diálogo político”)58 This meant that the strategy of Aylwin’s administration of achieving consensus on labor market issues broke down under Frei. Furthermore, high profile members of the Concertación itself were not convinced by the content of the reform as they had themselves by now become convinced of the need for greater labor market flexibility. Since the government did not achieve consensus on the reform before taking it to the vote, it was promptly vetoed in the Senate, which was controlled by the opposition parties.59 After much further debate and negotiation, the reform came close to being approved in 1997, but was ultimately rejected by one vote in the Senate. It then languished on the backburner of the political agenda, having also lost the interest and backing of the president. It was then resurrected in 1999 as a political maneuver during an election campaign in which the right wing candidate, Joaquin Lavín, had adopted many of the social issues that had been the territory of the center–left coalition during the previous two elections. The maneuver was intended to call his bluff, but ultimately failed again as it was still not fully supported by the government coalition itself (not even as an election maneuver).60 In the end, the Frei government made only marginal progress in the area of labor policy. It reformed the law of professional training (on which more in chapter 7), increased the resources and faculties of the Labor Office (Dirección del Trabajo) in order to improve its capacity to enforce legislation, instituted a


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minimum of one free Sunday a month for every worker, and prohibited pregnancy tests before employing a female worker. At the end of the Frei administration, however, labor relations were considerably more tense than they had been when President Frei assumed office. 5. Legislative Reform under Lagos The revival of the labor reform by the Frei government during the election campaign of Ricardo Lagos obviously put employment policy into the spotlight during the period leading up to the election. However, voters were more concerned about losing their jobs than they were interested in the reforms as the unemployment crisis hit Chile in the run up to the elections in 1999.61 Nevertheless, Lagos promised that a new labor reform would be among his government’s first priorities together with legislation for an unemployment insurance. However, despite all the debate about how to generate more employment, the election campaign brought up no new issues or ideas. Instead the candidates repeated well-rehearsed arguments over matters that had remained unresolved since Chile’s transition to democracy, with the political parties blaming each other for having obstructed earlier attempts at reform. Even before the president’s inauguration, employers announced that they would oppose any reform that included the two major elements Ricardo Lagos and his team focused on during the presidential campaign: the right to collective bargaining for temporary workers and at a sector level, and prohibiting employers from replacing striking workers. If anything, the attitude of employers toward labor reform had hardened even more as a result of the attempt of the Frei administration to reintroduce it during an election campaign. The new labor market reform package—essentially containing the same issues as previous packages—was proposed very soon after the new administration took over. Again, the proposal was not fully supported by the governing coalition’s own parties, and the polemical debate raged on. The issue became a very sore point for the new government as Lagos had repeatedly promised to make it one of the first legislative acts of his new government. Still the Concertación did not have a majority in both houses, so Lagos needed to achieve a general consensus on the reform via social dialogue before sending it to the Senate for discussion. After having first presented these two aspects of the reform as nonnegotiable, the government then suddenly announced that it would scale back the reforms, first dropping the idea of collective bargaining at sector level and for the unions of temporary workers, and later bailing out on prohibiting employers from replacing striking workers.62 The eighteen-month period during which the labor reform was discussed was characterized by confusing, contradictory, and ambiguous signals from the government, which antagonized the business community and complicated the negotiation process. The issues at stake became even more politicized as the Lagos government had to face both municipal and parliamentary elections during this period. The government ended up accusing employers of slowing down the economy by refusing to invest, while employers accused the government of

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creating conditions of uncertainty that made it impossible for them to invest and employ more people, thus slowing down Chile’s potential recovery from its recent economic crisis (La Tercera, September 8).63 The reform that was finally passed in September 2001 included none of the principal issues that Lagos had originally intended to pass. Instead, it instituted a number of minor issues that mostly added detail to existing legislation.64 The change that had the most practical effect was the reduction of the working week from forty-eight to forty-five hours, as of the year 2005. It is interesting to note that the decision to reduce the working week (which was partly a measure to reduce unemployment) was the only point of the reform on which all parties could agree.65 The reform also included a number of measures that made employment more flexible, such as making it easier to hire part-time workers (extending the same protection to them that the law affords full-time employment), allowing contracts to contain various tasks as job specifications (multifunctionality), and creating a form of work called “Tele-work” (Teletrabajo), which recognizes that some workers can work from home and be linked to their employer only by internet or telephone. The Dirección del Trabajo’s resources were also again increased in order to improve their enforcement capabilities. As for the original issues that Lagos had proclaimed as central to the reform, these were watered down to such an extent that they have become innocuous and are most unlikely to have an effect. Temporary workers thus may form unions and bargain collectively, and interenterprise unions may also form and bargain collectively, but only if their employers agree to it. And the right to replace striking workers has not been abolished but made a little more expensive for employers.66 So, this has been another in a series of reforms that changes the detail of the Labor Code, but not its fundamental principles, and that leaves employers complaining about more regulation while unions remain dissatisfied with their status and rights. The progress that the Lagos government has touted as its greatest achievement in terms of labor policy is the passing of a law that institutes compulsory unemployment insurance for salaried workers in Chile.67 This had already been attempted by both the Aylwin and Frei governments, but the project had been stalled for twelve years because the social actors could not agree on its structure and financing. As we shall see in more detail in chapter 6, the scheme that the government presented as unemployment insurance is in reality a compulsory savings scheme with an insurance component, not an unemployment insurance per se, and it effectively covers only a very small percentage of the unemployed. Apart from the unemployment insurance, progress has been made on more minor issues of labor regulation that receive less attention from analysts and the media in particular, as these are less controversial. Such issues include the obligatory payment of pension arrears before a worker’s employment relationship is terminated, the prohibition of employing minors (under the age of fifteen), improved health and safety legislation (e.g., limiting the maximum time that bus and lorry drivers can work without interruption or the weight that workers


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are allowed to lift on their backs), the expansion of the Labor Office’s resources and faculties, and a judicial reform, which will be discussed in chapter 5.68 And the Lagos government has also instituted important legislation to fight against discrimination at work and sexual harassment and to establish equal opportunities for workers. All of this new regulation sends the right kind of signals to employers as to the government’s intention of protecting workers and guaranteeing basic rights at the workplace. Although the Labor Office is in no position to enforce all of these regulations at present, the time will come when it will be, as its resources are further increased and especially as workers become more aware of their rights. The judicial reform that the government undertook to expedite the labor courts’ procedures are a crucial complement to these regulatory improvements.69 Another legislative battle that the Lagos government has been waging since 2002 regards the appropriate definition and regulation of subcontracting arrangements. The original proposal was sent to the Senate, where so many changes were requested that very little remained of the original legislative proposal. The reform thus lingered in the Senate committees until the second round of the presidential election campaign in 2006. As had occurred during the presidential campaign of 1999, when the government also decided to call the opposition’s bluff by reactivating a legislative proposal of labor reform that the opposition had stalled in Congress, this subcontracting legislation was one of several legislative proposals (along with an Indigenous Rights Bill and the reform of the binominal election system) that the government pulled out of its hat at the last minute to illustrate that the campaign discourse of the opposition, which was focusing on greater equality and social issues, was but a discourse, which at the time of voting for legislation meant nothing.70 The chances are that Chilean labor market history will remember the Lagos administration for its failure in another attempt to significantly improve the situation of the unions. But it should credit it for instituting an unemployment insurance, albeit an imperfect one. And it should also credit it for laying the foundations of a more level playing field for workers by means of the above mentioned regulations on discrimination, equal opportunities, and sexual harassment, and for establishing a much more efficient and expedient judicial system to deal with the violation of employment legislation.

6. Concluding Remarks This overview of the legislative reform process and the political debate that surrounds it explains how the balance of power shifted from workers to employers under the military dictatorship in the 1970s and 1980s, and how it has remained with the employers. The basic labor market model that the democratic government inherited from the Pinochet administration has not been changed in substance by a decade and a half of almost constant debates and reforms. So, while there has been a stream of smaller changes, all the substantial issues have remained constant.

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The political wrangling between the social actors in Chile over the details of labor market reform is like a never-ending story because nobody is ever satisfied with the most recent reform. Also, it is always clear that the last reform was only a compromise and not a definite solution, so the social actors begin setting the scene for the next reform. The main sticking points are over unions, strikes, and collective bargaining, despite the limited impact that legislative changes in these areas have in practice.71 These issues are of symbolic rather than practical importance, because they are related to how the unions were treated under the Pinochet administration. This is why it is important to remember that, as discussed above, attitudes to the military regime still color political debates to this day. However, some changes are becoming more evident. Two fundamental trends can be distinguished from the processes of labor reform described above. First of all, it is clear that the Chilean labor movement, in particular its national association, the CUT, never really regained the political power it lost under the military dictatorship. It lacks the numbers in terms of its membership as well as the resources (especially the financial resources) to really be able to insist on the changes that they would like to see introduced. In fact, in the course of all three labor reforms (or attempted reforms in the case of the Frei administration), the CUT probably lost more influence as its principal demands were consistently rejected. As a political lobby, the CUT faces a dilemma that is common in many countries ruled by governments of the center– left or the left: politicians from these parties take the votes of the unions for granted as they are extremely unlikely to vote for right-wing parties. This means that the political bargaining power of the unions is reduced unless they can come up with means of pressuring governments other than through their votes. In the case of the CUT, it must also be pointed out that they never undertook a serious campaign to garner more extensive backing for their demands, which means that they have failed to build up a serious support base both among voters and politicians. Campero has described the CUT as a “political orphan,” and it is clear that until it adopts a serious alternative strategy that incorporates the overwhelming logic of free markets, it will remain in this position.72 What can now be regarded as the main success of the CUT is first that it managed to establish itself as the unified voice of labor, and second that they have managed to maintain the issues of labor reform on the political agenda of the Concertación for such a long time. But debates about reform and political discourse, not the content of legislation, are really the main manifestations of support that the CUT has received from the last three governments in Chile. The second trend that can be discerned is that the position of the Chilean business sector really has not changed since the country’s return to democracy. It remains essentially aligned with the political right, it continues to focus on achieving greater labor market flexibility and less regulation, and remains fundamentally opposed even to relatively minor changes that might strengthen the positions of the unions. It may even have gained political power as it appears to have won over more members of the governing coalition to its point of view that more regulation necessarily means fewer jobs. This already became clear during the various attempts at reform under the Frei government, when members of the


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Christian Democrat party openly opposed the proposed legislation. But the course of the last reform makes this point even more evident as the Lagos government dropped its two supposedly nonnegotiable components in the face of pressure from employers, despite holding a majority in the Senate for the first time since Chile’s return to democracy. President Lagos ends his term having earned the affection and respect of Chile’s employers, which seems at odds with his socialist credentials, but is a direct consequence of his courting employers more than labor.73 The debate about labor reform in Chile is at least as remarkable for its content and its roots in rather antagonistic traditions as it is for the issues it neglects to discuss. Some very important areas for potential reform have been ignored during the entire process. For example, few policymakers have openly questioned whether it still makes sense to exclude the self-employed from labor market and social security legislation. A self-employed taxi driver who crashes his car is most unlikely to have any kind of insurance, either for the car or for any personal injuries he might sustain. Potentially this leaves him unable to work and without any source of income as he has just crashed his only revenuegenerating asset. Considering that taxi drivers in Chile generally do not have extensive savings that can tide them over such situations, or help them reestablish their business (either by repairing the car or buying a new one), they often find their capabilities wiped out and their families exposed to poverty. A salaried lorry driver earning the same income, however, would be insured in the same situation, and thus not face these dilemmas. Does this make sense? Another issue that has been widely ignored is how to deal with the large proportion of wage-earners who do not have formal written contracts and are therefore also excluded from all labor legislation, including employment-based social security provisions, unless they go through lengthy court procedures. As we saw in the introduction, Germán is sometimes employed with a contract and sometimes without one. While his salary in both types of jobs is likely to be the same, the former situation pays his social security contributions and the latter leaves him without benefits, thus generating a very different set of capabilities. Can workers such as Sonia and Germán be protected from the insecurity that not having a formal written contract implies, and if so, how? Also, the Concertación, like the military dictatorship before it, has not attempted to reform legislation on public sector employment, even though almost every government official will admit that the existing regulations are outdated. At the moment, rather ironically, the government circumvents its own legislation by employing a large number of professionals on a freelance basis. This is one of the methods that businesses also use in order to avoid the obligations that labor legislation imposes. While this may not be technically against the law, as freelance contracts effectively represent a loophole in Chilean labor law, it certainly contravenes the spirit of the government’s own legislation. So, how can the public sector Labor Code be modernized? In addition to these issues, there are others on which there has been some debate, especially during the Lagos administration, but where no real initiatives have been taken so far. One such matter is how small and very small companies

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can be helped through legislation specific to their needs so that they can generate more productive employment. While individual measures have been taken in this direction (such as higher subsidies for vocational training of workers in small businesses), these do not amount to a comprehensive policy.74 What kind of regulatory changes would stimulate the generation of employment by companies with fewer than ten employees each? Similarly, severance pay, which unions would like to increase and employers would like to abolish, has been discussed in the course of the various labor reform debates only in terms of its level. The first labor reform increased the maximum amount of severance pay that should be paid, and the debates about instituting unemployment insurance discussed how much of the severance pay should be replaced by continuous contributions to individual savings accounts.75 But there have been no public and official discussions on whether severance pay still represents the best method to ensure employment stability and protect the capabilities of workers. Especially in view of the fact that employers often refuse to pay the full amount due, could they not be replaced with a mechanism that gives employers the flexibility they desire while at the same time ensuring that workers do not have to assume all the risk of unemployment themselves? In the course of this book when empirical evidence on these matters is presented, especially in the concluding chapter, we will come back to these issues. At this point, it is important to emphasize the fact that the democratic governments in Chile inherited a certain legislative structure from the military regime before them (and from democratic administrations before that), which they have tinkered with and made slight improvements to, but to which they have made no fundamental changes. It is also important to emphasize that these democratic governments have not always been able to legislate as they would have wanted to, due to the disproportionate strength of an opposition that owes its power to the undemocratic traits of a constitution that the democratic governments inherited from a military dictatorship. The discussion presented so far illustrates a point that Sen makes with regard to development issues in general: “So much energy and wrath have been spent on attacking or defending liberalization and deregulation that the monumental neglect of social inequalities and deprivations in public policy has received astonishingly little attention.”76 This has indeed been the case in Chile where the income distribution remains one of the worst in the world, and where a large proportion of the workforce must be considered as “working poor,” even though the Concertación’s slogan during all of its election campaigns was “Growth with Equity” (“Crecimiento con Equidad”).77 Labor market policy has neglected these issues while it has remained stuck to the concerns of unions and collective bargaining in a debate that continues to pitch the proponents and antagonists of liberalization against each other. This is particularly true in the case of the public debates on labor policy in Chile, which are driven by historical and ideological concerns rather than by concerns for the capabilities of Chilean workers. As a result, they have consistently


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failed to address the rapidly shifting employment relationships that are transforming the landscape of the Chilean labor market. While there have been numerous debates within the government about new employment relationships, such as part-time work, subcontracting, tele-work, and piece work from home, and while numerous studies have been commissioned to assess the extent and characteristics of these employment relationships, resulting in new legislation and regulatory changes, the government has completely ignored one of the main changes that has occurred in the Chilean labor market during the last decade and a half: the informalization of wageearners. Chapter 4 will show to what extent the proportion of workers who are now working without contracts has increased in Chile. There is a much more fundamental phenomenon that is transforming the Chilean labor market, which has not been recognized or acknowledged by policymakers, and it is a fact that traditional and stable open-ended contracts can no longer be considered as the standard employment relationship in Chile, as workers with these contracts now represent only one third of the workforce.78 Employment relationships have shifted significantly to nonstandard formats (e.g., short-term contracts or subcontracting arrangements), or to informal arrangements (i.e., employment on an open-ended basis without formal written contracts). Yet, the logic of the Chilean Labor Code continues to be based on precisely the concept of a traditional, stable, open-ended contract. The arguments presented in this chapter should make it clearer what the capability approach can contribute to the analysis of the Chilean labor market, and how it can break up the traditional parameters that analysts work with. The capability approach requires a wider range of data than is commonly used in Chile, and it also presents us with an objective theoretical framework that is free of the historical and political baggage that Chilean experts and social actors drag around. Above all, however, it obliges us to look at the capabilities that employment generates for Chilean workers, thus putting workers back into the center of political debates rather than into issues of flexibility, efficiency, productivity, and potential economic growth, the benefits of which mainly accrue to the top income decile. And this approach forces us to consider the changing contractual relationships that now characterize the Chilean labor market above traditional concerns such as regulation of collective bargaining and collective action, which, although important, now affect only a small minority of Chilean workers. All in all, the legislative process that we have looked at so far does not amount to a clear employment policy. Workers are rightly concerned about the employment situation in Chile, just as they claim in all the public opinion surveys. And Chilean employers have a point when they criticize the government for sending mixed signals on employment policy without tackling the labor market’s problems head on.


CHAPTER 4

The Characteristics of Employment in Chile

A

ll is not well in the world of work in Latin America. The 1980s have long been referred to as the lost decade in terms of economic growth and improvements in social indicators as a result of the profound effects of the debt crisis and the subsequent structural adjustment that was undertaken. But the 1990s were disappointing in most countries. To say the very least, the benefits of structural adjustment, liberalization, and deregulation have been slow in coming, especially in terms of labor market indicators. On average, unemployment in the region increased, the proportion of formal employment that contributes to social security decreased, poverty and inequality worsened, while wages increased moderately. Chile is undoubtedly one of the best performers of the region and was one of the countries least affected by the collapse of the Asian economies in 1997 and the subsequent crises in Brazil and Argentina. But even in Chile, strong economic performance has translated into only moderate improvements in the labor market, and even into some deterioration in aspects linked to unemployment and job security. Chile is by no means alone in booking only moderate labor market progress, as we will see in section 2 below. But in terms of economic growth it has certainly been the best performer since 1990, which makes it doubly disappointing that this economic growth has not translated into better employment. As was discussed in the introduction to this book, if Chile, the region’s model performer, cannot generate improved capabilities for its workers through better employment and employment opportunities, then there is very little hope for other countries in the region to achieve this, and we seriously need to reconsider the fundamental basis of its development model. In the introduction to this book, we met Sonia and Germán. Germán considered himself to be unemployed, yet the official labor market statistics would not agree with him, since he was engaged in remunerative activity, even if the job was of the most temporary and unprofitable nature at the time of the interview.1 And Sonia was working, but her job too was of the most precarious and

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unremunerative kind. If we are to analyze the Chilean labor market, it is of utmost importance that cases such as Sonia and Germán’s be identified. Without identifying them and estimating how many other workers in Chile are employed in similar conditions, we cannot formulate appropriate labor policies. While this point may be self-evident, it nevertheless has to be emphasized because Chile’s official source of labor market statistics would not allow us to identify them with any degree of precision. From the official data, we would merely be able to tell that Sonia and Germán are earning very little, and that they are “self-employed.” But we would lack any other information on their employment situations or employment history. Before delving into the analysis of the data, this chapter will first examine what our sources of information are in the Chilean case, as understanding their limitations is a prerequisite to any further analysis. The chapter further examines the logic behind definitions of terms such as unemployment and the informal sector before developing an alternative method of analyzing labor market data, one that captures cases such as Sonia and Germán’s and allows us to quantify workers who in Chile find themselves in positions similar to theirs. It then goes on to examine the characteristics of the Chilean labor force in general and of the new employment that it generates in more detail, using data from the CASEN 2003 household survey. All analysis of labor market developments over time, however, is discussed in the following chapter. 1. Sources of Information Any comprehensive analysis of a labor market can be only as good as the available data, which is why it is important to discuss this first in order to show the kind of analysis it allows us to undertake. This section will review the most important sources of information on the Chilean labor market in detail, especially the official labor market survey run by the National Institute of Statistics. With one exception, it considers only household surveys as they are the only source of information that can capture the labor market in its entirety in a developing country where such a large part of the labor market is informal. Workplace surveys, for example, could only provide partial information on the labor market, and would most likely exclude the poorest workers who generally hold the most informal and precarious jobs. 1.1. The National Employment Survey Since 1966, the National Institute of Statistics, the Instituto Nacional de Estadísticas (INE), has been on a monthly basis running a national employment survey, the Encuesta Nacional de Empleo (ENE), which collects the official information on the Chilean labor market.2 Its main task is to measure nationwide levels of employment and unemployment based on the ILO’s international definitions. Anybody who worked during the week prior to the survey, if only an hour, is counted as employed.3 The definition of unemployment is restricted to people who did not work during the reference period and have been actively

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looking for work for the last two months.4 This means that it not only excludes people such as Sonia and Germán, but also a lot of those facing short-term unemployment, including workers who might be entitled to unemployment insurance, since workers have to have been looking for a new job for two months. This definition has its logic. Most importantly, it is based on the ILO’s international guidelines, so that the statistics it produces are comparable with those of other countries. Second, it establishes an objective criterion according to which an unemployed person is categorized. Self-definition would probably lead to an overstatement of the unemployment rate, and would very largely depend on the workers’ subjective perceptions, which may differ from country to country. However, it does apply very rigorous criteria and probably underestimates the real unemployment rate. It certainly excludes cases such as Sonia and Germán’s, which is why we need other measures of labor market performance. A sixth of the ENE’s sample is renewed every quarter, which means that households remain in the survey throughout an entire year and a half. During the last quarter of each year, the survey also includes a module on household income. The ENE serves as little more than an indicator of employment and unemployment. The only other variables it includes are occupational position, income, hours worked, size of employer/establishment, and the reason for and duration of unemployment. The combination of the variables occupational position (wage-earner, self-employed, employer, nonremunerated family worker or domestic service) and the size of company allows the ILO to construct its variable “ ‘informal sector’.” The ILO defines the formal sector as including all workers employed by companies with six or more employees, employers, professional self-employed, and the armed forces. The informal sector consists of the nonprofessional, selfemployed, domestic service sector workers, nonremunerated family members, and employees of companies with up to five employees. The distinction between formal and informal sectors is largely based on the assumption that the selfemployed and the employees of small companies have different and generally more precarious working conditions than employees of larger firms. Such a distinction makes sense given that Latin American labor legislation distinguishes between the self-employed and employees, as we saw in the previous chapter, requiring the latter to contribute to social security, while the former are not obliged to do so. The informal sector is the variable that has been traditionally used by the ILO to capture aspects of the quality of employment in Latin American labor markets. The quality of employment in the informal sector was traditionally considered to be significantly lower than in the formal sector. However, as we will see below, the construction of this variable was clearly based on the availability of data in the 1960s and 1970s, and it no longer captures the complexity of modern labor markets. The absence of information in Chile’s national employment survey on the types of employment contracts held by workers is an especially serious flaw, as this is an important facet of the level of formalization of a job, as will be discussed below in this chapter.5 Similarly, the survey does not collect data on whether workers are contributing to health and pension insurance. As the main official source of information on the Chilean labor market the survey is wholly inadequate.6

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In common with most other household surveys in Chile, the ENE is applied to any adult member of the household who happens to be available for the interview. In addition, the interviewing is also done mainly from Mondays to Fridays during office hours. This means that the employed rarely answer questions relating to their jobs themselves. While other members of the family may be informed about general aspects of the jobs of the working members in the household, knowledge of facts such as hours worked, income or size of the employer is likely to be more inaccurate. For example, the family is likely to know when the worker concerned leaves and returns to the home, but not exactly how much time is spent on breaks or traveling to and from work. This method of applying the survey seriously handicaps its potential scope and also the reliability of its data. In fact, in a test of accuracy of the 1993 ENE, a high level of accuracy was found only in the age and sex variables, whereas answers in all other variables were similar in only 34 percent of the cases. 7 Discussions about a revision of the ENE’s survey questionnaire have been underway for a long time. In 2006, the National Institute of Statistics will finally begin to run a new questionnaire which will be much more comprehensive than the present one, and which will interview workers directly. At the time of writing, however, the new survey questionnaire had not yet been released to the public, so it is too soon to comment on its content in detail. 1.2. The Employment Module of the National Household Survey, CASEN The national household survey in Chile, the Caracterización Socioeconómica Nacional, commonly referred to as the CASEN, is a biannual survey designed to assess the impact of the government’s social policies. It is commissioned by the Ministry for Planning and covers a range of topics, such as housing, health, employment, income, and education.8 Its employment module includes a much broader range of variables than is considered by the INE’s national employment survey. For example, it includes questions on the type of contract, social security contributions, tenure, and vocational training. In practice and in the absence of better information, the CASEN therefore serves as Chile’s main employment survey.9 Studies generally quote the data from the ENE when it comes to statistics such as participation and unemployment rates, but use the CASEN when they are analyzing the characteristics of employment. However, the CASEN was never designed or intended to be an employment survey. First of all, it is carried out only biannually.10 This means that its usefulness as a barometer of labor market developments is limited, as the data is not produced with the required regularity, frequency, or expediency.11 Second, its questionnaire has varied considerably from application to application. For example, the all-important question of a worker’s type of contract was included only from 1994 onward. Until then, the survey merely asked whether a worker had signed a contract or not. Similarly, workers were only asked about their tenure or whether they had received any vocational training in 1996, 2000, and 2003. The 1998 survey skipped these questions.12


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In 2001, MIDEPLAN, Chile’s Ministry of Planning, for the first time commissioned a panel survey based on the CASEN’s 1996 sample. However, as far as the panel’s employment module goes, it only interviews workers about their employment situation at the time, without systematically tracking the changes in employment they have experienced during the last five years. This means that we can compare the employment situation of workers between 1996 and 2001, but not the developments in between these points in time. Essentially, this means that there is limited time series data on the characteristics of employment in Chile. We can produce some consistent data from 1990 onward, but not for all variables. And there is no information on the characteristics of employment prior to 1990. There is also no data on the characteristics of the jobs that the unemployed held prior to becoming unemployed. 1.3. Other Labor Market Surveys The Universidad de Chile also runs an employment survey, the Encuesta Ocupacional. The survey is run on behalf of the Chilean Central Bank in the area of Greater Santiago, also on a quarterly basis. It represents the longest range of available data in Chile as it has been run with an extremely consistent questionnaire and methodology since 1957.13 Its variables are as limited in scope as those of the ENE, but it applies slightly less restrictive definitions of categories, namely, unemployment, underemployment, and inactivity, which accounts for the fact that its unemployment rate differs slightly from those of the ENE.14 The main purpose of the survey is also to measure levels of employment activity and income, that is, it produces little more than the most basic labor market data.15 Another employment survey, the Encuesta Laboral, was developed in 1998 by the Dirección del Trabajo in order to obtain more consistent information on the levels of compliance with labor legislation as well as on the use of modern and flexible employment relationships, such as subcontracting or “tele-work” The survey was repeated in 1999, 2002 and 2004 and has thus become a regular survey of the Chilean labor market. Of all the existing sources of information, it includes by far the broadest range of variables, and covers them in a great deal of depth. Based on a sample of 1,200 companies, it combines interviews of employers and employees from the same establishment, asking them both the same questions as well as specific ones that can only be answered by either category.16 However, the survey is based on a rather peculiar methodology. First, questionnaires, while self-applied, are collected by the Dirección del Trabajo’s very own compliance officers. Although this guarantees a response rate of 100 percent (!), the reliability and perhaps truthfulness of the information gathered must be doubted. The most notable result that demonstrates this limitation is that the Encla does not register any employee working without a contract. This result blatantly contradicts the results of the CASEN and other surveys, which concluded that 26 percent of wage-earners do not have a signed contract in 2003, as well as official data from the Dirección del Trabajo itself, which registers a high incidence of complaints from workers whose contracts were never set up.

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The second main flaw of the Encla is that it is limited entirely to the formal sector of the economy, not because it excludes smaller companies, but because it cannot include either informal companies or the self-employed, as there is no register of the latter from which to draw a sample.17 It therefore excludes approximately a third of the labor force ex ante. Were it not for its method of application, the Encla could have been accepted at least as a survey of the formal sector, but given its curious interview methodology, the Encla’s results must be viewed with skepticism. At best, it can be used as an indicator of labor relations and of the proportion of subcontracting. Many ad hoc surveys are also carried out in Chile on specific topics linked to the labor market, commissioned mainly by various ministries and departments of the government, international organizations, and sometimes NGOs.18 While these can provide valuable additional information, the same problem prevails with all of them: first, they are usually not repeated, so that they cannot be used for the analysis of any trends, and second, their data is usually based on smaller samples or is limited to Greater Santiago due to resource constraints. The most promising survey that has been carried out recently is the Employment History and Social Security survey, the Historias Laborales y Seguridad Social (HLSS), which was commissioned by the superintendent of the pension system and was carried out by the Universidad de Chile’s reputed survey department, first in 2002 and then in 2004. Its purpose was to investigate the density of contributions to the pension system by examining how workers move in and out of the labor market or between different jobs, thus contributing intermittently to the pension system. Two aspects of this survey must be highlighted: first, its first application in 2002 was based on a universe of people affiliated to the pension system, not on the labor market as a whole. Although the number of people affiliated to the pension system in total is higher than the total labor force at any given time, this does not amount to exactly the same universe. In fact, the methodology risks excluding the most vulnerable workers as they are unlikely to have ever contributed to the pension system. The second application of the survey in 2004 remedied this and applied the survey to a sample of 1,000 people who were not affiliated to the pension system. Nevertheless, such a solution is inferior to using the total working age population as a universe. The survey’s second important feature is that it interviewed specific individuals about their employment history, rather than any member of a household. This was a necessary prerequisite because respondents were asked about their employment history since 1980. While in theory this provides a fabulous opportunity to obtain historical information that would be equivalent to panel data, in the experience of this author, only those workers with very stable job situations remember their employment history in detail. Those with precarious jobs who rotate frequently, do not remember more than a couple of years of employment history, which means that their responses to such a survey are likely to be very imprecise and unreliable.19 This book does not use data from these surveys due to the methodological limitations of its first application in 2002, and because at the time of writing the database of its 2004 application had not yet been released.


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1.4. The Politics of Information As we can see from the description of the surveys above, there is no perfect source of information on the Chilean labor market. Analysts have to use a variety of different sources to complement the data generated by the official employment survey, which is exactly what this book does. The main problem with the information on the Chilean labor market is the paucity of data generated by the official source, the National Institute of Statistics. This is the survey that is supposed to be the main national source of information on the labor market. It is the only survey that is carried out on a continuous basis so that it generates data with the required frequency, but in terms of its scope it is extremely limited. In 1998, Mariana Schkolnik, when she was the head of the research department at the government’s National Institute of Statistics, wrote that “the production of socio-economic statistics and indicators has not kept up with the development of reality. . . . It is necessary to generate labor market statistics that not only measure employment and unemployment, but that also consider the quality of employment and the different types of employment that are being created.”20 Her words perfectly identify the main problem with official Chilean labor market statistics, yet they seem to have fallen on deaf ears at her own institution, as the INE has taken so long to modify its employment questionnaire. Much progress has been made since 1998 in terms of generating more information on the labor market, but it has all been through other institutions and ministries. The questionnaire of the CASEN survey has improved significantly over time, and the CASEN panel survey that was undertaken in 2001 also represents significant progress as does the more recent survey of employment histories, the HLSS. This means that we can now carry out much more sophisticated analysis than during the 1990s. The main problem with the available data in Chile is that the INE, which is responsible for generating the official data, has taken so long to revise its employment survey. There are two serious problems with this: the first problem is that many analysts simply ignore other sources of information because they are not “official” or not easily available. Data from the other surveys simply does not make it into the “public mind” in the same way as the INE data does, especially as the latter is the official source of unemployment data. If the INE were to include a more complete range of variables then additional labor market issues would be more likely to be included in public debates and official reports.21 The second problem is that the funding and consistency of the INE’s survey as the official source of data is reasonably assured over time. All the other surveys are subject to budgetary cuts and shifting political priorities (e.g., in 2002 the CASEN was not carried out for lack of resources and postponed until 2003). And there is no guarantee that surveys such as the Encla or the HLSS will be carried out consistently or over a long period of time, especially if the Concertación is voted out of office. Even the Encuesta Ocupacional, which is financed by the Central Bank, has been threatened with being discontinued and has suffered budgetary cuts that have affected the size of its sample and the frequency of its application. Official labor market surveys, however, are less likely to suffer such fates.

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This raises the question why the government has not invested more effort in expanding and improving the INE’s official survey rather than investing in a series of ad hoc surveys, which in the end swallow up far more resources. There is no clear answer to this. Bureaucratic inertia is certainly to blame for a large part of this inadequacy: among Chilean institutions the INE has one of the worst reputations for being slow, antiquated, difficult to work with, and unwilling to change.22 But this alone cannot explain the INE’s reluctance to change its questionnaire, especially as it is institutionally linked to the Ministry of Economy. Originally, much of the inadequacy of the available data in Chile could be blamed on the government’s reluctance to generate official data that would allow experts to analyze the density of contributions to the pension system in detail. Given the low level of contributions, the limited coverage of the system and the fact that most workers fell significantly short of the required period of twenty years of contributions that would guarantee them a minimum pension, generating data that would actually make these facts evident was politically a highly sensitive matter that involved confronting the interests of the pension fund management companies, which are associated with the opposition. Generating such data would have immediately prompted demands for reform and this was a battle that the Concertación was unwilling to take on for many years. But these issues were overcome in 2004 when the results of the HLSS, which was specifically designed to provide data on the density of contributions to the pension system, were made public. They showed that only 50 percent of Chilean wage-earners would be entitled to at least a minimum pension. In addition, a process was started that intended to merge the individual databases of the pension funds, which, unbelievable as it may seem, did not provide consolidated real data to the supervisory body of the pension system.23 So while institutional inertia and also economic resource constraints are certainly to blame for the INE’s antiquated survey questionnaire, political factors that aim to control access to information are also a big factor. A similar issue has come up since 2002 with regard to the real data that is being generated by Chile’s new unemployment insurance system. (See chapter 6 for a detailed analysis of this insurance.) Officials from the Ministry of Labor who are in charge of the unemployment insurance admit that the data shows that job rotation in Chile is significantly higher than they had originally assumed. Since this is a politically very sensitive issue that raises serious questions about the quality of employment in Chile, the database that the unemployment insurance system is generating is not being released to the public. This prevents experts from being able to undertake a detailed analysis of the employment situation of workers with short-term contracts. Aside from these political issues, the management of employment data in Chile since 1990 suggests not only a degree of institutional inertia, but also indicates that the importance of generating adequate data and engaging in extensive analysis is not fully appreciated as the matter is simply not a political priority. While the government would be the main beneficiary of better information (as it could then base its policies on more precise data), it is also the government that has so far neglected to implement and fund better research. The


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political will that such a project would require is lacking. Unfortunately, this leads to policymaking being based on opinions rather than facts, thus creating a vicious circle that allows traditional antagonisms to continue to fester and prevents more effective reforms from being implemented (chapters 3 and 9 discuss these matters in more detail). In particular the issues addressed by Chile’s labor market reforms have been underresearched. It seems incredible that the Chilean government has gone through a continuous process of labor reform for sixteen years without once commissioning a coherent and extensive study of its labor market. The fight for status quo thus becomes the main subject of the employment debates rather than the workers themselves, let alone the characteristics of their employment and the capabilities that these generate. Chapter 6 will further illustrate this point by discussing how policymakers designed an unemployment insurance system without the specific data needed to estimate how it would function in practice. One last point regarding information policies must also be highlighted: Chile has made undeniable progress in making survey information available to the public, especially through the Internet. Mideplan now puts at least some results from the CASEN survey on the Internet, and even the National Institute of Statistics has put some data on its Website, especially from the 2002 census. Most importantly, the Ministry of Labor has made the database of the HLSS available to the public, which represents a significant step forward. However, much more could be done. Even Bolivia makes its employment survey database available to the public through the internet without the requirement of any bureaucratic procedures! 2. Participation, Employment, Unemployment, and Wages Using ILO data, table 4.1 below shows that Chile has indeed performed much better in terms of its basic labor market indicators than its Latin American neighbors. Economic growth on average has been the highest in the region, its unemployment rate is significantly below the region’s average (although still high in comparison with unemployment in the United States), and its wage growth, especially of the minimum wage, which was significantly increased by legislation, has by far outstripped other countries in the region as well as the United States where average wage growth has been very low since the 1970s. Two noteworthy points, however, that are perhaps unexpected, are that the proportion of wageearners contributing to social security has fallen significantly, from above the Latin American average to below that average, and that Chile’s informal sector, as measured by the ILO’s definition, is also higher than the regional average and has even increased slightly since 1990. This in turn means that in Chile the high wage growth in industry and also the minimum wage apply to a smaller and decreasing proportion of workers compared to other Latin American countries, and certainly compared to the United States. The data highlights a process of increasing informalization of the workforce. As for Chile’s participation rate, it is lower than the regional average and significantly below the participation rate in the United States, a fact that indicates that the potential labor supply is by no

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Table 4.1 Basic labor market indicators 1990

1995

2000

2003

Economic growth, average annual rates, percent

LA, av. Chile USA

0.3 3.3 1.9

1.1 9.0 2.5

3.7 4.5 3.7

1.5 3.3 3.0

Participation rate, percent

LA, av. Chile USA

52.1a 53.0 66.5

57.2 54.9 66.6

58.3b 53.7 67.1

58.6 52.9 66.2

Urban unemployment, percent

LA, av. Chile USA

8.0 7.4 5.6

9.1 6.6 5.6

10.5 9.2 4.0

11.5 8.5 6.0

Real wages, industry (base year: 1990)

LA, av.c Chile USA

100.0 100.0 100.0

111.4 128.5 100.1

118.8 144.2 102.8

114.9 148.1 103.6

Minimum wage (base year: 1990)

LA, av.d Chile USA

100.0 100.0 100.0

113.1 129.3 98.8

123.9 172.5 106.0

127.4 186.5 99.2

Wage-earners contributing to social security, percent

LA, av. Chile

66.6 79.0

65.2 67.4e

64.6 62.8

63.6 NA

Total informal sector, percent

LA, av. Chile

29.2 37.9

24.2 38.8e

27.2 38.0

26.2 38.8

Notes: All Latin American averages are simple averages. a Excludes Nicaragua and Dominican Republic. b Excludes Nicaragua and Honduras. c Excludes Honduras and Barbados. d Excludes Haiti and Guatemala. e Refers to data from 1996. Source: ILO (2004a).

means exhausted. This low participation rate is due to the low employment rate of Chilean women in particular, who have not joined the workforce in as great a number as their female counterparts in some other Latin American countries. Infante and Sunkel (2004) have divided the period between 1990 and 2000 into three periods. The first, from 1990 to 1994 was one of strong economic growth (8.2 percent GDP growth per annum) and a high rate of employment growth. However, the unemployment rate did not decrease much as a result of a compensatory increase in the participation rate. The second period from 1995 to 1997, on the other hand, was one of even higher economic growth (8.4 percent per annum), in which employment growth outstripped the growth of the labor force due to a slight decline in the participation rate, which in turn brought the unemployment rate down to 6.1 percent in 1997. The third period, between 1998 and 2000, was characterized by the shocks of the economic crises in Asia, Russia, and neighboring Latin American countries. Chile’s Central Bank reacted with a sharp raise in interest rates, which brought the economy to a grinding halt and decreased average economic growth during the period to 2.2 percent, which also slowed down the generation of employment. Even though the participation rates contracted further, unemployment rose to 9.2 percent. Since then, the unemployment rate in Chile seems to have become stuck at these high levels even though the participation rate is still lower than its peak.


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In June of 2005, nationwide unemployment had dropped only to 8.2 percent according to the INE’s data, even though Chile had again achieved a high rate of economic growth of 6.1 percent in 2004.24 If we look at the period from 1990 to 2004 as a whole, an important variable to examine is the economic sector that has generated the most employment. We find that employment in the services sector has outstripped all other sectors by a huge margin (134 percent). This is followed by employment growth in the construction sector (52 percent), transport and communications (46 percent), utilities and commerce (both 39 percent), and community and social services (35 percent). Employment growth has been negative in the agricultural and mining sectors (13 percent and 28 percent respectively).25 We will come back to these results in the discussion of the quality of employment that each of these sectors generate in chapter 8. 3. How do We Look at the Data on the Chilean Labor Market? One point that must be discussed before analyzing the data on the Chilean labor market is how best to analyze it. If we are looking at the hours worked, do we analyze the hours worked by sex, occupational category, type of contract, size of company, income quintile, or other variables? Each of these classifications would serve a different analytical purpose and the choice would depend on the aspect of the labor market to be analyzed. Common forms of presenting labor market data are either according to the occupational position, which divides workers into employers, self-employed, wage-earners, domestic service, and nonremunerated family members, or according to the ILO’s definition of formal and informal sector, using the variables occupational position and size of company.26 While these definitions are useful in that they allow us to use historical data from the INE or University of Chile employment surveys, they are less useful for analyzing developments in the modern labor market as they do not allow us to examine how working conditions differ according to the many different types of contract that have emerged over the last decades such as short-term, project-based, freelance, temporary, or part-time contracts, not to mention subcontracting, home-based work, or tele-work.27 And since these types of work have proliferated in recent years and have also been integrated into Chilean legislation, it is important to capture their differing characteristics. Furthermore, these definitions do not capture shifts that are taking place within the formal (or wage-earning) and informal (or independent) segments of the labor market. As we will see below, many jobs in the latter segment are now of a significantly better quality than formal jobs, especially with regard to income levels. By contrast, the formal sector has become increasingly informalized as it employs a large proportion of workers without contracts or with freelance contracts. The analysis of empirical data below will show that this informalization is not limited to small companies only. In addition, one of the most important reasons for rejecting the ILO’s definition of informal employment is that the figure it produces, is

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much lower than the proportion of workers who are not contributing to social security, which is perhaps the best indicator of the formality of an employment relationship in Chile and also implies having a formal written contract in the case of wage-earners. So the ILO’s distinction between formal and informal work is now a little outdated and can be significantly improved upon if we use CASEN data, which now provides a much broader range of variables than it used to do. In choosing a method for presenting data on the Chilean labor market, we should remember that we are undertaking our analysis from the perspective of the capability approach, and that we are specifically trying to capture the employment characteristics of workers such as Sonia and Germán. This means that we have to analyze the data according to criteria that will allow us to assess the level of capability that will ensue from a particular category of employment. In turn, this means that it is important to consider the legal definitions of different employment relationships as these largely determine a worker’s entitlements to, for example, social security benefits, compensation in circumstances of job loss, as well as a range of other factors. This book therefore rejects the traditional forms of data presentation discussed above in favor of a composite variable that first makes a distinction between the salaried or dependent workforce and the self-employed or independent workforce, and then further distinguishes between different types of contract within the salaried sector and different types of occupational status within the independent sector. This type of analysis is more useful in the context of a modern labor market as it groups jobs together that are subject to similar legal provisions, and also allows us to examine how much the capabilities that these jobs generate vary according to the different types of contract used today. Throughout this book, this variable will be used and referred to as the “occupational status” of workers.28 The salaried workforce is split into the categories open-ended contracts, atypical contracts, and no contracts. The atypical contracts, in turn, distinguish between short-term, project-based, apprenticeship, and temporary contracts. The independent sector differentiates between employers, independent professionals, and the self-employed. Independent professionals are defined as selfemployed with some form of higher education (complete or incomplete), while the self-employed by definition do not have any level of higher education. The variable “type of contract” must be considered as fundamental to the concept quality of employment as it determines not only the potential stability of a job but also forms the legal basis of an employees’ rights and obligations. An open-ended contract imposes no inherent time limitation on a job and can therefore be considered more stable, both in theory and in practice, as the data will show. A fixed-term contract is by definition short-term as the worker will be obliged to seek either a renewal of contract or a new job at its conclusion. 29 Project-based contracts (contratos por obra o faena) have no specified length, but are generally also considered to be relatively short-term. Apprenticeship contracts cannot exceed a maximum of two years, in fact they are generally much shorter, and temporary contracts cannot exceed three months. Employees without contracts, on the other hand, have no written legal basis to


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prove that they are employed. Although in theory they can claim the existence of verbal contracts, this type of arrangement has to be established in court if a conflict between employer and employee arises. As we saw in Sonia’s case, few workers choose to go down this route, which is time consuming, incommodious, and uncertain. Formal contracts are generally a prerequisite to contributing to the health and pension insurance schemes in Chile. Employed persons without contracts would have to contribute voluntarily as independent workers, a possibility that only a minority of cases considers. An explanation of the terminology used in Chile and the translations used here is also necessary before looking at the data. In Chile, both the terms “honorario” and “independiente professional ” describe forms of employment where professionals (especially doctors, lawyers, and independent consultants) charge a fee for a particular service provided.30 These forms of work are not considered to be employment contracts, but civil law contracts and they are therefore excluded from the labor legislation and any benefits or protection it may provide.31 Both terms would be best translated as “freelance contracts,” which is where the matter becomes confusing. In practice, the difference between the two in Chile is that honorarios have increasingly become freelancers who are essentially working as dependent wage-earners, while the professional selfemployed are actually independent and consider themselves as such. Honorarios, on the other hand, consider themselves to be dependent, salaried workers.32 A particularity of the Chilean case is that employers are increasingly using honorario contracts instead of traditional open-ended contracts in order to avoid potential severance pay liabilities and also to free themselves of the responsibility for paying social security contributions onto employees themselves, as honorario workers are responsible for paying their own contributions to health and pension insurance schemes.33 This is a legal loophole that employers often abuse. Honorarios are not necessarily professionals, but can be sales staff, cashiers, or any other category of worker. In order to avoid confusion between these different types of freelance work, the Spanish term honorario is used to describe dependent freelancers and the term “professional self-employed” to describe those who are truly independent and self-employed.34 In the data presented below, honorarios are therefore included in the category of wage-earners without contracts. This explicitly recognizes the fact that honorarios are disguised wage-earners without formal employment contracts and increases the total proportion of wage-earners without formal contracts beyond levels that the Chilean government is prepared to recognize in its own documents.35 The composite variable set up for the purpose of data analysis in this chapter, and which is used systematically throughout this book, thus marks an important difference to other forms of data analysis, as it allows us to capture how different types of contract or occupational status generate different levels of employment quality. Official government sources and most labor market experts alike completely ignore the distinction between wage-earners with contracts and those without. If we look at government documents, this is an omission that occurs again and again. The same goes for publications by labor market experts. Even the ILO’s

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definition of informal sector, which was originally designed to capture informal employment, is not an appropriate measure of this distinction, as it includes the self-employed, who frequently have much better employment characteristics than wage-earners without contracts. As the data below will show, the most precarious category of employment is the wage-earner without a formal written contract. Any analysis of labor market data that does not specifically look at this category of worker is ignoring one of the most important problems of the Chilean labor market. To begin with, table 4.2 presents the distribution of the different types of contracts and occupational positions in the total labor force as it stood in 2003, and also of the new jobs that were initiated in the year prior to the survey. Of the total labor force, 75 percent work as wage-earners, whereas 25 percent work independently. Fifty-six percent of all waged workers still have traditional openended contracts. This amounts to 42 percent of the total labor force. The remaining wage-earners are distributed between atypical forms of contracts (14 percent) and workers without written contracts (30 percent). This means that of the total labor force, 10 percent have atypical contracts and 23 percent have no formal written contract. The majority of atypical contracts are fixed-term or project-based; only a negligible proportion of wage-earners have temporary or apprenticeship contracts (0.1 percent and 0.4 percent respectively).36 In the independent sector, the vast majority (72 percent) are self-employed, 12 percent are professional self-employed, and 16 percent are employers. This Table 4.2 The Chilean labor force by occupational status CASEN 2003 Contract or occupational status Wage-Earners Open-ended contracts Fixed-term contracts (a) Project-based contracts (b) Apprenticeship contracts (c) Temporary services (d) Total atypical contracts (a b c d) Freelance contracts (e) No contracts (f ) Total wage-earners without contracts (e f ) Subtotal wage-earners Independent Employer Professional self-employed Self-employed Subtotal independents Total workforce Source: Author’s calculations based on CASEN data.

Total labor force

New jobs

Percent

Subtotals

Percent

Subtotals

42.4 6.2 3.8 0.1 0.3 10.4

56.3 8.2 5.1 0.1 0.4 13.8

26.2 11.3 8.5 0.2 0.5 20.5

30.7 13.2 10.0 0.2 0.6 24.1

4.9 17.6

6.6 23.4

6.3 32.2

7.4 37.8

22.6

29.9

38.4

45.1

75.4

100.0

85.2

100.0

3.9 2.9 17.8

16.0 11.6 72.3

1.5 2.3 11.1

9.8 15.2 75.0

24.6

100.0

14.8

100.0

100.0

100.0


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means that 18 percent of the labor force are self-employed, 3 percent are professional self-employed, and 4 percent are employers. As is to be expected, the distribution of new jobs is very different from the labor force in general: a much lower proportion of new jobs is generated with open-ended contracts (26 percent), and a correspondingly higher proportion has atypical contracts (21 percent). This is only normal given the short-term nature of atypical contracts, which are expected to be renewed periodically. However, we should note that the largest proportion of new jobs is generated without formal contracts (38 percent). This means that close to half of the workers offered jobs in the salaried labor force are not offered contracts, with all the corresponding informality, instability, lack of social security contributions, and ultimately lack of capabilities that this implies. Whether this high proportion is due to simple job rotation among precarious contracts or whether it means that the overall proportion of wage-earners without contracts is increasing is a point that we will return to in the analysis below and in the following chapter. As for the independent sector, relatively fewer jobs are generated here, a majority of which are in self-employment. This points to a higher rate of employment stability among the self-employed, a fact that the analysis below will confirm. Three very important results from this analysis should be highlighted: first, only 42 percent of the labor force works in conditions that are covered by traditional labor legislation of the kind that presumes continuous employment with the same employer, that is, an open-ended contract. Second, while much of public policy concern has focused on wage-earners working under atypical forms of contract (e.g., temporary work, tele-work, piecework from home, etc.), the category of nontraditional employment that should cause the greatest level of concern is that of wage-earners without formal written contracts. Third, there are now more honorario workers than professional self-employed or employers, and certainly more of them than temporary workers or apprentices. Yet these workers have so far been completely ignored by public policies and debates. 4. The Characteristics of Employment in Chile The following analysis presents the characteristics of employment in Chile according to the breakdown discussed above. In the tables below, all atypical contracts (fixed-term, project-based, apprenticeship, and temporary contracts) have been grouped together in order to simplify the presentation of the data. The Armed Forces have been excluded from the data as a specific category and are simply included among wage-earners. The same goes for nonremunerated family members, who can be expected to form a small proportion of wage-earners without formal contracts. In the following sections any reference to data that does not appear in the tables below, together with further analysis of the data, can be found on the author’s Website. 4.1. The Male and Female Workforce Sixty-one percent of the total workforce is male and 39 percent is female. Table 4.3 shows that the proportion of open-ended contracts held by women

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Table 4.3 Characteristics of the labor force by occupational status Employers and self-employed

Wage-earners

Sex Men Women Total Level of education None Incomplete primary Complete primary Incomplete secondary Complete secondary Incomplete technical secondary Complete technical secondary Incomplete technical higher Complete technical higher Incomplete professional institute Complete professional institute Incomplete university Complete university Postgraduate Total Age group 15–24 25–34 35–44 45–54 55–64 65 Total

No contract

Total No contract

Sub-total wage-earners

54.7 45.3

55.2 44.8

55.1 44.9

60.2 39.8

100.0

100.0

100.0

100.0

1.7 23.0 17.1 18.0 18.0 11.2 1.3 0.5 1.2 1.1 1.6 1.3 3.1 0.9

1.2 16.0 12.9 15.3 19.2 14.0 2.2 0.8 2.3 2.1 2.7 3.1 7.3 1.3

0.3 4.2 5.6 8.2 21.7 11.3 2.4 0.8 4.9 3.3 5.3 10.3 17.5 4.2

2.2 21.7 15.5 17.6 19.2 11.7 1.2 0.5 1.3 1.6 1.6 3.7 2.0 0.2

100.0

100.0

100.0

100.0

10.9 29.5 28.8 20.5 8.8 1.6

21.4 33.1 26.0 14.1 4.6 0.7

16.5 29.1 30.9 16.7 5.5 1.2

19.8 31.4 27.8 15.2 4.8 1.0

100.0

100.0

100.0

100.0

Openended

Fixedterm

Project based

Total Aypical

61.1 38.9

60.2 39.8

80.2 19.8

67.3 32.7

100.0

100.0

100.0

0.6 8.2 8.7 11.1 23.3 12.0 3.2 1.1 3.8 2.2 4.8 4.9 13.8 2.3

0.9 12.1 10.7 13.6 19.1 15.4 2.6 0.9 3.0 2.5 3.4 4.2 10.1 1.6

100.0

Prof. self

Self

Sub-total independents

72.0 28.0

61.1 38.9

69.7 30.3

69.1 30.9

62.4 37.6

100.0

100.0

100.0

100.0

100.0

100.0

1.7 17.9 13.4 15.5 19.7 11.6 1.5 0.6 2.1 2.0 2.4 5.2 5.4 1.1

1.0 12.2 10.7 13.0 21.7 12.2 2.6 0.9 3.1 2.1 3.8 4.7 10.4 1.8

0.4 7.6 6.2 10.0 18.9 8.2 2.4 0.6 3.3 1.6 4.2 10.1 23.6 2.8

— — — — — — — 3.6 11.8 7.9 12.7 26.9 33.3 3.9

2.8 25.5 17.6 19.8 22.0 10.3 1.9 — — — — — — —

2.1 19.7 13.7 15.9 18.9 8.8 1.8 0.5 1.9 1.2 2.1 4.7 7.7 0.9

1.3 14.0 11.4 13.7 21.0 11.3 2.4 0.8 2.8 1.9 3.4 4.7 9.7 1.6

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

18.7 32.1 24.1 15.1 7.4 2.6

22.9 24.6 25.4 16.1 8.3 2.7

22.0 26.2 25.1 15.9 8.1 2.7

15.4 28.8 27.5 18.4 8.0 1.8

1.4 14.1 27.0 29.7 17.8 10.1

8.5 31.0 27.3 22.0 8.5 2.5

6.9 15.2 27.0 25.2 16.7 9.1

6.2 16.9 27.0 25.6 15.9 8.5

13.2 25.9 27.4 20.2 10.0 3.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Honorario

Employer

Total work-force

Table 4.3 Continued Employers and self-employed

Wage-earners

Economic sector Manufacturing Financial services Commerce Construction Mining Agriculture Transport Services Otros Total Income category 0.5 minimum wage 1 minimum wage 1– 2 minimum wages 2– 3 minimum wages 3– 4 minimum wages 4 minimum wages Average hourly income (pesos) Standard deviation

No contract

Total No contract

Sub-Total wage-earners

11.9 12.4 15.6 6.2 1.0 4.5 6.8 41.0 0.7

9.9 3.0 18.0 9.3 0.5 21.1 7.7 29.9 0.5

10.3 5.1 17.5 8.6 0.6 17.5 7.5 32.4 0.5

13.7 7.5 17.0 7.9 1.9 12.6 7.4 31.1 1.0

100.0

100.0

100.0

100.0

3.7 33.0 43.1 10.1 3.7 6.4 — 3,422

6.1 17.8 35.3 14.1 7.8 18.9 1,757 2,529

18.3 39.9 33.6 4.8 1.3 1.9 670 774

15.5 34.7 34.0 7.0 2.9 5.9 — —

Openended

Fixedterm

Project based

Total Aypical

15.9 9.5 18.4 4.4 2.4 7.6 8.0 32.6 1.3

13.9 4.6 14.4 10.4 2.6 16.6 4.9 31.9 0.7

8.5 3.3 3.5 38.1 2.8 33.6 4.1 5.2 0.9

11.9 4.7 10.4 20.4 2.6 22.6 4.7 22.1 0.7

100.0

100.0

100.0

0.8 14.6 44.6 15.5 7.8 16.7 1,663 3,306

3.3 31.6 42.0 11.0 4.6 7.6 1,104 1,256

4.2 34.6 45.0 9.0 2.4 4.7 898 818

Honorario

Prof. self

Self


15.6 12.1 28.3 9.9 0.8 11.1 8.0 13.5 0.7

11.2 18.9 24.6 7.8 0.1 4.7 7.5 24.5 0.7

12.8 1.7 30.9 11.6 0.4 19.2 9.3 13.9 0.2

13.1 5.3 29.7 10.9 0.5 16.2 8.9 15.1 0.3

13.5 7.0 20.1 8.6 1.5 13.5 7.8 27.1 0.8

100.0

100.0

100.0

100.0

100.0

100.0

5.4 22.9 41.4 12.4 5.8 12.2 — —

0.5 1.2 6.0 7.6 8.9 75.7 8,990 14,903

3.4 8.5 6.5 15.5 13.7 30.1 13.5 19.4 12.1 11.6 50.8 14.8 4,312 1,459 6,121 1,502

6.6 12.2 24.3 16.8 11.2 28.8 — —

5.7 20.2 37.1 13.5 7.1 16.3 — —

Employer

Total work-force

Continued

89

90


Wage-earners

Income decile I II III IV V VI VII VIII IX X Total

Openended

Fixedterm

Project based

Total Aypical

2.9 6.2 12.1 13.3 11.3 11.3 11.4 11.1 10.9 9.5

8.4 14.3 20.7 15.1 9.6 6.3 9.5 6.5 4.8 4.8

11.6 15.3 21.1 17.2 9.0 7.3 7.7 5.3 3.6 1.8

9.9 14.7 20.9 15.6 9.5 6.9 8.7 6.0 4.3 3.6

100.0

100.0

100.0

100.0

No contract

Total No contract

Sub-Total wage-earners

12.1 6.6 10.8 10.6 8.3 8.3 10.0 9.6 12.0 11.7

34.5 16.6 14.7 11.7 7.5 5.6 4.5 2.3 1.6 1.1

29.2 14.3 13.8 11.5 7.7 6.2 5.8 4.0 4.0 3.6

11.4 9.7 13.8 13.1 10.0 9.2 9.4 8.4 8.0 7.0

100.0

100.0

100.0

100.0

Honorario

Note: Total Atypical refers to fixed-term, project-based, apprenticeship and temporary contracts Source: CASEN, 2003. Own calculations.

Prof. self

Self


0.8 0.9 0.4 1.4 1.3 2.2 5.0 10.4 15.8 61.9

6.5 3.3 1.3 1.7 3.1 6.0 7.7 17.3 15.1 38.2

16.0 6.9 5.1 5.1 8.6 9.2 13.5 18.4 10.8 6.4

12.4 5.5 3.9 4.1 6.8 7.7 11.5 17.0 12.1 19.0

11.6 8.7 11.3 10.9 9.2 8.9 9.9 10.5 9.1 10.0

100.0

100.0

100.0

100.0

100.0

Employer

Total work-force


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(39 percent) corresponds to the proportion they represent in the labor force, while they hold fewer atypical contracts (33 percent), and represent a significantly larger share of the workforce without contracts (45 percent). An interesting detail to note is that women are significantly more likely to hold an apprenticeship (54 percent) or a temporary contract (48 percent), while they are relatively less likely to hold one that is project-based (20 percent). Women are also significantly overrepresented among honorarios (45 percent). Overall, the data on wage-earners shows a higher level of informality or a lower quality of employment among the female labor force. Women are also slightly less likely than men to work in the independent sector. They are underrepresented in the employer (28 percent) and self-employed (30 percent) categories, but their participation as professional self-employed is proportionate to their overall participation in the labor force (39 percent). 4.2. Levels of Education The data on the levels of education of the Chilean labor force shows that less than 2 percent of the workers have no education at all. It also clearly shows the problems that the Chilean educational system has with high dropout rates. At the primary level, more people did not complete their respective level of education than those who did complete it (18 percent versus 13 percent), whereas at the secondary level more students complete their studies. Secondary education in Chile can be either technical or traditional. The latter prepares students for university entrance, while technical secondary education teaches a skill as well as basic academic subjects to prepare students for a technical career in specialized fields, such as accounting, secretarial work, plumbing, or tourism. Overall, 21 percent of the Chilean workforce have a complete secondary education. Most of the education at the secondary level is traditional. Nineteen percent of Chilean workers have some level of higher education, although only 12 percent have completed their respective level of education. Higher education in Chile is also separated into technical and academic degrees, which are generally undertaken at different universities. The technical degrees are offered by vocational training centers, which provide a less theoretical and shorter degree, and by technical institutes, which offer longer and more theoretical degrees that also require work experience and a degree of research in the field. Most students with higher education undertake traditional academic degrees as opposed to technical degrees, but dropout rates at all levels are very high. The profile of workers with open-ended and atypical contracts is not that dissimilar in terms of their educational levels, although a greater proportion of workers with atypical contracts have not completed their respective level of education. Perhaps the most surprising result is that workers with atypical contracts are almost as likely to have a university education as those with open-ended contracts. Among those workers without contracts, the level of education is noticeably lower: 31 percent have only primary education while another 48 percent fall into the secondary education category. They also have the highest proportion of incomplete levels of education in the wage-earning sector.

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In the independent sector, the professional self-employed by definition have some level of higher education, while almost half the employers have some form of higher education (34 percent technical and 52 percent university). By definition, the remaining self-employed all have either primary (43 percent) or secondary (54 percent) education levels, as they would otherwise be classified as professional self-employed. 4.3.

Age Structure

Approximately three quarters of the Chilean labor force are concentrated in the 26–55 age bracket, with equal proportions (11 percent) of younger people (15–25) and older people (56–65) working. Looking at how different forms of contract or occupational status are distributed among age groups leads to the overall conclusion that the younger workers tend to be concentrated in the salaried sector, and that the older the workers become, the more likely they are to work independently. On the whole, in the wage-earning sector the age distribution among those who have openended contracts is relatively similar to the overall age distribution of the labor force. However, within the salaried sector, younger workers are less likely to have formal written contracts than older workers, and they also hold a proportionately higher percentage of atypical contracts. In the independent sector, most professional self-employed or employers are concentrated in the 36–55 age bracket, although an astonishingly high percentage of 20–25-year-old, professional self-employed seems to be emerging.37 This may indicate a trend that could increase with the greater numbers of students emerging from higher education. If this should be the case, the effect on future income distribution is likely to be negative.38 An important point to note is also that a higher percentage of the independent sector than of the waged sector is over 55 years of age (24 percent versus 10 percent). This makes sense given that the self-employed are not obliged to contribute to the pension system and, as we will see below, rarely do, so that their best option is to continue working for as long as possible. 4.4.

Economic Sector

As regards the distribution of economic activity, the most important sectors are manufacturing (14 percent), agriculture (14 percent) commerce (20 percent) and services (27 percent), with services representing by far the largest sector. CASEN surveys are generally carried out in spring, which means that they capture only those workers who are employed in agriculture on a relatively stable basis. The proportion of agricultural employment would increase further during the summer and early autumn months. The mining sector, although it is one of the largest contributors to GDP in Chile employs less than 2 percent of the workforce. There are clear differences between the sectors in terms of the types of contract that they employ. Clearly, the mining and utilities sectors employ proportionately the most number of workers with open-ended contracts (both 66 percent),


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followed by the financial services sector (58 percent). The agricultural sector employs the lowest proportion of workers with open-ended contracts (24 percent). Conversely, all sectors, except for mining and financial services, employ a large proportion of workers without contracts, while the construction and agricultural sectors employ the highest proportion of workers without contracts. Overall, the workers in the construction and agricultural sectors split relatively evenly between open-ended contracts, atypical contracts, workers without contracts, and nonprofessional self-employed. The commerce sector also employs a relatively low proportion of workers with open-ended contracts, and a relatively high proportion of work in this sector is carried out by self-employed workers. If we look at this data by type of contract, we can see that some sectors employ a majority of workers with particular types of contracts. For example, the bulk of workers with project-based contracts work in the construction and agricultural sectors (37 percent and 33 percent respectively). Workers with short-term contracts or without any contracts, on the other hand, are much more evenly distributed across different economic sectors. Similarly, the largest proportion of honorarios work in the services sector. These distributions are determined by traditional forms of hiring in certain economic sectors. In the independent sector, the commercial sector attracts by far the largest proportion of workers, especially of the self-employed, which is easily explained by the low barriers of entry of this activity. This is followed by services, manufacturing, and agriculture. It is interesting to note, however, the large proportion of the more educated independent sector, especially of the professional selfemployed, who work in financial services. On the whole, the data shows that some sectors have clear preferences for certain types of contract, and also that employers and independent workers are concentrated in certain sectors. This is an important fact to bear in mind while matching economic sectors with the kinds of employment generated. It is a point we will come back to, especially in chapter 8, where we will discuss which economic sectors generate the best quality jobs. 4.5.

Levels and Distribution of Income

About 20 percent of the total labor force earns the stipulated minimum wage or less.39 Another 37 percent earns 1–2 minimum wages, and 22 percent earn 2–4 minimum wages. If we consider that two minimum wages are necessary to keep a family of four above the poverty line, then it is clear that there has to be more than one earner in most households in order to avoid poverty. Only 16 percent of the total labor force is earning more than 4 minimum wages. The data shows that there is a clear tendency for the more precarious forms of work to earn less across all categories of occupational status. While 15 percent of workers with open-ended contracts earn a minimum wage or less, 24 percent of the self-employed, 37 percent of workers with atypical contracts, and 40 percent of workers without contracts do so. Conversely, employers and the professional selfemployed are concentrated in the highest income category: in both cases the majority earn more than 4 minimum wages (76 percent and 51 percent respectively).

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The relationship between the type of contract and the level of income is even clearer if we look at the occupational status by income decile. Open-ended contracts are relatively evenly distributed across all income deciles, except for the first two, while all kinds of fixed-term contracts are clearly concentrated among lower income deciles. It is interesting and important to note that the earnings of the self-employed are not generally less than those of workers with open-ended contracts. Almost the same proportion of the self-employed earn more than 4 minimum wages as among wage-earners with open-ended contracts (15 percent versus 17 percent). If we look at earnings by income decile, the same picture emerges. While there is a high concentration of self-employed in the lowest income decile, reflecting the thousands of street vendors and other low paid types of self-employment that we find in Chile, the proportion of self-employed drops in the second to the sixth decile, and then increases again in the seventh to the ninth decile. In the highest income decile, the proportion of self-employed, however, is lower again. This means that the self-employed by no means necessarily earn less than workers with open-ended contracts. But they do earn less than the highest paid workers with open-ended contracts. If we look at average wages, this conclusion is confirmed. The average hourly wage of workers with open-ended contracts is 1,663 pesos (US$ 3.03), while the average hourly wages of the self-employed is 1,459 pesos (US$ 2.67). But the dispersion of income among the self-employed is much lower than among workers with open-ended contracts (1,502 versus 3,306 standard deviations). This has significant implications as regards, for example, the ability of the self-employed to contribute to the social security system. It also means that there is no reason for self-employment to be classified as informal or precarious employment per se. As for the other types of occupational position, their average wages are very much in line with what one would expect. Fixed-term contracts pay a higher average hourly wage than project-based ones, which pay more than temporary contracts, and workers without written contracts earn the least. One interesting point to note, however, is that honorario workers earn much less than the professional self-employed, and only slightly more than the average self-employed worker. This means that honorario contracts are clearly now being used for a wide range of middle-income jobs and are no longer used as the standard form of payment for professionals rendering a personal service, as was traditionally the case.40 4.6.

Health, Pension, and Unemployment Insurance

Contributing to a health, pension, and unemployment insurance must be considered as a fundamental component of the quality of employment, and to a worker’s capability set, particularly in a country where the state’s emergency social security provisions cover only the very bare minimum. As was discussed in chapter 3, Chilean workers finance their health insurance and pensions themselves without any contributions from employers. However, only wage-earners are obliged by law to contribute to health insurance and the pension system, while the self-employed are under no obligation to do so.41


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The main difference between the health system and pension system is that as regards health insurance, users have a choice between a public health service (the Fondo Nacional de Salud, FONASA) and private insurers (Instituciones de Salud Previsional, ISAPREs), while pension plans are now all private. A few contributors to the public pension system (Instituto Nacional Previsional, INP) remain simply because they chose not to switch schemes after the privatization of the plans. But it has been impossible to join the public scheme for new contracts since 1982. Accident insurance and, since 2002, also unemployment insurance are the only two remaining additional wage costs that Chilean employers have to assume for each worker. All wage-earners who have a written contract should therefore be covered by these insurance schemes. As we will see below, accident and unemployment insurance are thus two variables that are closely related to a worker’s type of contract. This section will discuss each of these insurance systems in turn. As regards health insurance, we must distinguish between different levels of coverage. There are two types of health insurance systems: the public service (FONASA), and private insurance companies (ISAPRES). However, the public system is also run like a private insurance company, in the sense that workers have to pay contributions. Only people who are poor are attended to free of charge.42 As we will see from the data below, Chilean workers are very adept at obtaining the required certification to show that they are poor. Workers generally contribute to one of the two types depending on their level of income. Some workers in the public sector are, however, covered by specific schemes that are remnants of the health insurance structures that existed in Chile before privatization. This applies especially to all members of the armed forces and police services. While the military regime privatized health insurance for all workers in the 1980s, it never touched its own privileges.43 As regards the coverage of the pension system we must distinguish between workers who are affiliated and those who are contributing to the pension system. Many studies in the past have discussed affiliation to the pension system, but this measures only those who contributed to the system at some point in time. A worker can contribute for only two months and stop and yet remain affiliated to the system. This explains why the number of affiliated members to the pension system gradually grew to a point where it exceeded the actual number of the workforce in Chile. So, what we have to focus on is the proportion of the labor force that is contributing regularly to the pension system. Even so, this only tells us how many workers are contributing at any point in time, not whether they are actually contributing long enough to accumulate enough funds to be able to finance a future pension. In order to analyze the latter point we need to have historical data on the employment histories of workers, such as was gathered by the HLSS survey. Nevertheless, the low overall rate of contributions to the pension system gives us an indication that many Chilean workers will not be able to finance a pension. Contributions to the health insurance and the pension system should mirror each other, as employers who deduct contributions for one system generally also

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deduct contributions for the other. But if we look at the total workforce, a slightly higher proportion of workers contributes to health insurance, and some important differences emerge for the various occupational positions, as we can see from table 4.4. Of the total workforce, 69 percent contribute to health insurance, while 62 percent contribute to the pension system. This proportion increases to around 75 percent if we consider only wage-earners. Independent workers, however, overwhelmingly choose not to contribute to either health or pension insurance, although all categories of independent workers decide more frequently to contribute to the former than to the latter (45 percent have health insurance, while only 24 percent contribute to a pension fund). This is consistent with survey evidence that shows that the health insurance system is better evaluated than the pension system. Although Chileans think little of either the private pension funds or the private health insurance system, they generally evaluate the public health insurance system positively.44 The data also suggests that there is some level of abuse of the public system among the self-employed, who have a greater tendency to use the public services that are free of charge for the poor than their average earnings would lead us to expect. If we remember that the self-employed earn only slightly less than workers with open-ended contracts, then they should be only slightly more likely to use FONASA’s free services. Instead, they are more than twice as likely to use them. Among wage-earners, the typical pattern emerges with which we are by now familiar: the better the contractual arrangement, the more likely workers are to contribute to health and pension insurance. Yet there are some remarkable differences between the two systems if we look at different types of contracts. While 96 percent of workers with open-ended contracts contribute to the pension system, only 93 percent contribute to health insurance. This percentage falls to just over 90 percent of pension contributions among workers with fixed-term or project-based contracts, and to 88 percent of temporary contracts. However, among the same categories of contracts significantly fewer workers contribute to health insurance: 79 percent, 71 percent, and 77 percent respectively. The very low ratio of contributions among workers with project-based contracts is particularly noteworthy. There is no obvious reason why workers with atypical contracts should be more likely to contribute to the pension system than to health insurance. If we look at honorarios and wage-earners without formal written contracts, the same pattern as among the self-employed emerges: workers are more likely to contribute to health than to pension insurance, but in all cases the proportions of contributions are significantly reduced. Overall, 45 percent of workers without contracts contribute to health insurance, while 26 percent contribute to the pension system. These proportions are the same as among the independent sector. We should note, however, that the formulation of the question workers are asked with regard to their pension provisions does not specify that these provisions have to be their own. So, respondents who considered themselves covered through the insurance of their spouse may well answer that they are insured.45 This may explain why, despite low-income levels among workers without contracts, one-fifth of them still respond that they have pension insurance.

Table 4.4 Characteristics of the labor force by occupational status Employers and self-employed

Wage-earners

Health Insurance FONASA, Group A FONASA, Group B FONASA, Group C FONASA, Group D Another public system Armed Forces ISAPRE (private insurance companies) No insurance Other insurance Does not know Total Total workers covered Total workers not covered Pension system contributions Contributes Does not contribute Does not know Total Unemployment insurance contributions Contributes Does not contribute Does not know Total

Openended

Fixedterm

Project based

Atypical

Honorario

4.2 23.9 18.5 14.8 1.4 0.9 33.0 1.8 0.1 1.5 100.0 92.5 6.0

14.5 35.2 16.0 10.9 1.5 0.9 14.7 4.2 0.1 2.0 100.0 79.3 18.8

22.1 36.9 16.7 9.1 1.8 0.3 6.6 4.2 0.1 2.1 100.0 71.5 26.5

17.6 35.6 16.5 10.3 1.6 0.6 11.5 4.2 0.1 2.0 100.0 76.3 21.8

13.9 18.6 12.3 9.7 1.1 2.0 24.5 16.1 0.4 1.5 100.0 68.5 30.1

45.0 19.9 6.9 4.3 1.0 1.2 4.6 15.0 0.1 1.9 100.0 38.1 60.3

38.1 19.6 8.0 5.5 1.0 1.4 9.0 15.2 0.2 1.8 100.0 44.8 53.6

16.2 24.2 15.1 11.4 1.3 1.0 22.8 6.2 0.1 1.6 100.0 76.0 22.5

96.4 2.7 0.9

92.4 6.2 1.4

90.8 7.9 1.3

91.5 7.1 1.3

48.5 49.0 2.5

19.9 77.2 2.9

26.2 71.0 2.8

100.0

100.0

100.0

100.0

100.0

100.0

21.7 61.0 17.2

23.6 57.4 19.0

25.4 60.1 14.5

24.0 59.0 16.9

9.4 77.0 13.6

3.2 83.1 13.7

100.0

100.0

100.0

NA

NA

No contract

NA

No Sub-total contract wage-earners Employer

Prof. Self

Self


Total work-force

8.3 17.3 7.6 8.6 1.0 2.4 36.5 17.0 0.3 0.8 100.0 73.9 25.5

12.6 16.3 8.2 8.8 1.5 1.6 28.2 21.2 1.0 0.7 100.0 65.5 33.8

47.0 20.7 5.9 3.2 1.0 1.2 3.5 16.1 0.1 1.1 100.0 35.7 63.4

36.8 19.7 6.5 4.7 1.1 1.5 11.7 16.8 0.2 1.0 100.0 45.3 53.9

21.3 23.1 13.0 9.7 1.2 1.1 20.1 8.8 0.2 1.5 100.0 68.5 30.2

74.7 23.8 1.5

54.0 44.5 1.4

31.0 67.0 2.0

16.3 82.3 1.4

24.0 74.5 1.5

62.3 36.2 1.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

4.7 81.6 13.7

17.4 66.3 16.2

NA NA NA

NA NA NA

NA NA NA

NA NA NA

100.0

100.0

100.0

100.0

NA

100.0

17.4 66.3 16.2 100.0

97

Continued

98


Wage-earners

Accidents Accident at work Accident in transit to work Work-related illness None Total Tenure 6 months 6 months 1 year 1 2 2 5 5 11 11 24 24 26 26 Total More than years 2 More than years 5 More than 11 years Average Tenure in months

Openended

Fixedterm

Project based

Atypical

5.1 1.6 0.6 92.6

5.9 1.2 0.5 92.3

5.5 1.4 0.7 92.4

5.8 1.3 0.6 92.4

100.0

100.0

100.0

5.8 6.9 9.0 26.5 26.2 18.5 1.3 5.9

36.8 16.0 10.9 17.1 12.6 5.1 0.2 1.2

54.0 15.2 8.6 12.6 6.4 2.6 0.0 0.6

43.2 15.8 10.1 15.5 10.4 4.0 0.1 1.0

19.9 13.8 10.8 25.0 16.9 10.2 0.5 2.9

41.4 12.7 9.8 17.3 9.6 6.3 0.3 2.6

100.0

100.0

100.0

100.0

100.0

78.9 52.2 25.8 98.6

36.4 19.2 6.6 36.2

22.4 9.7 3.2 20.4

31.1 15.6 5.2

55.8 30.7 13.7 58.3

NA

Honorario

4.2 0.9 0.5 94.3 NA

No contract

2.0 0.9 0.2 97.0



Total work-force

4.4 1.4 0.5 93.7

NA NA NA NA

NA NA NA NA

NA NA NA NA

100.0

100.0

100.0

100.0

100.0

100.0

36.7 12.9 10.0 19.0 11.2 7.1 0.3 2.6

20.2 9.9 9.4 22.8 19.5 13.1 0.9 4.2

4.2 3.2 5.6 17.1 25.9 29.3 1.9 12.7

10.2 8.3 9.1 28.2 22.5 16.6 1.5 3.6

10.8 5.1 6.1 19.5 21.0 22.5 1.9 13.2

9.7 5.1 6.4 20.2 22.0 22.9 1.8 12.0

17.6 8.7 8.7 22.1 20.1 15.5 1.1 6.1

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

36.3 18.9 9.2 40.0

40.6 21.5 10.2

60.8 37.9 18.3

87.6 70.4 44.2 152.0

72.4 44.2 21.7 86.3

78.4 58.7 37.7 137.3

79.1 58.9 36.8

65.3 43.1 22.9

NA

4.4 1.4 0.5 93.7

Self

NA NA NA NA

NA

2.5 0.9 0.3 96.3

Prof. Self


Wage-earners Openended

Fixedterm

Project based

Total Atypical

Honorario

Job Rotation: How many Jobs have you had in the last three years? (excludes unemployed) One job 72.5 35.4 23.5 30.6 51.2 Two jobs 14.8 23.5 27.2 24.9 16.1 Three jobs 3.1 11.6 19.0 14.3 6.4 Four jobs 0.7 4.2 6.9 5.3 2.3 Five jobs 0.3 1.7 4.0 2.5 0.5 More than five jobs 8.8 23.5 19.4 22.4 23.5 Total Size of Employer 1 2–5 6–9 10–49 50–199 200 no sabe Total Total 2–9 workers Total 10 or more workers Total 50 or more workers

No contract


Prof. Self

Self


Total work-force

34.2 21.1 9.7 3.5 1.9 29.7

37.9 20.0 9.0 3.2 1.6 28.4

56.3 17.7 6.4 2.1 1.0 16.5

85.4 8.3 2.0 0.4 0.1 3.8

85.4 8.3 2.0 0.4 0.1 3.8

64.1 14.7 2.6 0.4 0.3 18.0

74.9 10.6 2.3 0.8 0.4 10.9

60.9 16.0 5.4 1.8 0.8 15.2

100.0

100.0

100.0

100.0

100.0

100.0

100.1

100.0

100.0

100.0

100.0

100.0

100.0

4.8 9.5 6.5 20.8 16.9 34.5 7.0

1.2 6.4 5.8 22.8 18.5 35.5 9.7

0.5 4.0 3.8 24.2 27.7 29.3 10.5

1.0 5.4 5.1 23.3 22.3 33.0 9.9

2.4 14.1 7.9 19.5 15.8 28.4 11.8

17.6 34.3 9.0 15.5 7.4 8.2 7.9

14.3 29.9 8.8 16.4 9.2 12.7 8.8

7.1 15.0 7.0 19.8 15.3 27.8 7.9

— 59.2 16.2 17.0 3.0 1.6 3.0

72.9 25.3 NA NA NA NA 1.8

74.2 24.7 NA NA NA NA 1.1

62.2 30.3 2.6 2.7 0.5 0.3 1.5

20.6 18.8 5.9 15.6 11.7 21.0 6.3

100.0 16.1 72.7 51.7

100.0 12.3 77.1 54.2

100.0 7.9 81.4 57.1

100.0 10.6 78.8 55.5

100.0 22.1 64.0 44.4

100.0 43.6 31.2 15.7

100.0 38.9 38.4 22.0

100.0 22.1 63.3 43.3

100.0 75.9 21.8 4.6

100.0 25.3 NA NA

100.0 24.8 NA NA

100.0 33.0 3.5 0.7

100.0 24.8 48.6 32.9

Note: Total Atypical refers to fixed-term, project-based, apprenticeship and temporary contracts. Source: CASEN, 2003. Own calculations.

99

100

●


An interesting point to note with regard to pension and health insurance is that honorarios are more likely to be covered than the self-employed, professional, or otherwise. In fact, they are almost as likely to be covered as employers are. This is surprising given that for all intents and purposes honorarios are essentially self-employed. There may be an issue of perception or mentality here as anybody who calls herself a cuenta propia (own-account worker) assumes that they do not have to contribute, while honorarios essentially consider themselves as salaried workers. But this is speculation and has not been researched by any systematic method. In 1999, the author’s own survey asked workers who did not contribute to a pension plan, why they did not contribute. Forty-one percent claimed that this was due to either low and unstable income or employment, an answer that was not at all directly linked to their income levels as poor and rich alike tended to consider themselves too poor to contribute.46 Another 17 percent claimed that their employers were not paying the required contributions and an astonishing 30 percent claimed that they were not interested or too lazy to sort it out.47 Unsurprisingly, the proportions among dependent and self-employed workers varied substantially on this question, as dependent employees were more likely to blame their employers (34 percent), while the self-employed mainly complained about low or unstable income (almost 50 percent), or said that they were too lazy or disinterested (40 percent). Fifty-five percent of those respondents who were not contributing to a pension or health insurance indicated that they intended to do so “in the future,” while 28 percent did not (the remainder did not know). Again the proportion of wage earners who intended to contribute was higher than that of the selfemployed (68 percent vs. 49 percent), which confirms that overall the selfemployed are much less interested in being insured. Among those interviewees who replied that they were not contributing to any health insurance system, the most frequently stated reasons for this were slightly different from the reasons for not contributing to the pension system. People responded that they would use the tarjeta de indigencia whenever they needed to see a doctor, 20 percent said that they were protected through another member of the family, 17 percent claimed low income, while another 10 percent again claimed disinterest or laziness (the majority of these cases being from the self-employed sector). Twelve percent of the respondents without insurance also claimed that whenever they went to the doctor, they simply paid for it then and there. For those not contributing, the options when seeking medical help are effectively to either pay for it or to claim indigence (in which case the state ends up paying). However, a number of tricks also exist for getting around these problems, the most common of which seems to be to get a voucher for a medical service from a friend or family member who is insured and visit the doctor with it. This mechanism is facilitated by the fact that in Chile many sons and daughters have the same first names as their fathers or mothers. These survey results on health and pension insurance confirm the widely accepted perception that the self-employed are not very interested in contributing to a pension scheme. An interesting difference to note between the dependent and


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self-employed segments of the workforce is that among the latter, the desire to contribute at some point in the future is higher than the proportion actually contributing, while for the wage-earners, the reverse is true. This result may suggest that given a choice, a lower proportion of wage-earners would contribute to the system than currently does. With regard to the new unemployment insurance system, the CASEN data follows the same general pattern as with the other social security systems, although the overall percentages of coverage are very much lower because workers are being gradually included in the insurance, that is, the insurance is obligatory only for new contracts. There is high proportion of workers who answer that they do not know whether they are affiliated to the unemployment insurance, which indicates that the system is not yet well known among the workforce. Since chapter 6 is entirely dedicated to the analysis of the unemployment insurance scheme, this chapter will not enter into any further analysis of the subject. 4.7.

Tenure and Job Rotation

Another variable that must be considered as key to any judgment on the quality of employment is the duration of the individual’s employment periods. As was already indicated above, tenure can indicate how secure or stable a job is, but it is also a variable that is very important for people who lose their jobs, as it determines the level of severance pay in cases of redundancy. As mentioned in the section above, the duration is also very important for social security protection, especially pensions, as the amount to be received depends on the total length of time spent working.48 Despite its obvious importance, this variable is not included in any of the other labor market surveys in Chile (INE, or Universidad de Chile, and the CASEN only included the variable in 1996, 2000 and 2003). Table 4.4 shows that 26 percent of the labor force has worked in the same job for less than a year. Forty-three percent of these workers do not have a formal written contract, 23 percent have some form of atypical contract, and 20 percent are new open-ended contracts. Only 13 percent of these new jobs were formed in the independent sector. We will come back to this characterization of new jobs in the following chapter when we look at how the generation of different types of employment changed as a result of the economic crisis in 1999. The most important result to highlight here is that a relatively high proportion of atypical contracts, and especially of fixed-term contracts, has had relatively long durations. Fixed-term contracts, according to legislation are supposed to last a maximum of one year and are renewable once, except in the case of professional employees, who may be contracted for up to two years (also renewable once).49 However, the data shows that 36 percent of fixed-term, 22 percent of project-based, and 39 percent of “temporary” contracts have lasted more than two years. Among fixed-term contracts, this proportion rises to almost half if we consider tenures that exceed one year. This means that a large proportion of respondents with fixed-term contracts are saying that they have worked for the same employer continuously for a length of time that exceeds legal stipulations. Average tenure data reflects this as well. Workers with fixed-term

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contracts state that they have been in the same job for an average of three years. A common practice of employers, which is well known to compliance offices, is to hire a worker for one year, terminate her contract, and rehire the person again after one month, and a year later to do the same thing, and so on. Although illegal, this is a typical way in which employers avoid the potential obligation to pay severance pay, in case they have to make workers redundant. In order to insist on the payment of the severance pay that they are theoretically entitled to, workers would have to go through lengthy court procedures to prove that they were effectively employed on a permanent basis although they had only signed a short-term contract. The data on honorarios shows that a large proportion of them too is being employed on an indefinite basis, without the open-ended contract that they should be given, as 56 percent of them have been working for the same employer for more than two years. Their average tenure amounts to almost five years. In the case of the workers without contracts, a large proportion of them (54 percent) have only been with the same employer for less than a year. However, the remainder have worked for much longer without a formal employment relationship. So with these jobs, it cannot be taken for granted that they are temporary arrangements either. On average, they have been with the same employer for almost three and a half years. An important figure to note when looking at the duration of employment is the proportion of open-ended contracts that have a tenure of more than five years. These are the people who are expensive to make redundant in situations of economic downturns if employers have to pay one month’s salary for every year of service (with a maximum of eleven months). And this is also one piece of legislation that employers would be most likely to change (preferably abolish). These workers represent approximately half of those with open-ended contracts, or 38 percent of wage-earners. However, the most expensive workers to dismiss are those who have been in the same job since before the labor reform of 1979, and who are therefore still entitled to severance pay without a maximum ceiling. But these workers represent only a very small proportion of open-ended contracts (7 percent) or 4 percent of wage-earners. The highest rates of employment stability can be found in the independent sector: 72 percent of the professional self-employed, 78 percent of the selfemployed and 87 percent of employers have been in the same employment for more than two years. In fact, almost 60 percent of the self-employed have been in the same job for more than five years, and almost 40 percent for more than eleven years. So not only are income levels quite good for a large proportion of workers in the independent sector, their job stability also is particularly impressive. The average tenure data for the independent sector confirms this view: employers have directed the same company for an average of 12.6 years, the self-employed have exercised the same work for 11.5 years, and the professional self-employed for 7.2 years. Table 4.4 confirms these results with additional data on job rotation. Wageearners have had more jobs during the last three years than the self-employed, and


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103

within the salaried sector, workers with short-term contracts have obviously rotated jobs more frequently. However, again we should note that a large proportion of workers with fixed-term contracts state that they have only held one job during the past three years, which again suggests that employers are using these contracts in place of open-ended contracts in order to avoid potential severance pay. 4.8.

Size of Employer

The size of the establishment that a worker is employed by is also a fundamental variable in the profile of the labor market. Many studies have assumed a relationship between the size of the company and the level of formality and therefore also the quality of the jobs it creates, that is, the larger the company, the more formal the jobs it generates. And as was discussed above, the size of a company constitutes a fundamental component of the ILO’s definition of informal sector. The size of a company is also important from a legal perspective as different regulations apply to different firm sizes.50 Table 4.4 shows that almost a third (31 percent) of the Chilean non-selfemployed workforce or a quarter of wage-earners is employed by very small companies with two to nine workers. Another 16 percent work for medium sized companies that have between ten and forty-nine workers (20 percent of wage-earners). This means that a third of the Chilean labor force is employed by companies with more than fifty employees (43 percent or wage-earners). The data further shows that workers with open-ended contracts and fixedterm contracts are employed by small and large companies in roughly equal proportions, while project-based contracts are used more frequently by larger companies, in particular in those with 50–199 employees. As one would expect given the generally close link between the size of a company and its compliance with labor legislation, most workers employed without formal written contracts work for smaller firms—52 percent of them are employed by companies with 2–9 workers. But we should also note that this does not mean that large companies do not employ workers without contracts, as 16 percent of the workers work for companies with fifty or more employees. However, larger companies, in order to avoid hiring workers with formal written contracts, are more likely to hire them as honorarios, 44 percent of whom work for companies with more than 50 employees. In terms of actual numbers, this means that almost as many honorarios work for larger companies as do workers without formal written contracts. This suggests that larger companies are more likely to avoid blatant infractions of the law than smaller companies and instead use the semilegal loophole of using honorarios, which they would be more likely to be able explain to the authorities if they were called upon to do so. 4.9. Vocational Training, Additional Employment, and Part-Time Work As chapter 7 focuses entirely on the issue of vocational training, we will only briefly discuss this variable here. Table 4.5. shows that almost 20 percent of the

104

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Chilean workforce received some form of vocational training during the year preceding the survey. This is an impressive amount, especially if we compare it to historical levels of training (as we will do in chapter 7). However, rather predictably, vocational training is concentrated among wage-earners with formal contracts (31 percent of workers with open-ended contracts, 22 percent of those with atypical contracts, and 7 percent of those without contracts). Perhaps the most surprising result with regard to training is that almost a quarter of honorario contracts have also received training. The independent sector broadly follows the same pattern, with employers and the professional self-employed undertaking more vocational training than the nonprofessional self-employed, although overall the self-employed undertake less training than wage-earners. The practical experience of living in Chile gives one the impression that almost everybody does something—apart from their regular work—to earn a little extra cash, often through activities that they would never themselves consider as extra or additional employment. For example, the concierge of an apartment block who receives tips for various favors rendered to the occupants of the apartments, such as cleaning their cars, would not really consider this “additional employment,” even though these services are not included in his job specification, and even though it provides him with an additional source of income. Similarly, for example, a worker who during the summer sells ice-cream lollies to the children of the neighborhood would equally not consider this “work” although this also generates extra income.51 In 2003, the CASEN for the first time included a question on additional employment in its survey questionnaire in order to examine its frequency among Chilean workers. Before looking at the data, however, some reservations about its accuracy should be expressed. From a qualitative perspective, it should be considered that any information on the issue of additional employment is likely to be understated. Capturing this phenomenon by means of a standard labor market survey is as complicated as capturing other types of informal work, such as the full extent of the participation of women or children in the labor market. First, this can be attributed to the discrepancy between the workers’ perceptions of their activities and officially accepted definitions. And second, additional employment will almost always be informal, that is, it will remain undeclared, which makes some people reluctant to talk about it. Third, additional employment is often not a regular activity that is carried out throughout the year: the housewife mentioned above, for example, sells ice-cream lollies only in the summer. And in many cases additional employment may constitute only a one-off activity. A series of rather more detailed questions would be required to fully capture the extent of additional employment, with regard to both its frequency and the income it generates. So the CASEN’s result that approximately 5 percent of the labor force in Chile has more than one job should therefore be treated with some caution. Only among honorario workers and to a lesser extent the professional selfemployed is the proportion higher (12 percent and 9 percent respectively).52 The overall proportion of part-time work in Chile is very low compared with other countries.53 Only 13 percent of employees work part-time, and almost

Table 4.5 Characteristics of the labor force by occupational status Wage-earners Openended

Fixedterm

Project based

Total Atypical

Vocational training (excludes unemployed) Financed by employer 26.5 Financed by State 2.6 Financed with own resources 1.8 Other 0.3 None 68.8

19.7 3.8 2.6 0.3 73.7

12.5 2.2 0.9 0.2 84.2

16.9 3.2 1.9 0.2 77.7

Employers and self-employed No contract

No contract


Employer

Prof. self

Self


16.2 3.8 3.5 1.2 75.4

3.1 2.7 0.8 0.2 93.1

6.0 2.9 1.4 0.4 89.2

19.0 2.8 1.7 0.4 76.2

5.5 2.9 5.2 1.0 85.5

5.5 2.9 5.2 1.0 85.5

2.5 4.5 8.0 0.8 84.2

1.9 3.8 2.5 0.7 91.1

14.8 3.0 1.9 0.4 79.9

Honorario

Total work-force

100.0 31.2

100.0 26.3

100.0 15.8

100.0 22.3

100.0 24.6

100.0 6.9

100.0 10.8

100.0 23.8

100.0 14.5

100.0 15.8

100.0 6.5

100.0 8.9

100.0 20.1

Additional employment Yes No

4.7 95.3

5.7 94.3

3.5 96.5

4.7 95.3

12.0 88.0

4.8 95.2

6.4 93.6

5.2 94.8

6.3 93.7

9.3 90.7

5.0 95.0

5.7 94.3

5.3 94.7

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

92.9 7.1

87.9 12.1

92.7 7.3

89.6 10.4

68.6 31.4

73.6 26.4

72.4 27.6

86.6 13.4

NA NA

NA NA

NA NA

NA NA

86.6 13.4

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

NA

NA

NA

NA

100.0

20.5 28.9 3.9 5.3 1.9 1.3 4.9 3.2 30.0

19.0 30.4 4.5 6.4 4.5 0.8 4.1 3.5 26.8

19.4 34.4 6.0 10.4 1.8 0.5 1.2 4.4 21.9

19.1 31.7 5.0 7.9 3.5 0.7 3.2 3.9 25.0

19.1 31.8 4.3 4.1 1.9 1.0 6.2 6.4 25.1

28.8 38.5 2.3 5.3 0.8 0.7 1.7 7.3 14.6

26.7 37.0 2.8 5.1 1.1 0.8 2.7 7.1 16.9

22.2 31.7 3.7 5.6 1.9 1.1 4.0 4.5 25.4

12.8 5.1 0.5 1.1 0.1 0.0 1.4 69.0 10.0

12.8 5.1 0.5 1.1 0.1 0.0 1.4 69.0 10.0

8.9 8.3 1.5 0.4 0.6 — 3.6 67.9 8.7

15.2 9.2 0.7 0.6 0.6 0.0 1.0 65.8 6.8

20.5 26.2 3.0 4.4 1.6 0.8 3.3 19.5 20.8

100.0 49.5

100.0 49.4

100.0 53.8

100.0 50.8

100.0 51.0

100.0 67.3

100.0 63.7

100.0 53.9

100.0 17.9

100.0 17.9

100.0 17.2

100.0 24.4

100.0 46.7

Total Workday Full-time Part-time Total How did you find your present job? Family members Friends or neighbors Former colleagues Former employers Municipality Employment agency Place of study By myself Others Total Total family and friends

Continued

105

Total Total vocational training

106


Wage-earners Openended

Fixedterm

Project based

Total Atypical

Reason for leaving job held in 2000 (excludes unemployed) Reasons of the firm 6.8 13.3 End of contract, project or specified job 2.9 22.3 Voluntary 2.5 5.1 For a better job 6.3 9.3 Others 3.5 8.0 Has not left job 77.8 42.0

8.9 52.7 2.1 6.1 6.2 24.1

11.7 34.1 3.9 8.2 7.4 34.7

100.0 8.1

100.0 12.0

Total Total voluntary

100.0 8.9

100.0 14.3

No contract

No contract


Employer

Prof. self

Self


12.3 6.1 4.6 7.8 6.0 63.2

12.9 24.5 5.8 6.5 7.4 42.9

12.8 20.3 5.5 6.8 7.1 47.6

9.0 11.5 3.5 6.7 4.9 64.3

3.4 2.3 1.7 1.9 2.8 87.9

3.4 2.3 1.7 1.9 2.8 87.9

8.7 2.4 4.4 3.4 4.5 76.6

5.1 5.3 2.1 2.3 3.4 81.8

8.0 9.9 3.1 5.6 4.5 68.8

100.0 12.4

100.0 12.3

100.0 12.3

100.0 10.2

100.0 3.6

100.0 3.6

100.0 7.8

100.0 4.4

100.0 8.7

22.6 42.9 10.2 11.4 12.9

24.3 38.7 10.6 12.9 13.5

25.2 32.3 9.8 18.8 13.9

28.2 18.8 13.8 16.0 23.2

37.2 10.4 18.6 14.6 19.1

26.3 34.1 10.2 11.7 17.7

28.0 29.1 11.7 12.6 18.5

25.6 31.9 10.1 17.8 14.6

100.0 21.6

100.0 23.5

100.0 28.6

100.0 29.7

100.0 33.3

100.0 21.9

100.0 24.3

100.0 27.9

Honorario

Reason for leaving job held in 2000 (excludes unemployed, and workers who did not change jobs) Reasons of the firm 30.7 22.9 11.7 17.9 33.3 End of contract, project, or specified job 13.3 38.5 69.4 52.3 16.7 Voluntary 11.5 8.7 2.7 6.0 12.5 For a better job 28.6 16.0 8.0 12.5 21.2 Other 15.9 13.9 8.2 11.3 16.4 Total Total voluntary

100.0 40.1

100.0 24.7

100.0 10.7

100.0 18.5

100.0 33.6

Note: Total Atypical refers to fixed-term, project-based, apprenticeship and temporary contracts. Source: CASEN, 2003. Own calculations.

Total work-force


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two-thirds of these are working without a contract.54 Among honorarios the proportion of part-time work is also relatively high. The low participation rate of women in Chile is probably partly explained by the lack of formal part-time employment opportunities. 4.10.

Finding and Leaving Jobs

Fifty-four percent of wage-earners found their present jobs with the help of family or friends. This proportion rises to 67 percent if we consider only those wage-earners who hold jobs without contracts, these jobs are typically those that are found by word of mouth. The data on this issue clearly shows that municipal offices and employment agencies play only a very minor role in the process of searching for work. The only category of wage-earners who make less use of their personal connections to find jobs are apprentices. But even they do not go through public employment services and instead, to a large extent, find their placements through their place of study. Germán’s statement quoted in the Introduction about how he normally finds employment thus exemplifies the strategy through which workers in his position find new jobs. This is an issue we will return to in chapters 6 and 7. In the independent sector, workers generally set themselves up by themselves. Only 17 percent say that they found their work with the help of family and friends, and almost none say that they had help from municipal offices. As regards the reasons why workers left their previous employment, table 2.3 shows that overall, 28 percent of the workers who changed jobs between 2000 and 2003 did so for voluntary reasons. Eighteen percent left their previous job for a better one. These proportions are much higher among workers with openended contracts (40 percent and 29 percent respectively). Workers with atypical contracts generally leave because their contracts have expired, although 19 percent also leave for voluntary reasons. However, with regard to this issue, we encounter another problem with the information that the CASEN obtained. We should be relating the reason for which a worker left a job with the occupational status the worker held in the job he or she left, and not with the worker’s current occupational status. But the CASEN 2003 survey, although it asked workers about their employment situation in 2000, did not ask them whether they had signed a contract, so we cannot construct the same variable “occupational status” that we have been using throughout this chapter. The data presented below on this point, therefore, makes little sense. It is presented nevertheless, more to illustrate the problems we encounter with CASEN data than in order to draw a conclusion about the reasons why workers leave their jobs. 5.

What the Data Does Not Tell Us

The analysis presented so far would not be complete without mentioning what the CASEN data does not allow us to analyze. In some cases, the CASEN simply excludes certain topics, in other areas it does not ask enough in-depth questions that would allow us to further analyze a particular working relationship,

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and on other subjects, its questions are simply too inconsistent to allow us to undertake an appropriate analysis of the labor market’s development over time.55 At this point we should remember that the CASEN was originally designed as a survey that would test the impact of the government’s social policies and was never conceived of as an employment survey. The CASEN, in its present format (2003) is an excellent household survey, but it is an inadequate employment survey given the analysis that should ideally be undertaken of the Chilean labor market. So the following discussion really constitutes less of a criticism of Chile’s national household survey, and more a plea for a comprehensive and regular employment survey. Notable topics that are simply excluded from the CASEN are, for example, subcontracting, performance related pay structures, the use of overtime, labor relations (including unionization rates, collective bargaining, and the general perception of employment relations), and issues of regulatory compliance. In the case of subcontracting, for instance, we know through studies undertaken by the Dirección del Trabajo that many employers outsource their production or certain services, and that subcontractual relationships are by now common. We cannot, however, tell whether and how employment characteristics of subcontracted workers vary in comparison with those of other workers. Similarly, we have no idea how and to what extent employers use overtime. If a worker states that she has worked 60 hours during the week of reference, does this constitute her normal working week, or was it an exception? And how was this working week remunerated? In the case of the self-employed, an important omission that the CASEN makes is that it ignores the question of whether workers have a license for what they are doing.56 This would allow us to distinguish, for example, between the formal and informal among the self-employed, which in turn would have important implications if social security regulation were to be changed. After all, the employment conditions of a plumber are unlikely to be the same as those of a street vendor, but we can only make these distinctions if we go through a very time-consuming and detailed analysis of specific occupations.57 Other areas in which the CASEN does not provide enough details include, for example, questions that would allow us to analyze more situations of atypical employment, such as work from home (in Spanish this is called trabajo a domicilio, and refers to jobs such as Sonia’s of making paper bags at home), telework (e.g., telemarketing), or piecework. Without specific measurements of these types of employment, we cannot tell to what extent they are increasing or decreasing, and in particular how they are related to economic circumstances. Some of the categories described above can be constructed using a combination of variables. For example, a worker who says she’s a seamstress, does not have a formal contract and works from home is likely to belong to the trabajador a domicilio category. But these composite constructions lack precision and definition. In the case of the honorarios, as we noted above, they should also be asked additional questions as to their employment conditions, such as whether they have to be present during particular number of working hours. This would allow us to define them more precisely as wage-earners without contracts or self-employed.


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Many of the contractual relationships described in the empirical evidence presented above are self-defined by workers, who are not asked the requisite questions that would confirm or contradict their statements. Such issues show up as contradictions in the data: for example, why do over two-thirds of temporary workers state that they have held the same job for more than six months, if the maximum duration of their contracts is not supposed to exceed three months? Why do over 80 percent of apprentices state that they have received no vocational training during the last year? This prompts the question of whether workers have defined themselves inaccurately as temporary employees or as apprentices, or whether non-compliance with labor legislation is really that widespread. Vocational training is also a subject that is underresearched by the CASEN. Although we know how many workers have received training, the survey does not define what is meant by training, and we find out nothing about the training itself. This means that it is difficult to analyze the extent and effectiveness of this training: was the worker trained for an hour or a year, does he think that it increased his productivity, has the training led to a change of responsibilities, job function, promotion, or increase in salary? Has the worker been trained before or never before? These and other issues related to vocational training will be further analyzed in chapter 7. Another important issue on which we lack detail is the extent to which workers are covered through the insurance policies of other family members. A husband who is covered through his wife’s health insurance policy may rightly consider that he would rather work as an honorario (i.e., without a contract) and save himself additional insurance contributions than work as a wage-earner. If this were the case, then his employment situation would be considered normal, if it were not the case, we would have to consider the lack of insurance as an element of precariousness. Compliance issues are also underresearched by the CASEN. Do companies provide the facilities that they are supposed to provide (e.g., sanitary or childcare facilities)? Are workers prohibited from forming unions? Is overtime being paid for with the requisite surcharge? Were women obliged to take a pregnancy test before being given a new job? To what extent are atypical contracts being abused through the renovation of fixed-term contracts on an annual basis? So far, we have data on all of these subjects from occasional studies, many of which were carried out by the Dirección del Trabajo, based on the latter’s own experience with the violation of regulatory norms.58 However, methodologically, there is a big difference between the reliability of data gathered by a nationwide representative household survey and much smaller studies that have to draw samples from more limited universes and thus may not capture the full picture. In general, we should bear in mind that any labor market study that is not based on a sample of households in a developing country with a large informal sector is unlikely to be representative of the entire labor force. In particular, such studies are unlikely to include the most vulnerable and informal workers who are rarely part of the formal labor market. The concerns raised in this section lead us to another methodological point: the more detailed the questions become regarding a worker’s employment

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situation, the more necessary it becomes for survey interviews to be carried out directly with workers themselves instead of with proxies (i.e., other household members). 6.

Conclusions so far

The empirical analysis presented in this chapter can already lead us to some important conclusions about the Chilean labor market. Overall, only 42 percent of the Chilean labor force holds the traditional open-ended contract that the Labor Code considers as the standard employment relationship. A considerable proportion of the workforce holds atypical contracts (10 percent) and an even more important proportion are wage-earners without formal written contracts. These workers are on the whole more likely to be female, young, and less educated. They are more likely to be working in smaller companies, they earn much less, and they are generally far less likely to receive any form of vocational training. They are also unlikely to have any form of health or pension insurance and are therefore often totally reliant on minimal state benefits. In short, they represent the most vulnerable segment of the labor market, and their jobs are likely to generate the fewest capabilities. As for workers holding atypical contracts, the main disadvantage of their jobs is their instability or generally short duration. Workers with these contracts are almost as educated as those with traditional contracts, almost as likely to be making social security contributions, and almost as likely to receive training when employed. Their contractual situation is not particularly linked to any size, category of company, or economic sector (with the exception of the construction and agricultural sectors). However, their incomes are significantly lower than those of wage-earners with open-ended contracts, and the top range of their incomes is much lower. The data presented above leads to the unsurprising conclusion that among the dependent labor force, workers with traditional contracts have the best quality jobs with the highest level of protection, stability, and benefits. Generally, these workers are likely to be male, between thirty-five and fifty-five years of age, and with a higher level of education. What the analysis presented above emphasizes is that within the dependent sector a high degree of informality prevails. A large proportion of dependent employees have jobs with characteristics very similar to the self-employed workers in the independent sector and, in terms of income levels, actually fare worse. This goes especially for wage-earners without formal written contracts, while the employment characteristics of honorario workers are more similar to those of the professional self-employed. Among the independent sector, the best employment conditions are found among employers, followed by the professional self-employed. The sector enjoys much greater employment stability than the dependent sector, but it faces greater vulnerability in terms of its social security provisions. The conclusions that can be drawn from this chapter so far are first, that there is definitely a segment of the labor force that works under very precarious conditions, but that the most precarious jobs are not necessarily found only in


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the independent sector but also in the dependent sector. Second, any analysis of the labor market that does not specifically examine this category of workers is likely to be misleading. The ILO’s definition of the “informal sector” is therefore no longer an appropriate distinction to make, as “informal” workers are by no means concentrated only in the independent and small companies sector. And third, most of Chilean labor market legislation is focused on dependent workers with open-ended contracts, who now represent a minority of the labor force. And even if we add workers with atypical contracts into this equation, it would still mean that the Chilean Labor Code considers just over 50 percent of the labor force. Two important issues remain to be looked at to complete the range of concerns that this chapter raises: the first question is whether the types of jobs that demonstrate a lower quality are increasing, and the second is whether workers who hold these jobs are marginalized and excluded from better quality employment on a permanent basis, or whether a degree of employment mobility provides them with the opportunity to improve their situation. These questions will be addressed in the next chapter.


CHAPTER 5

The Development of the Chilean Labor Market

T

he previous chapter gave us an impression of the characteristics of the labor force and the differences that arise from different types of contracts. In particular, it showed how many jobs in the Chilean labor market had no contracts, health, or pension insurance, paid low wages, and were of short duration. This prompts the question whether the Chilean labor market has always had a large proportion of precarious employment of this kind, or whether we are observing a new phenomenon. Many labor market analysts have argued that employment in Chile has become more precarious due to the increased use of atypical contracts, the shorter employment tenures that result from the less rigid dismissal legislation, lower rates of unionization and collective bargaining, and the general cost cutting that companies have had to undertake in order to compete in an increasingly globalized market.1 Such a view, however, is difficult to assess without an appropriate series of data spanning a relatively long period of time. As was explained in the previous chapter, historical data on the Chilean labor market that goes beyond a few basic indicators such as the participation or unemployment rate is difficult to come by. The only available historical indicator that we can use of precarious employment is the ILO’s variable “informal sector.” But as explained earlier, the definition of the informal sector is a practical definition based on available data rather than on variables that can capture changes in the modern labor market. As such it does not allow us, for example, to distinguish at what rate the use of atypical contracts has increased. Similarly, developments such as the increased use of honorario contracts are not captured by this variable, and the employment of wage-earners without formal written contracts is only partially included. In addition the definition of the informal sector does not detect that the working conditions of the self-employed may be improving while the overall working conditions of wage-earners may be deteriorating. Nevertheless, it is interesting to note that Chile’s informal sector has not diminished since 1990 despite its impressive economic growth record. In fact, as table 4.1 in the previous chapter showed, it even increased slightly.

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This chapter approaches the data on the Chilean labor market from a historical perspective as far as this is possible. It will first, attempt to assess the extent to which the composition of employment has changed since 1990. For this purpose, it will, as far as possible, consider the development of some of the variables that the previous chapter looks at—variables such as occupational status, social security contributions, and tenure. Second, it will highlight how and to what extent the economic crisis of 1999 changed the type of employment that the Chilean labor market generated. This constitutes an important contribution to the study of labor markets in developing countries as the effect of economic fluctuations on the labor market is generally only examined with regard to unemployment and participation rates, or salary levels. Third, this chapter will present some data on the mobility of Chilean workers between different employment categories, in an attempt to answer the question whether workers with low quality jobs are stuck in this segment of the labor market, or whether there is a degree of mobility between different types of employment. Fourth, this chapter will examine the links between employment on the one hand, and poverty and income inequality on the other. Since we are considering the labor market as the mechanism that transmits economic growth to the individual, studying this connection is absolutely fundamental to the analytical purpose of this book. Fifth, this chapter will briefly analyze union density and activity in Chile as there have been some noteworthy developments in this area. And finally it will examine the effectiveness of the country’s institutions at enforcing labor regulation. Unfortunately, this chapter will raise at least as many questions as it answers. This is partly because further studies have to be undertaken that would go beyond the scope of this book in order to provide more precise answers to some very complex questions, and partly because the issues that this chapter raises will bring us back to the by now familiar theme of data limitations. For most of the analysis presented here, this chapter will use CASEN data. However, for the discussion of employment generation and employment mobility, data from the Quality of Employment Survey (carried out in Santiago in 1999) will be used, as the survey perfectly captures the effect of the economic downturn that occurred during that year. As discussed in chapter 4, the only means of studying the mobility of the labor force in the absence of panel surveys is to ask workers about their employment histories, which is precisely what this survey did. 1. Unemployment and Underemployment The first aspect of any labor market to consider is, of course, the unemployment rate. Although this book has argued against the excessive focus of labor market policy and debate on the unemployment rate, this does not mean that we can focus on the quality of employment to the exclusion of the unemployment rate. Labor markets can only generate enhanced capabilities for populations if they generate good jobs. And “good jobs” should be regarded as a concept that consists of both quantity and quality.

Development of the Chilean Labor Market

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Table 5.1 Unemployment and underemployment 1990

1992

1994

1996

1998

2000

2003

4.9 5.5 15.2 8.5

2.3 4.2 11.4 6.8

3.2 5.9 13.2 7.4

3.1 5.3 10.7 6.6

5.9 8.5 17.5 12.6

6.1 8.8 18.4 13.0

5.5 8.8 17.4 12.5

8.3

5.5

6.7

5.7

9.9

10.2

9.8

Underemployment rate, percent Head of household Spouse Employed sons & daughters Others

20.3 33.2 30.9 34.9

18.0 28.9 28.5 32.8

19.4 30.8 27.0 29.4

19.4 29.6 30.7 29.0

18.9 28.4 28.3 26.3

27.7 37.6 41.6 41.4

25.0 34.5 35.2 32.3

Total

26.3

23.6

23.9

24.7

23.3

33.8

29.7

Unemployment in households with no other earners, percent

30.2

25.2

24.5

26.5

30.0

28.9

26.0

Unemployment rate, percent Head of household Spouse Employed sons & daughters Other Total

Note: For the purposes of this analysis underemployment is defined as working less than 25 hours and earning less than the minimum wage per hour. Source: Own calculations based on CASEN data.

Table 5.1 considers the development of the unemployment rate in Chile and distinguishes between the different unemployment rates of particular members of a household.2 This is an important distinction to make, as the head of the household is usually the most important earner in a family. Thus, if a family member becomes unemployed, it makes a big difference whether the member is a primary or secondary earner (spouses and other family members). Table 5.1 shows that while the unemployment rate has increased across the board since its low point in 1992, it has increased much more dramatically among household heads, or primary earners. The family members least affected by the rise in unemployment are the children of the household heads. They are the only family members among whom unemployment increased less than the average rate. The unemployment rates of spouses has also increased more than the average rate, but less than it did among household heads. This is consistent with the data that shows that although female unemployment is still higher than male unemployment, the gap between male and female unemployment narrowed during the 1998 crisis as women were proportionately less affected by the crisis than men.3 Another important aspect of the labor market to consider is the level of underemployment. The latter is often defined as workers who are either working less than a certain minimum of hours and would like to work more, or as those who are earning less than a particular minimum level of income, or both.4 Unfortunately, however, the questions of the CASEN surveys do not allow us to construct a definition of underemployment that would consider both the number of hours worked and the worker’s wish to work more. We can only work with the actual hours worked and income levels.5 Table 5.1 below therefore

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presents a substitute definition based on the proportion of the labor force working less than 25 hours and/or earning less than the minimum wage per hour. Despite this rather arbitrary definition, the data shows an interesting trend: since 1990, the proportion of the workforce thus defined as underemployed has increased quite significantly, albeit with some fluctuations, from 26 percent in 1990 to 30 percent in 2003, and the proportion of underemployed household heads has also increased significantly (from 20 percent to 25 percent). Underemployment among spouses also increased, but significantly less than the overall trend, while the underemployment of children and other household members rose roughly in line with the trend. While these results probably indicate a more successful participation of women in the labor market, the overall levels are nevertheless worrying. Moreover, they reflect the developments discussed above with regard to the unemployment rate by household position.6 It is also interesting to note that while both unemployment and underemployment peaked in 2000, the drops in underemployment between 2000 and 2003 have been much more significant than the decreases in the unemployment rate, especially among family members who are not the heads of households. This simple conclusion shows why it is so important to look beyond developments in the unemployment rate when analyzing a labor market. One positive trend that should be highlighted is that the proportion of unemployed from households with no other earners dropped between 1990 and 2003, although it increased during the period of economic crisis between 1998 and 2000. This is an important variable to consider because households with no employed members at all are much more likely to be poor or indigent than households with at least one earner. The data presented in table 5.2 generally follows the pattern of the total unemployment rate, which decreased during the 1990s but increased sharply as Table 5.2 Developments in the occupational status Occupational status

1996

1998

2000

2003

Wage-Earners Open-ended contracts Atypical contracts No contract

49.5 8.7 17.0

48.4 8.5 18.0

47.7 9.3 17.8

45.2 12.4 17.0

Total wage-earners

75.2

74.9

74.8

74.7

Independent Sector Employer/professional self-employed Self-employed

5.9 18.9

7.0 18.2

7.0 18.2

7.0 18.3

Total independent sector Total labor force

24.8

25.1

25.2

25.3

100.0

100.0

100.0

100.0

Note: Own calculations based on CASEN data. For the purposes of this calculation, “atypical contracts” refers to fixed-term, project based, or temporary contracts. In this calculation the issue of whether workers were employed on an honorario basis was not considered, as it would have complicated the comparison of data from 2003 and previous years. This also explains why the data for 2003 in this table is different from the data presented in the previous chapter for 2003. The formulation of the questions regarding the type of contract for the years 1996 to 2000 is the same, but differs in 2003.


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a result of the economic crisis in 1998–1999, and has since then begun to decrease gradually again. However, the detail of this picture looks a little bit more mixed if we consider unemployment and underemployment rates among different household members, some of whom have experienced much more rapid increases or decreases in their employment situations. 2. The Changing Characteristics of Employment in Chile As we saw in the previous chapter, one of the most important labor market variables to consider is a worker’s type of contract or occupational status. Unfortunately only the CASEN surveys from 1996 onward asked precise details about the different types of contracts that workers held. Between 1990 and 1994, the question asked was merely: “Do you have a formal written contract?”7 We therefore have to undertake two different types of analysis on this variable: the first analyzes whether wage-earners have formal written contracts, and the second looks at whether the use of different types of contract has changed. Figure 5.1 below shows that there was a significant decline in the proportion of wage-earners with formal written contracts between 1992 and 1994, from 89 percent to 78 percent. After 1994, the rate further increased slightly to 79 percent after which it dropped to 76 percent, where it seems to have stabilized.8 A closer analysis of these results shows that the proportion of wage-earners without contracts has doubled among larger companies (with more than 50 workers) from 5 percent to 10 percent, and has almost doubled among smaller firms (with a maximum of 50 workers), from 18 percent to 32 percent.9 It is important to note that this shift occurred in a period of very high economic growth and a declining unemployment rate. After 1996, we can start analyzing trends with regard to different types of contract used in the Chilean labor market. The format of table 5.2 follows the presentation of employment data developed in chapter 4. It shows that the proportions of wage-earners and independent workers remained broadly stable between 1996 and 2003, fluctuating by less than 1 percent, despite the economic crisis that hit Chile during this period. This may indicate that the labor market did not absorb the economic crisis largely through workers switching to informal independent work, a fact that is confirmed by the data presented in table 5.3. Similarly there was no increase in the proportion of wage-earners without formal written contracts. However, the data does show that a shift occurred between open-ended and atypical contracts, as the proportion of the former declined to 45 percent while the incidence of the latter increased to slightly over 12 percent. As we saw in the previous chapter, contributions to the health and pension insurance systems are closely linked with the occupational status of workers. Table 5.3 below shows the development of pension contributions of wage-earners, independent workers, and the employed workforce since 1990. The data shows that although there has been an overall decline in the proportion of the workforce that contributes to the pension system, this decline is mainly due to a

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Figure 5.1 Changes in the use of formal contracts among wage-earners % of wage-earners with a formal contract

% of total

95 90 85 80 75

% Small companies

% Large companies

70 1990

1995

2000

100 95 90 85 80 1990

1995

2000

1995

2000

100 90 80 70 60 1990 2.50

Average

97.50

Note: Bootstrap calculations based on CASEN data.

decrease in the contribution rates of the independent sector. Among wage-earners the contribution rate has remained broadly stable. One important issue that is not addressed by any employment survey in Chile is to what extent workers are contributing to the pension system relative to their total earnings. Since the confidence of both workers and employers in the private pension system is very low, many smaller companies officially pay workers the minimum wage based on which contributions are paid, and then pay them additional bonuses, generally in cash. This means that many workers only pay partial contributions to the pension system. The extent of this problem, however, has not yet been estimated, nor can it be with the available data. Table 5.3 shows that the distribution of workers by size of company in Chile has remained relatively stable since 1990. However, the data throws up many questions. For instance, there was a notable jump in the proportion of large companies between 1996 and 1998, for which there is no obvious explanation. Companies employing more than 200 workers have thus significantly increased


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Table 5.3 Pension system contributions and size of company 1990

1992

1994

1996

1998

2000

2003

Pension system contributions Total employed 66.0 Wage-earners 77.2 Independent sector 32.5

62.8 75.7 24.0

65.1 77.9 26.4

64.7 76.9 25.9

NA NA NA

62.8 75.0 24.2

63.7 76.3 24.4

Size of company 1 worker 2–9 workers 10–49 workers 50– 99 workers 200 workers

23.6 29.7 20.0 12.5 14.2

20.7 30.6 22.7 13.0 13.1

22.0 28.1 23.7 12.5 13.6

20.3 32.8 24.2 12.8 9.9

22.3 25.4 18.6 12.8 20.9

20.1 28.2 19.1 12.4 20.3

21.7 26.1 16.4 12.3 23.5

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Total

Note: Data from the 1998 CASEN survey on pension contributions has been omitted from this table as the results from this year are inexplicably and significantly different from the overall trend, which may be due to a computational difference in that year’s database. The total of self-employed and professional self-employed presented in the previous chapter amounts to 20.7 percent. The percentage varies slightly, as a small minority of self-employed work in small firms, but consider themselves to be self-employed.

the share of the workforce that they employ, but further research would need to be undertaken in order to explain why this has been the case. The segment of medium sized companies (50–199 employees) has remained the most stable and experienced the least fluctuation during the period under consideration, while smaller companies (10–49 workers) and the so-called microenterprise sector (2–9 workers) have fluctuated much more. While these companies increased their share of the workforce during the years of high economic growth between 1990 and 1996, their share declined in 1998, which may be a result of the economic crisis that had already begun to make itself felt by the time the CASEN was undertaken that year. However, it is difficult, based on biannual data, to draw conclusions about the relationship between economic growth and the proportion of the workforce employed by different sized companies. The proportion of own account workers has remained basically stable over the period, with some fluctuations but no clear trend. An important point to note with regard to this category of workers is, however, that they do not appear to have increased as a result of the 1999 economic crisis. The received wisdom among labor market analysts of developing countries is that an economic crisis swells the ranks of the informal sector (especially informal own account workers) as people in poor countries without fully functioning welfare states cannot generally afford extensive unemployment benefits. As a result of this lack of welfare support, poor workers who cannot afford to be unemployed generally tend to take up an informal job with low barriers of entry, such as selling products in the street or on buses. Anybody who experienced the economic crisis of 1999 and walked the streets of Santiago would confirm this view as the number of street vendors multiplied very rapidly. However, the data below does not confirm this impression.

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3. The Effects of the 1998–1999 Economic Crisis From the data presented above, it is difficult to discern specific relationships. For example, why would the proportion of formal written contracts diminish at a given moment, or why would the use of atypical contracts suddenly increase? To what extent are these shifts related to changes in economic growth or to changes in the regulatory environment? It is very difficult to come to any reliable conclusions with regard to changes in contracting without labor market data that is gathered much more frequently, ideally on a monthly or at least on a yearly basis. The following set of tables compares the new jobs generated during the years 1997, 1998, and 1999 with the existing pool of jobs at the end of each year, using data from the Quality of Employment Survey carried out in Greater Santiago in 1999.10 We should recall here that Chile underwent an economic downturn in 1999, as a result of which the unemployment rate shot up. The survey used here was undertaken in September, just after the peak of the unemployment rate, and therefore captured the labor market after it had already absorbed the crisis. Table 5.4 below compares data on the new jobs that were created in the twelve-month period of each year as well as on the labor force in general in September of each year. As examples of the type of analysis that can be undertaken with this kind of data, the tables look at changes in the occupational status of workers, in their contributions to the pension system, and in their income levels. Table 5.4 shows that during the two years prior to the survey, the proportion of jobs with open-ended contracts declined gradually from 55.9 percent to 50.3 percent. Conversely, the proportion of atypical contracts and jobs without contracts rose, the former from 11 percent to 12.3 percent and the latter from 10.9 percent to 14.5 percent. The proportion of independent workers, however, remained relatively stable over the same period of time, with only the number of self-employed rising slightly.11 If one compares these results on the total labor force with the distribution of new jobs created during each twelve-month period, the numbers show an even stronger trend: during the twelve months preceding the survey, the proportion of jobs created with open-ended contracts halved compared to during the previous years. This means that while in 1997–1998, 42.3 percent of all new jobs were created with open-ended contracts, in 1998–1999 this applies to only 20.7 percent of all new jobs. This is a very significant drop in the number of jobs that were created with open-ended contracts. Conversely, jobs with atypical contracts or without contracts increased proportionately during the same period. Atypical contracts thus increased from 23.8 percent to 33.5 percent, and employment without contracts increased from 23.1 percent to 33.8 percent. It must be taken into account that, at least in theory, almost all atypical contracts will automatically be turned over at least every twelve months, so it is no surprise that they constitute a high proportion of all new jobs. But the data shows that a significantlyhigher proportion of atypical contracts were created

121 Table 5.4 Characteristics of new jobs generated each year compared with those of the labor force: occupational status, pension contributions, and income levels 10/96–9/97 Sept. 97 10/97–9/98 Sept. 98 10/98–9/99 Sept. 99 Occupational status Open-ended contracts New jobs Labor force Atypical contracts New jobs Labor force No Contract New jobs Labor force Employer or prof. sem. New jobs Labor force Self-employed New jobs Labor force

46.6

42.3 55.9

19.6

23.8 11.0

20.5

23.1

2.3

33.5

12.3

33.8

14.5

0.6

4.2

11.5

18.7

12.3 1.2

4.3 11.0

50.3

11.7

10.9

4.3 9.6

17.8

Contributions to the pension system Contributes New jobs 61.3 Labor force 70.3 Does not contribute New jobs 38.8 Labor force 29.7 Income levels 1 Minimum wage New jobs Labor force 1–2 Minimum wages New jobs Labor force 2–3 Minimum wages New jobs Labor force 3 Minimum wages New jobs Labor force

20.7 53.9

17.9

61.1

47.1 69.2

38.9

65.7 52.9

30.8

18.3

34.3

21.4 10.9

43.2

11.6 45.3

33.9 26.4

37.5 19.7

24.4 12.1

23.9 13.7

30.9

28.8

Note: New jobs refers to all jobs that were initiated within the given time period. If a worker held two jobs in this time period, then both jobs are considered. Atypical contracts according to the definition used for this survey include fixed-term, project-based, and honorario contracts. The total number of cases that this table refers to in terms of the total labor force is 1009 for 1999, 1008 for 1998, and 943 for 1997. The new jobs are based on 358, 260 and 219 cases respectively. In the case of income levels, the number of cases is slightly reduced to 952 and 862 with regard to the total labor force, and 351 and 273 with regard to new jobs in 1999 and 1998 respectively. Source: Own calculations based on Quality of Employment Survey, 1999.

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each year than such renewals would generate. It is also worth noting that the independent sector is neither affected by the same trends nor to the same extent, which seems to indicate that most of the shifts between different types of employment are taking place within the dependent sector. We should further note that the total cases of new jobs increases at a significant rate each year, by more than the increase in the participation rate of the labor force, which suggests a higher job rotation as the economic crisis took effect. The big question that such data raises is whether such changes in the generation of employment become permanent, or whether they are temporary and are reversed once the economy picks up again. Do employers who have reduced the proportion of their employees with open-ended contracts and replaced them with fixed-term employees, for example, convert these contracts back to openended ones once they feel that their business is recovering? Since the data presented here refers only to Santiago, it is not comparable to the nationwide CASEN data. However, there is some consistency in the data as table 4.2 in the previous chapter shows that at a nationwide level, only 26 percent of new jobs were being generated with open-ended contracts. The data on pension contributions shows very similar trends: while the proportion of employment with pension insurance coverage generated within the last three years has declined sharply, the trend of the labor force in general is less pronounced, but the rate of contributions is declining. Conversely, the proportion of jobs generated without any type of pension insurance rose sharply, leaving an increasing percentage of the total labor force’s jobs without insurance. This is a particularly serious development because it means that more and more people will fall behind on their pension payments, leaving the state with a larger bill to finance in the future. A very similar trend can be expected from the variable health insurance, which generally mirrors the rate of pension contributions. This would add a more immediate expenditure to the fiscal bill, however, than future pension payments. Data on income levels has only been considered for two years as the quality and veracity of the data cannot be assured if we go back any further in time through a method that relies on workers’ memories. Table 5.4 shows an increase in the proportion of jobs with the lowest income levels over the past couple of years, although this trend is nowhere near as pronounced as the shifts in pension coverage and types of contract discussed above. This confirms the point made by other labor market analysts, who argue that the Chilean labor market adjusted to the recent economic crisis through wage levels only to a limited extent.12 To sum up, we can therefore conclude that the effect of the 1998–1999 economic crisis on the Chilean labor market was significant in terms of the changes that occurred in the characteristics of jobs. The data presented in table 5.2 shows that the composition of new contracts changed radically, based on a significant reduction of traditional open-ended contracts, and that the contributions to the social security system among new jobs decreased proportionately, but also that there was only a slight increase in the proportion of workers earning less than the minimum wage. This demonstrates that over time it is


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important to monitor the characteristics of employment as well as the unemployment rate, especially in relation to economic developments. 4. Employment Mobility Within the Chilean Labor Market Households that are stuck below the poverty line are likely to require a very different set of policy measures to help lift them out of poverty than households that have briefly fallen below the poverty line as a result of a particular misfortune that has affected the family’s income level. The same principle applies to employment situations. If public policy is to address the problems of workers who are only able to find employment of the lowest quality, the measures required to help this segment of the workforce are likely to be very different from those aimed at helping workers who have temporarily accepted a lower quality job. Hence, one of the key questions to ask with regard to the analysis of any labor market is whether workers with low quality jobs are stuck in this segment of the labor market, or whether they have the opportunity of moving into better quality jobs. This question is especially important to ask with regard to the type of contracts that workers hold, as evidence from Spain and France, for instance, shows that workers with short-term contracts often have difficulties in finding long-term employment.13 The following tables look at the data related to wage mobility in more detail. These examine the movements of workers between different occupational situations, between different economic sectors, and also between different income groups, as well as looking at movements between employment, unemployment, and inactivity. Table 5.5 is based on the CASEN survey from 2003, which asked workers what their occupational status was in 2000. The table is based only on those workers who experienced a change in their employment situation during the period in question. Unfortunately, the survey did not ask whether workers had signed a contract, only whether they considered their work to be permanent, short-term, or temporary. This means that the data does not allow us to analyze movements between jobs with contracts and those without. Also, since the data spans a period of three years, it does not allow us to undertake any meaningful analysis of movements between employment, unemployment, and inactivity. In a labor market such as Chile’s with very little long-term unemployment, one would hardly expect a worker who was unemployed in 2000 to remain unemployed in 2003. Workers who show up as unemployed in both years are likely to have again fallen into unemployment as opposed to having been unemployed all along. The matrix is based only on those workers who experienced a change in their employment situation between 2000 and 2003, or who moved between the states of employment, unemployment, or inactivity. Table 5.5 shows that people who were inactive in 2000, in their vast majority (82 percent), were inactive again in 2003. Thus, only 18 percent moved from inactivity into some form of employment. Of the employed who experienced a change in their employment situation, almost 70 percent remained employed,

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Table 5.5 Transition matrix: Changes in occupational status, CASEN 2002–2003 2000 2003

Openended

Short-term

Other independent

Open-ended Short-term Other independent Self-employed Total employed Unemployed Inactive

43.7 15.1 3.1 6.1 68.0 15.4 16.6

16.0 48.3 1.4 5.6 71.4 16.3 12.3

27.1 14.6 22.9 4.3 68.9 12.8 18.4

13.5 16.6 1.6 33.4 65.1 13.7 21.2

28.5 30.2 2.8 7.8 69.3 15.6 15.1

100.0

100.0

100.0

100.0

100.0

Total

SelfTotal employed employed Unemployed

Inactive

Total

28.9 31.8 1.8 8.3 70.9 18.7 10.4

5.4 5.7 0.7 1.9 13.7 4.8 81.6

12.0 12.7 1.2 3.6 29.5 8.0 62.5

100.0

100.0

100.0

Note: The data excludes all employed workers who did not experience a change in their employment situations. Source: Own calculations with data from 2003 CASEN survey.

with 15 percent having exited the labor force into inactivity and another 15 percent becoming unemployed. We should note that the proportion of workers who have become unemployed does not vary much according to the different employment situations. Workers who considered their employment situations to be permanent were almost equally likely to be unemployed in 2003 as those who considered their jobs to be temporary. The same goes for the self-employed and other independent workers (employers and the professional self-employed). Of the workers who were unemployed in 2000, 71 percent moved into employment by 2003, while 18 percent were either still unemployed (unlikely) or had again become unemployed (we cannot tell the difference from this data, as was discussed above). A further 10 percent exited the labor force. It is interesting to note that the unemployed found work with short-term and open-ended employment situations in roughly equal proportions. As regards the different categories of occupational status, there is a higher degree of mobility between different employment categories among independent or self-employed workers than among wage-earners. We should note that few workers move from a wage-earning position into independent employment. Wage-earners are more likely to move between open-ended and short-term situations. However, the reverse is true for the self-employed and other independent workers, who demonstrate a relatively high rate of mobility between independence and dependence. For example, only 33 percent of the self-employed in 2000 remained self-employed until 2003, while the proportion among other independent workers (employers or professional self-employed) was even lower at 22 percent. Conversely, among wage-earners 44 percent of workers with open-ended employment situations moved into another open-ended situation, while workers with short-term positions moved to other short-term positions in 48 percent of all cases. These results indicate that wage-earners are relatively more likely to move between similar employment situations and that workers in short-term employment relationships probably find it relatively more difficult to move into permanent positions.


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However, in the absence of data on the specific contractual situations of wage-earners, we should view these findings with caution. Workers without formal written contracts may well consider that their employment relationships are permanent, while workers with open-ended contracts may consider them temporary. The most useful results of this matrix are, first, that the unemployed are almost as likely to move into permanent employment situations as they are to move into temporary ones, second, that independent and self-employed workers are more likely to move into inactivity than wage-earners, and, third, that only relatively few inactive people have moved into employment. The matrix presented in table 5.5 is really an exercise in demonstrating both the potential of the CASEN data as well as the limitations of its current format. While it is a very good idea to include questions in the survey that ask workers about their employment situations at a particular point in the past, it is not a good idea, however, to ask them about their employment situation three years prior to the survey date, as this creates a time-frame that is too long and is thus unlikely to give us information on the prior employment situation of workers short-term tenures. And second, if a survey enquires into the previous employment situations of workers, then the very first thing it should ask about is their contractual situation or occupational status as opposed to merely asking whether the worker considered his or her employment situation to be permanent or not, since the legal contract and not the worker’s opinion is the basis of a worker’s rights and entitlements. Given these limitations of the CASEN data presented above, the following tables show similar matrices based on the Quality of Employment Survey from 1999, which allows us to draw conclusions about the more recent employment situations of workers one year prior to the survey date and also permits us to analyze movements between different types of contract and other occupational positions. The drawback of this particular survey, however, is that due to resource constraints it did not interview respondents who declared themselves to be inactive at the time of the survey. We therefore cannot include movements from employment to inactivity in the analysis. Also, the survey’s sample size is much smaller than CASEN’s. The following tables look only at changes in the employment situation of workers. Again, this means that all respondents who maintained the same job from one year to the next have been excluded from the calculations. Nevertheless, the data does give a very good indication of some possible trends in the mobility of the labor force and is further interesting because it captures the period of economic crisis from 1998 to 1999. The transition matrices show that there is a high degree of employment rotation among the labor force. Table 5.6 shows that over a third of those who were employed in September 1997 and who changed jobs between 1997 and 1998 were unemployed in September 1998, and only a very small proportion (2.5 percent) left the labor force for inactivity. Conversely, of the people who were unemployed in September 1997, 57 percent were either still unemployed or unemployed again by September 1998. An important result of this matrix is that the difference between the percentages of unemployed with open-ended contracts in their previous jobs as opposed to those with atypical contracts is not much lower and is in fact comparable to the

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Table 5.6 Transition matrix: Changes in type of contract or occupational status from 1997 to 1998 1998 1997

No SelfTotal Labor Open Atypical Contract Profs/Ers employed employed Unemployed force 97

Employed Open-ended Atypical No contract Profs/Ers Self-employed

39.7 20.5 35.0 0.0 37.5

11.5 34.1 5.0 0.0 0.0

11.5 4.5 20.0 0.0 12.5

1.3 0.0 0.0 0.0 0.0

0.0 0.0 5.0 0.0 12.5

64.1 59.1 65.0 0.0 62.5

32.1 40.9 30.0 0.0 37.5

96.2 100.0 95.0 0.0 100.0

Total employed 98 Unemployed Labor force 98

33.5 21.5 28.5

15.8 7.7 11.9

10.8 6.2 10.0

0.6 1.5 0.8

1.9 6.2 3.8

62.7 43.1 55.0

34.8 56.9 35.8

97.5 100.0 91.8

Note: Total number of cases: 260. Cases with missing information were excluded from the sample for the purposes of this study, as were cases that moved from inactivity into employment. Since the latter were omitted, the rows do not quite sum 100. Profs/Ers refers to professional self-employed and employers. Source: Own calculations based on Quality of Employment Survey, 1999.

proportion of workers who had no contracts at all. This appears to echo the results presented above from the CASEN survey, at least as far as open-ended and fixed-term contracts go. The same goes for workers who were self-employed in 1997. This result is sharply reversed as the economic downturn hits the labor market, as we will see in table 5.7. When looking at the employed who changed jobs over the period, the most striking result is the high degree of their mobility between different contractual categories and even between salaried employment and self-employment. About two-thirds of the employed with open-ended contracts in September 1997 changed to jobs within the same contractual category, while about a third changed the type of their contract. Of those with atypical contracts, over half got another job with an atypical contract, while the rest changed category. And among those working without a contract, most moved to jobs with open-ended contracts, suggesting that the “no contract” category of employment is a temporary one. The segment of the labor force that shows the least degree of mobility and rotation is the employer and professional self-employed category. Partly, because the number of cases from this segment included in the sample is so much smaller, but also because they have the least reason to move, it therefore makes sense that the table shows almost no movement in this category. The results of the transition matrix for the years 1998 and 1999 are relatively similar to those just discussed, with high degrees of mobility between employment and contractual categories, although the data does clearly show the impact of the economic downturn. The main difference apparent in this table is that the year 1999 registered a greater overall shift toward unemployment. Of the total labor force that had to look for a new job between September 1998 and


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Table 5.7 Transition matrix: Changes in type of contract or occupational status from 1998 to 1999 1999 1998 Open-ended Atypical No contract Profs/Ers Self-employed

No SelfTotal Labor Open Atypical Contract Profs/Ers employed employed Unemployed force 98 30.0 22.0 16.3 0.0 7.1

12.0 30.5 8.2 0.0 50.0

15.0 8.5 16.3 33.3 7.1

0.0 0.0 0.0 0.0 0.0

3.0 1.7 6.1 33.3 14.3

60.0 62.7 46.9 66.7 78.6

40.0 37.3 53.1 33.3 21.4

100.0 100.0 100.0 100.0 100.0

Total employed 99 23.1 Unemployed 11.8 Labor force 99 18.5

18.2 10.9 15.7

13.3 14.5 16.3

0.0 0.0 0.0

4.4 3.6 5.0

59.1 40.9 55.5

40.9 59.1 44.5

100.0 100.0 100.0

Note: Total number of cases: 362. Profs/Ers refers to professional self-employed and employers. Source: Own calculations based on Quality of Employment Survey, 1999.

September 1999, only 55 percent had succeeded in doing so, while 45 percent found themselves unemployed at the time of the survey. All contractual categories and the self-employed were severely affected by unemployment, even employers and the professional self-employed. However, the category most affected was those workers who had no written contract in September 1998. Fifty-three percent of them found themselves without a job in September 1999. And although 50 percent of the workers with open-ended contracts who changed jobs managed to find another job with an open-ended contract within the year, the general mobility over the year toward open-ended contracts was lower, especially for those who had no contract or were self-employed. Table 5.8 shows a similar degree of mobility between different economic sectors as opposed to the mobility shown in table 5.7 between contractual categories. While generally about half the workers who have experienced a change in their employment situation remain in the same sector, a large proportion does, however, switch sectors. It seems to have been most difficult or least attractive for workers in the industrial and construction sectors to maintain jobs in the same sector, as the percentages of those who remained in these sectors are the lowest. This is probably a result of the economic crisis rather than an indicator of any trend, as more jobs were lost in these sectors than in others. It appears to be the services sector that has the highest rate of stability. Table 5.9 indicates similar levels of mobility between different categories of income. The data shows that there clearly is a degree of mobility from one income level to the next one, up or down, but rarely do workers move more than one level. Workers who earned one minimum wage or less in 1998 did not succeed at all in obtaining jobs with earnings above two minimum wages. It appears to be similarly difficult for the unemployed to obtain well-paid jobs, as most of them moved into lower income jobs, with only 2 percent obtaining incomes of

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Table 5.8 Transition matrix: Changes in economic sector from 1998 to 1999 99

Total Labor Other employed 98 Unemployed force 98

98

Industry

Construction

Commerce

Services

Industry Construction Commerce Services Other

25.0 5.1 11.4 6.3 11.1

7.5 25.6 6.8 0.0 3.7

7.5 2.6 36.4 4.2 9.3

10.0 5.1 4.5 41.7 11.1

10.0 12.8 4.5 4.2 27.8

60.0 51.3 63.6 56.3 63.0

40.0 48.7 36.4 43.8 37.0

100.0 100.0 100.0 100.0 100.0


11.6 7.3 10.2

8.0 4.5 6.4

12.0 14.5 13.5

15.1 8.2 15.2

12.4 6.4 10.2

59.1 40.9 55.5

40.9 59.1 44.5

100.0 100.0 100.0

Note: Total number of cases: 362. Source: Own calculations based on Quality of Employment Survey, 1999.

Table 5.9 Transition matrix: Changes in level of income from 1998 to 1999 98

99 1 MW

1–2 MW

2–3 MW

3 MW

Total employed 99

Unemployed

Labor force 98

1 MW 1–2 MW 2–3 MW 3 MW

12.9 6.0 3.8 0.0

38.7 36.0 24.5 8.6

0.0 13.0 28.3 20.0

0.0 5.0 3.8 28.6

51.6 60.0 60.4 57.1

48.4 40.0 39.6 42.9

100.0 100.0 100.0 100.0

5.5 6.5 7.9

29.2 19.6 25.8

16.0 11.2 13.9

7.8 1.9 7.1

58.4 39.3 54.7

41.6 60.7 45.3

100.0 100.0 100.0


Note: Total number of cases: 353. Source: Own calculations based on Quality of Employment Survey, 1999.

more than three minimum wages. It is again interesting to note that all categories of income were relatively equally affected by unemployment, except for the lowest income category, which also shows the greatest proportion of job losses. So while the Chilean labor market overall may not have adjusted to the economic crisis of 1999 by lowering wages, these results suggest that there are significant movements within different wage categories among those who changed jobs. The results from the transition matrices above show a far greater mobility between different employment categories, economic sectors, and income levels than many labor market analysts in Chile have led us to believe. However, within this mobility there is a detectable trend of declining quality of employment, which confirms the results of the previous section, which compares the characteristics of new jobs with those of the existing pool of jobs. Rather than emphasize the importance of these specific results, two very important conclusions of a more general nature should be highlighted. The first


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is that these results should be investigated in much more detail, with a larger sample size, and should be replicated with other variables, too. The second important general conclusion is that the movement between employment and unemployment is not the only notable shift within the Chilean labor market, but that other employment conditions have also changed significantly and should therefore be included in any analysis of labor market trends. The data presented in the previous chapter showed just how much employment conditions can vary depending on the type of contractual or occupational status. If we combine this analysis with the results of the transition matrices and the profiles of the newly generated jobs, it would give us an idea of just how much individuals and their capabilities will be affected by these changes. It is especially important to establish with certainty whether the new jobs being created are of a generally lower quality than the existing jobs, and whether this must be regarded as a long-term trend or simply as an effect of the economic downturn, and, if so, how long will it take for this effect to be reversed? This analysis will have a broad range of implications for policymakers who should be aware of such developments, as these will have a big impact on long-term economic growth, fiscal policies and the general well-being of their voters. Future labor market legislation will have to address these issues. 5. Employment, Poverty, and Income Distribution Many documents on Chile’s development since 1990 (especially those produced by government ministries) emphasize the country’s successful reduction of the high poverty rates the democratic government inherited from the dictatorship coupled with its high economic growth rates. And the Concertación’s success in both of these areas has indeed been remarkable and is key to Chile’s image as a Latin American success story. There is the slightly more disconcerting fact that along with Brazil, Chile has one of South America’s worst rates of income distribution, which makes it one of the most unequally distributed countries in the world. But, as most analysts close to the Concertación will be quick to point out, if we factor in social expenditure, this income distribution looks better.14 As discussed in chapter 1, the benefits of economic growth is passed on to individuals through employment and thus determine poverty rates and most income inequalities. Table 5.10 below explores this relationship with some very basic data. The definition of poverty it uses is the one established by the CEPAL. The poverty line is defined by two basic baskets of goods per person per household, while indigence is defined as half of that, that is, one basic basket of goods per person per household.15 Although there are evident limitations to this definition in the sense that it does not in any way capture human capabilities and is as arbitrary as all monetary definitions of poverty are, it is the most frequently used definition of poverty in Latin America and Chile. Its main advantage is simplicity, availability, and international comparability. It would also be difficult to persuade the Chilean government to consider a different definition at this stage. And with all its limitations, the CEPAL’s definition of poverty in Latin America is still infinitely preferable to the World Bank’s two dollars per head poverty

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line, which does not in any way consider the purchasing power of two dollars in the various countries that it is applied to. As we can see from table 5.10, the total rate of poverty in Chile dropped from 38.6 percent in 1990 to 18.8 percent in 2003, while indigence decreased from 12.9 percent to 4.7 percent over the same period. A quarter of the poor are indigent (down from a third in 1990). Overall, despite the economic crisis in 1998 and 1999, both poverty and indigence decreased consistently over this period, although the rate of decrease slowed down after 1996. Overall, total poverty decreased by more than 50 percent over this period, and indigence by over 60 percent. Table 5.10 also shows that the proportion of the poor who work has declined slightly. In 1990, 23.1 percent of the poor worked, while in 2003, only 20.9 percent did.16 The proportion of the indigent who work has declined slightly, too, from 17.1 percent in 1990 to 14.3 percent in 2003. The data also shows that the participation rate in poor and indigent households is much lower than in non-poor households: 46 percent versus 58 percent in 2003. In addition, we should note that the participation rate in non-poor households has increased since 1990 by 4 percent, while the participation rate in poor and indigent households has increased by only 1 percent and 3 percent respectively. We can also see that while the unemployment rate in non-poor households is below the national average (at 7 percent), the unemployment rate in poor and indigent households is approximately four times the rate in non-poor households at 28 percent, and the rate in indigent households is even higher at 48 percent. This means that poor and indigent households are hit disproportionately hard by unemployment, either because unemployment causes poverty or because workers in poor households are more likely to become unemployed. Table 5.10 further shows that for poor and indigent people the income from their work remains a very high proportion of their total income. Only in 1998 did this proportion decline for indigent people from 70 percent to 57 percent, mainly as a result of an increase in targeted subsidies to the indigent, while for the poor it has remained relatively stable at around 70 percent.17 If we look at the occupational status of workers in poor and indigent households, some very interesting trends also become clear. First of all, we have to note that a job as a wage-earner with a contract does not necessarily preclude a worker from poverty or indigence. In 2003, 46.5 percent of poor workers had contracts (29.4 percent even had open-ended contracts), 34.5 percent did not have contracts, and 19.1 percent were self-employed in some form. In fact, 25 percent of indigent workers had contracts. This compares with 58.7 percent of non-poor workers who had contracts. The second fact we have to note is that the proportion of poor workers with contracts has declined significantly since 1990, while the proportion of poor workers without contracts has risen proportionately (only the proportion of poor self-employed have remained stable). We can observe the same inversely related trends among indigent workers (although to a greater extent). However, even among non-poor workers the proportion of contracts has declined while the proportion of work without contracts has increased. This reflects the declining


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Table 5.10 Employment, poverty, and income distribution (all data in percentages except Gini or unless otherwise stated) 1990

1992

1994

1996

1998

2000

2003

Poverty Total poverty (including indigence) Indigence Poverty based on monetary income Indigence based on monetary income Proportion of poor who work Proportion of indigent who work

38.6 12.9 42.6 15.7 23.1 17.1

32.6 8.8 36.3 11.2 24.4 17.3

28.4 8.0 31.2 9.4 23.1 16.3

23.2 5.8 26.7 7.5 22.9 16.6

21.7 5.6 25.0 7.2 20.0 12.0

20.6 5.7 24.4 7.3 21.8 15.9

18.8 4.7 22.2 5.9 20.9 14.3

Participation, unemployment, and earnings Participation, poor Participation, indigent Participation, non-poor Unemployment, poor Unemployment, indigent Unemployment, non-poor Earnings/total income, poor Earnings/total income, indigent Earnings/total income, non-poor

45.3 43.0 54.7 17.1 28.4 4.8 76.8 74.0 73.8

46.1 41.0 56.5 12.3 22.5 3.5 78.1 74.3 76.9

45.6 41.1 56.7 16.0 28.9 4.5 77.2 70.2 80.3

45.6 41.4 56.5 15.6 28.8 3.9 76.5 70.6 78.6

46.4 44.0 57.7 28.6 52.9 6.7 71.6 57.4 77.6

48.9 47.3 56.7 26.7 42.5 7.3 71.3 57.6 78.9

46.2 46.3 58.7 28.1 48.1 7.1 70.9 57.9 80.7

Occupational status and tenure Poor with contracts Poor, no contracts Poor self-employed Indigent with contracts Indigent, no contracts Indigent self-employed Non-poor with contracts Non-poor, no contracts Non-poor self-employed Average tenure in years, poor Average tenure in years, indigent Average tenure in years, non-poor

60.5 18.9 20.6 53.3 24.3 22.4 61.7 10.3 28.0 NA NA NA

65.3 17.3 17.4 59.6 23.2 17.2 62.6 8.9 28.6 NA NA NA

50.4 26.4 23.3 37.1 35.2 27.7 60.4 12.7 26.9 NA NA NA

52.3 31.9 15.8 36.1 44.7 19.2 59.5 14.3 26.3 3.8 3.6 6.5

47.3 35.5 17.2 27.4 47.6 25.0 58.4 15.4 26.2 NA NA NA

43.4 36.6 20.0 26.4 51.0 22.7 59.0 15.0 26.0 4.5 3.7 7.4

46.5 34.5 19.1 24.9 47.7 27.5 58.7 15.1 26.3 4.6 4.5 7.6

Income distribution Gini based on total income Gini based only on income from work Income share decile 1 Income share decile 2 Income share quintile 2 Income share quintile 3 Income share quintile 4 Income share decile 9 Income share decile 10 Ratio 10/10

0.545 0.551 1.5 3.3 7.3 12.2 16.2 14.2 45.2 29.41

0.542 0.557 1.9 2.6 7.6 12.0 14.9 14.3 46.7 24.96

0.545 0.561 1.3 3.3 7.0 10.9 16.9 15.2 45.4 34.69

0.542 0.560 1.1 2.4 8.6 10.5 16.3 15.2 45.9 43.3

0.543 0.560 1.1 3.4 6.3 10.9 17.7 14.3 46.2 41.57

0.538 0.568 1.0 2.3 7.4 10.9 16.7 15.9 45.9 45.78

0.536 0.557 1.2 2.5 7.5 11.6 16.4 15.3 45.4 37.31

Source: Mideplan, CASEN surveys. The working poor are defined as those members of the labor force who live in poor households. More detailed information can be found on the author’s website.

trend of formal written contracts that can be observed in the labor force in general since 1990, and which is discussed below in more detail. However, two general conclusions can be suggested from this data: having a formal written contract reduces the likelihood of poverty (although it does not eliminate it by any means), and poor and indigent households have been more affected by the overall decline of formal contracts in the Chilean labor force than non-poor households.

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Looking at the periods of tenure among the different categories of workers also produces some interesting results. The tenures of all categories of workers have increased slightly (as far as we can tell by the limited data available), but the ratio of the tenure of poor and indigent workers to the tenure of non-poor workers has remained roughly the same. The tenure of non-poor workers is almost twice that of poor and indigent workers. However, the data also shows that the average tenures of poor and indigent workers are relatively long. On average, they remain in the same employment situation for four and a half years. This means that while a high rate of job rotation may be a contributing factor to the likelihood of falling into poverty, on average it certainly cannot be considered as its cause. Finally, table 5.10 also highlights some interesting facts about Chile’s income distribution. As we can see from all the measures presented, Chile’s income distribution is very unequal. Second, it has also been very stable over this thirteen year period. While the lowest income decile has generally commanded about 1 percent of the income generated by employment in the country (with a slight declining trend since 1990), the top decile has generally commanded around 45 percent (with some fluctuations, but no clear trend). However, if we consider the lowest income deciles together, we see that their overall share of income from work has declined from 4.7 percent to 3.7 percent. It is further interesting to note that the Gini indicators show that income from work is more unequally distributed than total household income, which makes sense given that income subsidies in Chile are relatively well targeted. 6. Levels of Unionization This review of the Chilean labor market would not be complete without at least some review of the development of Chilean unionization rates, especially since the political role of unions is discussed also in chapter 3. Since Chile’s return to democracy in 1990, the number of registered unions has increased dramatically, albeit from a very depressed base following almost two decades of military dictatorship.18 However, unionization rates are very low in Chile, having dropped again after an initial increase during the first years of the transition back to democracy. The debates about the causes of this include arguments that range from the ineffectiveness of the unions themselves to the apathy of their members to the hostile attitude that employers adopt toward them. The daily observation of politics in Chile shows even the casual observer that the country’s unions are no longer effective social actors. Chapter 3 discusses how important these issues are because they form such an important part of the debate on labor market reform and stir up so much political emotion. Prior to 1970, average rates of unionization were around 13 percent of the total labor force.19 This rate increased to around 30 percent under the Allende administration, which effectively constituted the high point of Chilean unionism. During the dictatorship, unions were actively repressed, and the unionization rate thus dropped to around 10 percent. This rate recovered to approximately 13 percent of the labor force in the run up to 1990 in anticipation of the return to democratic governance and reached a new peak of 15 percent in


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1991. Since then, however, the proportion of unionized workers has declined again, dropping to around 11 percent in 1997. Since then, however, the proportion of unionized workers has declined again, dropping to around 11 percent in 1997, and appears to have stabilized at roughly this level, which is similar to Chile’s historical rates of unionization. This amounts to approximately 17 percent of wage-earners and compares to union density rates in OECD countries that range from a low of 11 percent in Korea to 78 percent in Sweden.20 It is interesting to note that the number of unions registered since 1990 has doubled, even though the rate of unionization has not really increased overall. This is partly because today only slightly over half of Chilean unions are actually considered to be active (i.e., reporting some form of activity to the Labor Office), and partly because the average number of members per union has declined (from 91 in 1991 to 72 in 2004). A similar pattern to the trade union density levels emerges if we consider the proportion of the salaried workforce that is covered by some form of collective bargaining arrangement. After a brief revival after 1990, which led to a rate of collective bargaining agreements of 7.2 percent of the salaried workforce in 1993, this rate has declined steadily since then and appears to have bottomed out at around 4 percent. Although the overall rate of unionization has declined since 1990, this development has not been uniform across all economic sectors, some of which (Agriculture, Commerce, Construction, and Services) have increased their rate of unionization. In the remaining economic sectors, the rates of unionization have declined. The most highly unionized sectors are (and traditionally always have been) the mining sector and the utilities sector at 48 percent and 30 percent respectively, followed by the transport sector at 21 percent. Unionization rates in all three of these sectors have decreased significantly though since 1990. Union density and activities are not subjects that are included in Chile’s labor market surveys. The most frequently quoted source of information on the unions is the Dirección del Trabajo, which holds a register of all the operating unions and has undertaken various studies on the levels of unionization since the transition to democracy in 1990. As we see in chapter 4, the Dirección del Trabajo also runs the Encla survey, which is definitely the most consistent source of information on unions, labor relations, and collective bargaining in Chile. The survey was run in 1998, 1999, 2002, and 2004, and it thus allows us to gain a perspective of the last seven years of union activity. However, we should remember that the Encla’s sample is not representative of the Chilean labor force, not even of the salaried labor force (the rate of unionization it reports, for instance, is more than twice the rate of official statistics). We should also remember the other methodological reservations expressed in chapter 4 with regard to this survey. But since questions on these matters are not included in any other labor market survey in Chile, the Encla and the Dirección del Trabajo’s administrative data are our only sources of information. And we have no representative data on whether non-unionized workers have been prevented from forming a union. While the data gathered by the Dirección del Trabajo on violations of the Labor Code clearly show that many companies engage in antiunion behavior or

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discourage or prohibit the formation of unions in their companies, the Encla’s data shows that this problem, while widespread, does not affect the majority of unions, 74 percent of which report no negative attitudes of their employers toward their activities. In fact, the Encla overall reports very good labor relations. Almost 50 percent of employers, for example, consider that their collective bargaining agreements are very useful.21 One noteworthy point that the 2002 Encla highlights is that only 12.3 percent of the unions are directly affiliated to the CUT, Chile’s principal union confederation and the government’s main negotiating partner for labor reforms. Further, 39.8 percent of the unions are not affiliated to any national federation or confederation. This, of course, prompts the question whether the CUT actually represents the views of Chilean unions. In a 1996 survey of union leaders run by the Dirección del Trabajo, only 54 percent of the leaders stated that they agreed with the CUT’s proposals for labor reform. In 1999, the Quality of Employment Survey included some questions on unionization, which were designed not only to find out more about the levels of unionization in Chile, but also to research how the unions are viewed and appreciated by workers, and in particular how they perceive the way employers view the issue of unionization. Of the total waged workforce, 28 percent responded that a union existed at their establishment of employment.22 However, where a union exists, only half of the workers are actually affiliated to it, which significantly reduces the actual rate of unionization to about 14 percent, which is consistent with official statistics for the Metropolitan Region. Of these 14 percent, 82 percent thought that being unionized was useful, while 12 percent stated that affiliation was automatic. Of those not unionized even though a union existed at their workplace, 28 percent responded that they considered the union to be useless, 13 percent feared dismissal, and 59 percent gave “other reasons.” The majority of respondents of the Quality of Employment Survey, who stated that there was no union at their work establishment, claimed that the main reason for this was that the company was too small. This response, however, was not linked to the real size of the company, but to the workers’ appreciation of its size, that is, they thought their company was too small even though it employed more than the eight workers officially required to constitute a union. Thirty percent of the respondents claimed that their employer had either explicitly or implicitly disapproved of a union. The Encla confirms the result that among workers who are not affiliated to a union, the largest proportion fear negative repercussions from their employer if they affiliate. This brief overview of union density and workers’ opinions on unions is by no means conclusive though. Unionization is one of the principal areas of the Chilean labor market where lots of individually run studies provide different and often contradictory conclusions, and where there is a need for an official nationwide survey that not only records the responses of union leaders (as the Encla does), but also those of workers themselves. In particular, there is too little information on the activities of individual unions, on the policy concerns of their leaders, and on the relationships between national confederations (who represent the interests of all workers during negotiations for labor reform) and individual unions.23


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Questions such as why the union density has declined since the early 1990s, or why so many unions register no activity remain unanswered. In particular, there is little information on the specific concerns of unions, and on their relationships with their respective employers. This is an issue we return to in the concluding chapter of this book as we examine the employment policy options that Chile faces in the future. For the government to be able to develop any coherent strategy, it will require more information on one of its main social partners, the Chilean unions, who are perhaps more important because of their potential than because of their current number or power. 7. The Enforcement of Regulation The enforcement of regulation in Chile rests on two main institutional pillars: the Dirección del Trabajo, which is the main institution in charge of the enforcement of regulation, and the labor courts that deal with complaints from workers and employers. Much of the effectiveness of regulatory enforcement depends on the effectiveness of these two institutions. Although this section can only touch very briefly on the issue of enforcement, it is an important topic to bear in mind. As we see in almost all of the chapters of this book, regulatory infringements in Chile are widespread, ranging from the most basic infractions of employing workers without contracts and not paying their social security to preventing unions from establishing themselves. We also saw that many workers, such as Sonia, do not even think about the possibility of lodging formal complaints about their working conditions, partly because they fear negative repercussions from their employers, partly because they are ignorant of how the complaints procedures work and do not have the resources to use them, and partly also because they have little faith in the judicial system itself.24 In the first instance, the effectiveness of all regulation depends on the Dirección del Trabajo’s ability to enforce it. Since 1990, Chile’s governments have significantly increased the capacity of the Dirección del Trabajo to deal with regulatory enforcement. This has meant expanding its staff and in particular its number of inspectors, improving its administrative capacities, and equipping its regional offices, all of which until 1999 did not have even computes installed, with a better infrastructure. It has also meant simplifying the complaints procedures and making them more accessible to workers. To this effect, the Dirección del Trabajo has established an online capacity, for both workers and employers, as well as telephone help lines. The operations of the Dirección del Trabajo are currently based on three methods of checking compliance. The first is based on a complaints procedure, the second involves the systematic investigation of specific economic sectors every year, and the third involves spot checks on individual companies. The first method relies on employees reporting violations of their rights to the Dirección del Trabajo, which then investigates the cases. The number of complaints in recent years has risen significantly (by 60 percent between 1990 and 1999), which can probably be attributed partly to the increased (although still insufficient) capacity of the Dirección del Trabajo for dealing with complaints, and perhaps due partly also to an increased (although generally still very low) willingness on the part of the employees to report violations. The main issues

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that workers register complaints about are their remuneration, their contracts, the payment of pensions, their workday and rest periods, and the nonpayment of pension contributions, in that order.25 The second method that the Dirección del Trabajo uses is to investigate a particular economic sector.26 This is a very wise policy that was implemented by the Dirección del Trabajo’s charismatic and colorful former director, María Ester Feres, who headed the institution for fourteen years. It is based on the idea of self-regulation and generating a spirit of cooperation between companies and the regulator in order to improve the working conditions of employees. If the Dirección del Trabajo announces a visit and a company has to make certain changes in order to comply with legislation, then it is unlikely to undo these changes afterward, so the purpose of the visit has been achieved without the antagonism that would be generated by unannounced visits. One result of this cooperation, for example, is that long distance bus companies installed an automated system on buses that would not allow their drivers to exceed speed limits and would also monitor the time that each driver drove without taking a break. In a country where the main form of long-distance travel is its extensive network of buses, this has greatly reduced the number of accidents caused by speeding buses and drivers falling asleep at the wheel. Nevertheless, the Dirección del Trabajo does also apply fines for the violation of regulatory norms if during these visits companies are found not to have made necessary changes. The third method that the Dirección del Trabajo applies for checking compliance with reform is a system of spot checks that may either be carried out randomly or be prompted by the complaints of employees. In this situation, the Dirección del Trabajo acts very much as the policeman of employment regulation and applies fines for the violations as they arise. Overall, the Dirección del Trabajo’s activities have increased significantly since 1990. The number of regulatory visits it has carried out increased by a factor of 3.5, and the number of workers covered by these visits has doubled. This means that the average size of the companies monitored has decreased over time, which shows that the Dirección del Trabajo now has the capacity to monitor even small businesses. The proportion of the labor force covered by these visits generally ranges between 20 and 30 percent in a given year and largely depends on the proportion of large companies that the Dirección del Trabajo works with.27 Despite all of these efforts, the actual enforcement power of the Dirección del Trabajo is extremely limited, mainly due to the fact that its resources continue to be inadequate given the task that it faces. This task is not helped by the reality that much work in Chile today is being carried out in increasingly remote areas, such as at high altitude or at sea. For instance, it is not easy to monitor compliance with safety regulation on fishing boats while they are at sea. The other institutions that play a role in the enforcement of regulations are the Mutuales—private insurance companies set up in 1968 to insure Chilean workers against accidents and work related illnesses. Today accident insurance constitutes the only nonwage labor cost that employers are responsible for. Firms are assessed by the insurance companies based on their success in preventing accidents and illnesses, but the latter have no actual enforcement powers. The


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prevention of accidents is in the hands of the companies themselves. The main instrument that in practice supervises the prevention of accidents in companies is the threat of increased contributions if accident rates in a company are high. Employers pay contributions at a basic rate of 0.9 percent of all salaries and an additional 0–3.4 percent according to the level of risk generally associated with the sector and the track record of each company. If a company recurrently registers high accident rates, their insurance premiums may go up. However, companies can avoid the threat of higher insurance premiums by not registering accidents with the Mutuales, and, if necessary, by paying for medical care out of their own pocket if this is financially more advantageous for them. In addition, higher risk companies (which are often smaller businesses) frequently insure themselves through the Instituto Nacional de Previsión (INP), the state’s insurer of last resort that has to insure companies rejected by the Mutuales; as the latter does not compile data on the actual accident rates of individual companies, it therefore charges only a basic insurance premium plus an industry premium, but no individual company risk premium. For companies insured through the INP, there is therefore no regulatory incentive at all to lower their accident rates. Overall, though, Chile’s system of labor regulation works much better than in other Latin American countries, and Chilean employers do worry about getting into trouble with the Dirección del Trabajo.28 However, the Dirección del Trabajo’s inspectors are by no means as feared as the tax inspectors, who are much more in number and enjoy a much higher prestige, are better paid, have more resources and access to more and better information, and are consequently much more efficient at monitoring the behavior of Chilean companies. In fact, the differential treatment of tax and employment inspectors has been a very conflictive issue, one that the employees of the Dirección del Trabajo have striked over, and one that its former director, Maná Ester Feres, resigned over as she supported her own employees against the government’s policy of maintaining these different employment conditions. This policy of not treating tax and employment inspectors equally also highlights the priorities of the recent Concertación governments, which have all viewed employment issues as less important than other policy issues (especially economic policies), and in this case are prioritizing the enforcement of regulation that generates their own resources above the regulation that generates the capabilities of workers. And it must be added that large companies with international operations, especially if they are export oriented, are more likely to be motivated by the requirements imposed on them by their international business partners than by the Dirección del Trabajo, a point we will return to in the concluding chapter of this book. The other main pillar of regulatory enforcement in Chile is its system of labor courts for which a reform was finally passed in 2005, which at the time of writing has not been implemented yet. The judicial system associated with employment issues had long generated much criticism and despair among labor market analysts as it was widely recognized as being overloaded and without sufficient resources. Thus, both employers and workers could expect any judicial procedure to be extremely lengthy and time consuming, which has led to a

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situation in which it is much more expedient for the conflicting parties to come to a private agreement rather than refer a problem to the law. As was discussed in chapter 3, this has had an especially negative impact on worker’s rights to the receipt of severance pay as employers frequently refuse to pay the amount due, leaving workers not only without financial resources but also with little hope of obtaining judicial redress. The recognition of these problems led the Lagos government to initiate a reform of the labor courts system, which accorded it more resources and changed procedures in order to expedite the processing of complaints.29 This reform will only be implemented in 2007. One of the main changes it will institute is that oral evidence will be permitted in court. Currently, all evidence relevant to a case has to be presented in writing, which is what causes such long delays in the dealings of the courts. It is expected that future proceedings will take only around two months. This is a crucial change as far as workers are concerned as it will make court cases more feasible for them. When a worker applies for a new job, she is generally required to present the paperwork that concludes her previous job (referred to as the finiquito in Chile) to show that there are no outstanding issues with her former employer. In cases where there is a dispute, employers do not provide these documents, thus making it very difficult for the worker to be able to start a new job. The requirement to produce this finiquito in order to find a new job is what forces most workers to agree to the conditions that employers impose on them (e.g., a reduction in the severance pay that they are entitled to) in order to obtain the requisite paperwork. Speeding up court procedures therefore allows workers to insist on their rights. However, it should be pointed out that the reform does not include the issue of legal assistance for workers without resources. It is clear that the establishment of a functioning system of legal assistance for workers who cannot otherwise afford to make claims is necessary to make the system more equitable and to protect the most vulnerable workers. However, it is also simply necessary in order to make the system work at all, as employers at the moment are simply complacent in the knowledge that most of their workers would never be able to afford to make a claim. As Gazmuri puts it, such a reform is still “outstanding.”30 Yet is also evident that such a reform would require a fair amount of resources in order to work efficiently. This is precisely the type of reform that Chile needs to contemplate at this stage of its development. The country’s basic institutions are in place and to a large extent working efficiently. Now it is time to ensure that these institutions work equitably so that the most vulnerable workers and their capabilities are protected adequately. 8. Conclusions This chapter attempts to show that the composition of employment has changed substantially in Chile. Analysts who have argued that employment has become more precarious in terms of its stability and contractual conditions seem to have a very good point. However, it is still difficult to quantify the exact


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extent of these changes due to the limitations of the available data. The results presented in this chapter demonstrate the urgency of establishing a comprehensive time series of data as well as a panel study on employment mobility so that in future we can keep track of these changes with greater precision. The difficulties in constructing tables with comparable data highlights the flaws of the CASEN as an employment survey, a purpose for which it was not designed, but for which it ends up being used as other sources of data in Chile are even less appropriate for such an analysis (as was discussed in chapter four). This chapter also demonstrates how important it is to look at a range of labor market variables other than the unemployment rate, as different variables may move in very different directions at the same time or may move in the same direction but to different extents. Thus, while the unemployment rate in Chile was decreasing, the proportion of formal written contracts was also decreasing, although the logic of tighter labor market theories would predict the reverse. On the other hand, the unemployment rate and the rate of underemployment have moved broadly in the same direction, but to different extents. Even within the variable unemployment, there are marked differences in terms of its development: it appears that different family members have been differently affected by unemployment. This is an issue that merits further research and attention as more unemployed household heads may mean that families overall are worse off, even as overall unemployment rates are falling, since it may take several secondary earners to replace the income of one principal earner. In addition, this chapter clearly shows that the labor market responds to economic fluctuations through more variables than just the unemployment rate. Both the data on the generation of employment as well as the matrices on employment mobility suggest that an economic downturn has as much effect on the types of contracts generated by an economy (including the number of jobs without contracts) as on the overall unemployment rate. This is another important issue that policymakers should bear in mind, and which has very significant implications for employment policies attempting to protect workers against the effects of these economic fluctuations, as we will see in the next chapter where we examine Chile’s unemployment insurance system. Conversely, the data does not seem to confirm that workers absorb an economic crisis to a significant extent by shifting to informal self-employment. This result perhaps seems counterintuitive to those who have had to thread their way through streets filled with a seemingly infinite multiplication of street vendors after the economic crisis in Santiago, but it makes more sense if we consider that street vendors can only operate in large urban conglomerates. Again, this is an issue that merits further research and has important policy implications with regard to protecting workers from the effects of an economic crisis. One positive result that should be highlighted from this chapter is that the Chilean labor market appears to be relatively flexible in terms of the mobility of workers. Unlike other countries that have encouraged the generation of shortterm contracts, such as France and Spain, and where such contracts have led to workers getting “stuck” in a cycle of unstable employment, the problem appears to be less pronounced in Chile. However, it remains to be examined to what

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extent this result is consistent over time. This chapter does not attempt to undertake such an examination, as different surveys would need to be used in order to take this analysis further, leading to a comparison of data from very different sources, which is not an ideal research method. One very obvious result that this chapter highlights is that employment, poverty, and income distribution are clearly closely linked, as earnings constitute by far the largest proportion of family incomes, even among poor families that receive state subsidies. One connection that had not been examined so far is the link between poverty, income distribution, and employment status. Again, it may appear obvious that poorer workers have more unstable jobs, but this is a fact that is never considered by policymakers. To what extent is poverty caused by lack of employment opportunities in terms of the number of available jobs, and to what extent is it caused by the instability of those jobs that are available? As is related in the introductory chapter of this book, employment stability can constitute the difference between families getting by and families falling into poverty, even though income levels are the same. This point is especially important if we define poverty in terms of capabilities rather than just income. Much more research is required to answer the questions raised by this chapter satisfactorily. However, for now, this chapter concludes by emphasizing the links between poverty, income distribution, and employment, as they are absolutely fundamental to establishing appropriate employment policies. This is an issue we return to in the concluding chapter of this book. Another subject that we return to in the concluding chapter is that debates about labor legislation and regulation have focused principally on issues that concern only a small proportion of the labor force. As we saw in the section on unionization rates, only 11–12 percent of the Chilean workforce is unionized, and only 4 percent are covered by collective bargaining rights. Fighting interminably over whether intercompany bargaining should be allowed or not, for example, thus means focusing on the concerns of a few large companies and unions for which this is an important matter, and engaging in a political issue with largely symbolic implications. But it means ignoring the concerns that matter to a vast majority of workers, who are not covered by any collective bargaining agreements. Protecting workers with atypical contracts or without written contracts from economic fluctuations is a concern that would have a far greater impact on Chile’s poverty rates and would benefit a much larger number of workers, but is a matter that hardly figures on the political agenda of policymakers, who have fallen into the common trap of focusing on the problems of workers who are organized and have national representatives as opposed to the problems of workers who have no such representation and lack organization, and thus political profile. In the following chapter, we see how a very similar political agenda has shaped the most important employment legislation that Chilean governments have passed over the last decade and a half: its unemployment insurance system.

CHAPTER 6

Legislation versus Practical Reality: Chile’s Unemployment Insurance

D

uring his election campaign in 1999, Ricardo Lagos promised Chile an unemployment insurance scheme, and it was with great pride that he introduced a proposal for legislation as soon as his new administration was inaugurated in March 2000. This legislation has since then been approved and implemented and the first workers have been able to participate in the scheme since October 2002. All those who signed new contracts after this date have to contribute to the scheme.1 Historically, most Latin American countries have lacked the resources to provide comprehensive unemployment insurance for their workers.2 However, the region has always been and still is subject to repeated macroeconomic shocks, which can cause severe unemployment and poverty as well as an increase in the proportion of informal employment. In order to provide workers with some form of protection during potential spells of unemployment, labor market legislation in Latin America strictly regulates procedures for dismissals and redundancies, as shown in chapter 3. This legislation generally consists of three components: advance notice requirements,3 a distinction between what is termed “just” and “unjust” dismissals, and severance payments. In addition to these legislative requirements, Latin American governments also often resort to employment generation programs in order to control unemployment, a point we discuss in chapter 7. Together, these measures still do not amount to sufficient protection for workers, certainly not during an economic crisis. Given that their own labor is most people’s main endowment and thus the key variable in their exchange entitlement structure, unemployment is consequently one of the greatest risks that the individual faces. As argued in chapter 2, loss of employment not only implies loss of income, but also the loss of any benefits that may be associated with employment. It can thus wipe out all of the entitlements, functionings,

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and capabilities of workers and their dependants. Approaching the subject from this perspective places a different emphasis on the importance of unemployment insurance and related public action. It is not, therefore, the level of unemployment and the associated market mechanisms that this chapter is concerned with, but the entitlements that the individual can command and her capabilities in this situation. This does not mean that the relationship between employment levels and economic growth or the economic aspects of unemployment insurance should be disregarded. The capability approach rather shifts the emphasis to the individual and does not rely on economic growth and prosperity as the sole solution to the capability failure that unemployment constitutes. In this context, the Chilean unemployment insurance is interesting for four reasons. First of all, it represents the most important piece of labor market and social security legislation that the Concertación governments have implemented since 1990. As opposed to other areas of social policy, such as health, education, or pensions, where the government has merely tried to improve the results from existing structures through increased resources and minor changes, the unemployment insurance actually represents a new institutional structure that over time will replace the previous system of unemployment benefits. The second reason why this insurance is interesting to look at, especially in the context of this book, is that it constitutes a specific piece of labor legislation that we can follow through from beginning to end in order to examine in more detail the process of how Chilean labor policy works. Chapter 2 presents a general historical framework for an analysis of the development of Chilean labor legislation; this chapter establishes the links between particular components of the legislation and the ideological, theoretical, historical, and regional influences on these components. As such, this chapter can be used as a specific example of modern Chilean labor policy. More specifically, this chapter will illustrate the typical discrepancies between theoretical legislation and the practical reality of the labor market, which prevent this insurance from being effective in the task of protecting the functionings and capabilities of workers. Third, this insurance is truly innovative in terms of its mechanisms and institutional structure, as it provides protection against unemployment even though it has a relatively low public finance requirement. The scheme provides unemployment insurance based on each worker’s individual level of savings accumulated in a personal account. Contributions to these accounts are made by both employers and individual workers, and the government provides a contingency fund from which a worker can draw under certain conditions, should individual funds be insufficient. It is the design of this contingency fund together with the mechanisms of how it is combined in one single institutional structure with individual savings accounts that makes this system so innovative. Fourth, given Chile’s image as a successful pioneer of privatized social legislation, this innovative scheme has been presented both at a national and international level as a model for other countries. Thus, the ILO has described the Chilean unemployment insurance as “new legislation that could lead to a new generation of reforms in unemployment insurance matters” (Panorama Laboral 2001: 50). It is no coincidence that of all countries it is Chile that has come up

Chile’s Unemployment Insurance

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with an unemployment insurance based on individual savings accounts rather than on collective risk sharing. It is also no coincidence that this insurance has attracted much attention in other Latin American countries that lack effective unemployment insurance. One question that this chapter will therefore address is whether this insurance does indeed represent a model for other countries or whether they may be better off looking for models elsewhere. 4 Perhaps the most important questions to ask with regard to this insurance, and especially given its potential as a role model for other countries, concerns its levels of coverage and benefits. This chapter uses data that was specifically gathered in order to simulate this unemployment insurance in order to provide answers to these questions. The results show that wage-earners in the formal sector with good quality jobs will be those best covered by this insurance scheme. The more precarious a job is, the less likely it will be covered by this insurance. Since workers with low quality jobs face a far higher probability of becoming unemployed, a vast majority of the unemployed will not benefit from this new legislation at all. In order to understand why the new Chilean unemployment insurance was designed in its very particular way, we need to examine the principal factors that influenced this design. Based on documents and discussion papers published in Chile, four such factors can be distinguished: first, the existing structure of its Labor Code and the particular characteristics of its labor market; second, the specific political context of labor policies in Chile; third, the example of other systems of unemployment insurance in the region and in developed countries; and fourth, the ideological and theoretical foundations of this insurance.5 In the analysis that follows, we will see how all of these factors came together in the design of this unemployment insurance. The chapter begins by broadly outlining how the unemployment insurance scheme works, before going on to show which ideological, theoretical, and political concerns determined its design. It then identifies who the unemployed in Chile are, and what the main characteristics of the jobs they held were. It concludes by assessing the extent to which the scheme will cover the employed and the unemployed. The main focus of the chapter is therefore on whether workers will be adequately protected by this scheme given the definitions of unemployment that it applies. 1.

How Does the Unemployment Insurance Work?

According to the Ministry of Labor, the aim of this insurance is that it will protect workers in the event of unemployment and support their attempts to find a new job. It aims to protect those workers most who lose their jobs involuntarily, as opposed to those who resign or lose their jobs due to their own fault. The insurance scheme was not designed to cover structural, long-term, or cyclical unemployment. Its main purpose is to protect against frictional unemployment, that is, the time it takes the average worker to find a new job, under what could be considered “normal” economic circumstances (Ministerio del Trabajo, 2000c: 3). Appendix A lays out the specifics of the new unemployment insurance in detail. This section only summarizes its main points before moving on to a

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discussion of the proposal. The structure of the unemployment insurance is laid out in figure 6.1. It is a mixed scheme, financed by all social actors (government, employers, and workers), and it creates two types of funding mechanisms: a Solidarity Fund (Fondo Solidario) and an individual savings account for each worker. If the accumulated savings in their individual accounts are insufficient, workers acquire the right to receive a subsidy from the Solidarity Fund—under certain conditions and restrictions, of course. The government has committed itself to contributing to the Solidarity Fund from its budget, and employers are to pay 0.8 percent of total wage costs into this fund. In addition, the employer pays 1.6 percent of each employee’s monthly wage into an individual account set up for each employee. These payments cannot be subtracted from the employees’ wages but in the case of a worker’s dismissal will be deducted from the severance payments due. The only additional cost of the scheme to employers would be the contribution they make toward the Solidarity Fund. And finally, each employee has to contribute 0.6 percent of her monthly wage to her individual account. So, in total, 2.2 percent of a worker’s monthly wage is paid into her individual account each month, which over the course of one year will accumulate to the equivalent of a quarter of the worker’s monthly wage. The funds accumulated in the individual accounts will be available to all wage-earners in the labor force,6 regardless of their type of contract, but provided they have a contract, and regardless of the circumstances under which they become unemployed. Workers with open-ended contracts who are dismissed for “unjustified reasons” have the right to payments from the Solidarity Fund to cover a maximum period of five months of unemployment if they have insufficient funds in their own account. In addition, these workers should also receive severance payments designed to top up their funds up to the limit set by current legislation (one month’s salary per year of employment with a maximum limit of eleven years). Slightly different conditions apply to workers who have fixed-term contracts or have been hired for specific projects or services. In their case, the employer must pay 3 percent into workers’ individual savings accounts each month, and Figure 6.1 Structure of the unemployment insurance Government

Budget

Employer

0.8%

Solidarity fund

Employee

1.6%

0.6%

Individual account

= 2.2%


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the worker has the right to withdraw the accumulated funds as a lump sum upon the termination of the contract. Workers with fixed-term contracts do not have the right to additional benefits from the Solidarity Fund. The conditions for being able to withdraw funds from either the individual account or the Solidarity Fund are that the worker must have contributed to the scheme for twelve (not necessarily continuous) months prior to dismissal or loss of job.7 The worker must also be aged between 18 and 65 years, and have been unemployed for at least 30 days. This means that workers have to finance the first month of unemployment themselves (a mechanism, which is similar to a deductible in an insurance policy). The structure of the insurance is based on a calculation that the average duration of unemployment (during periods of normal economic activity in Chile) is under six months. Hence the number of withdrawals that can be made from the individual accounts is five, regardless of the amount accumulated in the account. This means that workers can benefit from the second to the sixth month of their period of unemployment. Only workers with fixed-term contracts or contracts for specific projects or services have the right to access their entire savings in one single withdrawal. The way the regulations of the unemployment insurance work out in practice is that if workers have accumulated less than two month’s wages in their savings accounts upon becoming unemployed for “unjustified reasons,” they would be entitled to payments from the Solidarity Fund, which would then make a maximum of five decreasing monthly payments that would be related to their previous level of income (Table A.2). Any payments made from the Solidarity Fund are subtracted from the savings in the personal account until these run out. On the other hand, if more than two month’s wages have been accumulated in the individual’s account, the total sum, regardless of its amount, is paid out in five decreasing installments. Workers who earned high salaries and whose savings exceed the maximum amount receivable from the Solidarity Fund are not entitled to any benefits. Workers who change jobs without a period of unemployment between them are free to either withdraw their accumulated funds or to leave them in their account, without this having any impact on the payment obligations of the new employer. If they decide not to withdraw the funds accumulated from their previous job, these are then added to any future unemployment insurance benefits that they may be entitled to. In reality, it is not in the workers’ interests to leave unused funds in their accounts as these may decrease future benefits from the Solidarity Fund that they may become entitled to. These conditions mean that all self-employed and fee-paid workers (honorarios), employers, and wage-earners without a written contract are excluded from this insurance scheme, as are workers under the age of eighteen or over the age of sixty-five. And participants in the scheme who have not worked for at least twelve months (six months in the case of those who had fixed term contracts) or been unemployed for at least thirty days do not have the right to withdraw any funds at all. In addition, the amount of funds that the worker is entitled to depends on the reasons for his unemployment. It is these conditions that we need to bear in mind when analyzing the data relevant to the unemployed.

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The new insurance will be phased in gradually. Only those who signed new contracts must contribute to it. Workers with contracts predating 2002 can join the scheme voluntarily, but as this means convincing their employers to pay their contributions, this does not occur very frequently. For workers who are not covered by the new insurance, the old unemployment insurance, the Subsidio de Cesantía, still applies. The latter provides a state subsidy paid for a maximum period of twelve months for employees who were dismissed for “unjust” reasons and who had contributed to social security for a minimum period of twelve months prior to their dismissal (continuous or not). The insurance pays approximately 16 percent of the minimum salary to start with, a proportion that decreases with the duration of unemployment.8 The coverage of this insurance is very low, partly for the same reasons that the coverage of the new insurance is low and partly because of the extremely low amounts of benefit. In the survey conducted for this study, 22 percent of the unemployed stated that they claimed the subsidy, and many of the interviews showed that potential recipients were barely aware of its existence (Table B.9).9 2.

Ideological and Theoretical Context

As we can see from this brief description, this is no traditional unemployment insurance. It is an insurance that is mainly built on individual responsibility, not collective risk sharing, although the Solidarity Fund does introduce an element of risk sharing into the system. This design is a direct consequence of the prevailing ideological and theoretical context in which this insurance was developed, and which was created by Chilean labor market analysts who acted as advisors to the government as well as to the other social actors. The first point that these analysts had to address was whether an unemployment insurance was indeed necessary in Chile. In 1997, an influential report by the World Bank, in fact, concluded that there was no need for Chile to implement unemployment insurance as its workers were adequately covered by its severance pay system. Their conclusion was based on an econometric model of hypothetical job rotation data, not on real data, and took no account of issues such as the widespread noncompliance with severance pay legislation or the informality of many jobs in the salaried sector. The World Bank’s conclusions were taken up by neoliberal analysts in Chile (see, for example, Beyer, 2000), but did not really convince those who were trying to promote the government’s efforts to improve social justice in Chile. The latter argued that the existing mechanisms of unemployment insurance were inadequate due to the high levels of noncompliance with severance pay and the insufficient amounts and coverage of the existing unemployment benefits. As was discussed in the previous chapter, In practice, employers often avoid paying the full amount of severance pay due, by coming to agreements with workers who are generally obliged to accept whatever terms the employer offers in order to obtain the papers pertinent to the termination of their employment situation.10 In Chile, for example, the Labor Office in charge of the enforcement of regulation (Dirección del Trabajo) estimates that only in 20 percent of


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all cases is severance pay actually paid in full.11 This figure shows that we should treat any study claiming that severance pay regulation introduces rigidities into the labor market with a degree of skepticism, unless it specifically measures the degree of compliance with this legislation and limits its analysis to formal employment. Unfortunately, very few such studies have been undertaken, and analysts assume only too often that they can apply the theories applicable to developed countries to developing ones.12 During the period in which the design of the new unemployment insurance system that Chile would implement was being debated, most Chilean analysts began with a discussion of two theoretical concerns associated with traditional unemployment insurance. First, they argued that traditional unemployment insurance schemes are subject to abuse (moral hazard), and that any new unemployment insurance scheme in Chile must therefore avoid such risks13. Second, they argued that unemployment insurance is not an insurance provided by insurance companies in a free market, as only workers facing a relatively high probability of becoming unemployed would be likely to contract such an insurance—a risk referred to as adverse selection. The idea that unemployment insurance is not provided by free markets of their own volition is borne out by the empirical evidence of the voluntary unemployment insurance scheme, the Pacto de Indemnización Sustitutiva, that existed in Chile prior to the new obligatory scheme. This scheme allowed employers and employees to contribute half a month’s salary per year of service from the seventh year of employment onward to an unemployment insurance fund, withdrawable in any circumstance of loss of employment including resignation.14 Although the benefit could have been offered by employers as a nonmonetary incentive to employees, only negligible use was made of this option.15 So the argument that the free market would not naturally provide such insurance is often made in order to show that unemployment insurance constitutes one of the areas in which the state has a legitimate responsibility to regulate. Many analysts argued this specifically to preempt criticism from neoliberal economists who are opposed to traditional unemployment insurance as a matter of principle based on their view that the state should not “interfere” with market mechanisms. The second argument that analysts almost always discussed is even more important to understanding the particular design of the new insurance scheme. It relates to the risk of any unemployment insurance being open to risk of abuse by the unemployed, a risk that is commonly referred to as “moral hazard.” The concern is that unemployment insurance will lead to longer durations of unemployment and to higher unemployment rates, as benefits would reduce the incentives of the unemployed to resume working at the first opportunity. The unemployed could also claim insurance benefits even if they are working. This is a particularly common problem in a developing country with a large informal sector, as workers can easily work informally while at the same time claim benefits. These risks are compounded by the lack of institutional capacity in developing countries, which means that they cannot monitor the behavior of the unemployed effectively and ensure that they find new work as quickly as possible.

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The argumentation of Chilean analysts is based on the international theoretical literature on unemployment insurance, which often focuses on issues of moral hazard, their complexity, and their interrelation with economic variables and the variety of institutional structures that they operate in.16 Yet somehow the more neoliberally inclined economists in Chile have summarized the complexity of these issues into statements such as “traditional systems of unemployment insurance in Europe have failed.”17 It is important to highlight such comments, because they are often echoed by policymakers, as we will see in the next section. While the more mainstream economists do not resort to such radical statements, they nevertheless associate moral hazard with traditional systems of unemployment insurance and disregard the fact that such issues can be minimized if institutional structures are designed appropriately.18 This means that theoretical papers proposing unemployment insurance based on individual savings accounts have had much resonance in Chile.19 The main argument that analysts present in favor of unemployment insurance is that it will make the labor market more flexible, efficient, and productive, thus benefiting both employers and employees. This argument is based not only on evidence that unemployment insurance helps workers to better match their skills with their new jobs, but also on studies that argue that the existing severance pay legislation introduces significant rigidities into a labor market, as was discussed in the previous section. So an unemployment insurance scheme that reduces the severance pay liability of employers would enhance labor market flexibility. The argument for unemployment insurance is thus largely based on the argument against the rigidities of the existing severance pay system in Chile.20 As a result, severance pay legislation has come under attack from analysts all over the world, especially economists who favor free markets and claim that it introduces rigidities into the labor market by imposing potentially high lay-off costs on employers and is therefore considered an obstacle to the flexible labor market legislation required to lower unemployment rates. 21 Moreover, in times of economic downturns, the legislation is considered to be countercyclical as employers face high layoff costs when they can least afford it and therefore postpone cost reduction decisions, which increases the likelihood of bankruptcy. However, it is important to note that the de jure stipulations of the severance pay system provide protection against unemployment only to the extent that the number of years an unemployed person spent in his previous job is at least equal to the number of months he is unemployed. Consequently, workers with long periods of tenure are adequately covered by such a system, while workers with short periods of tenure may find that their severance payments are inadequate. This means that in Latin America the payments received to cover periods of unemployment have always been correlated with the time spent in the previous job. The theoretical literature on unemployment insurance in Chile is at least as remarkable for the issues it focuses on as it is for the issues it ignores. First of all, it fails to seriously consider the possibility of instituting a traditional


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unemployment insurance based on tax revenue. Such systems, even though they predominate around the globe and even though they exist in many countries with low unemployment rates, are merely mentioned in the context of the moral hazard argument presented above, that is, as a negative example that Chile should not follow. But this author could not find a single comprehensive study that discussed the different types of unemployment insurance and benefits that exist in developed countries, related them to their experience with unemployment and economic growth, and then analyzed the relevance of these experiences to the Chilean case. This means that from the outset, the collectivization of the risk of becoming unemployed was not regarded as an option by Chilean analysts, which illustrates the influence of ideology in analytical materials that are supposed to be objective.22 The second remarkable feature of the literature produced prior to the introduction of this unemployment insurance is the almost complete lack of data analysis. As in previous chapters, the point that must be emphasized here is that inadequate data leaves too much room for biased interpretation and speculation that is not strictly based on facts. The simple explanation for this is that there was no official data in Chile on the jobs held by the unemployed prior to the introduction of the insurance. As was discussed in chapter 4, information gathered by the standard official surveys on unemployment was limited to the most basic characteristics of the unemployed: their sex, age, level of education, and the length of time that they have been looking for work.23 And what little data exists beyond the official surveys is rarely referred to in the studies on the unemployment insurance scheme.24 This means that there is no available data with which a proposed unemployment insurance could be simulated and tested.25 Unfortunately, the absence and inadequacy of data leaves too much room for biased interpretation and speculation that is not strictly based on facts. Three main aspects have thus been ignored that are very important features of unemployment: first and foremost, what sort of jobs did the unemployed hold before losing their work? (i.e., what types of jobs are most likely to lead to unemployment?). Second, what are the patterns of labor market mobility? (i.e., how do people move between states of inactivity, informal employment, formal employment, and unemployment?). And third, if an unemployment insurance scheme is to be designed, then which characteristics of the unemployed need to be taken into account in designing such an insurance in order to protect different groups of workers? While Chilean government officials had partial information with which they could estimate some of these factors, their information was far from complete, and did not come from a coherent source. The third issue that the theoretical discussion of unemployment insurance in Chile ignored almost entirely is how unemployment insurance could be used to upgrade skills by linking benefits to professional training. As a result, the component of the new unemployment insurance scheme that attempts to give the unemployed better access to training is minimal, as elaborated in the next chapter. Again, international experiences with such programs were not given any serious consideration.

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3.

The Political Context of the Unemployment Insurance Legislation in Chile

The arguments presented above are important, not because they reflect empirical realities in Chile—this is difficult to tell in the absence of adequate data— but because the social actors believe them. For the Chilean government avoiding the risks of “moral hazard” was a primary concern that outweighed all concerns for social equity when the new insurance was designed. As we will see in this section this was necessary in order to make it a politically viable project. Although there was theoretical agreement among analysts and policymakers that the unemployment insurance had to be designed around individual savings accounts, this did not mean that legislation could be passed rapidly, as there was still too much disagreement about its details. The main points of contention were first how to finance the proposed insurance and second what to do if individual savings were insufficient. Overall three proposals were made during the 1990s before legislation was finally passed in 2002. The first of these proposals, presented by the government of President Aylwin in 1990, contemplated contributions to individual savings accounts of 4.11 percent (to be equally provided by employers and workers), which would have amounted to half a month’s wage after one year of work. Benefits would not have been linked to the cause of unemployment but would have been subtracted from any severance pay due. In addition, the government proposed guaranteeing a minimum benefit equivalent to 75 percent of the minimum wage and later included the idea of establishing a fund from which the unemployed could obtain credit against their future earnings and then pay back the loan once they had begun a new job. This idea, however, was violently opposed by the main union association, the Central Unitaria de Trabajadores (CUT), who considered it outrageous that the unemployed should accumulate debt when they could least afford it.26 For their part, employers protested that the contributions they had to pay into this scheme were too high. In 1997, the government of Eduardo Frei Montalva proposed an unemployment insurance, which became known as Protrac, short for Protección al Trabajador Cesante (Protection of the unemployed worker). The scheme dismissed the idea of establishing a loan fund and was based entirely on individual savings accounts. Contributions were still set at 4.11 percent, but this it time split differently: 80 percent of the contributions were to be paid by employers, the rest by workers. Disagreements about this proposal centered on how these contributions were to be financed. Employers argued that the additional wage costs it implied would increase unemployment, even though these effectively represented a provision for future severance pay costs.27 This means that the employer had to make up the difference between the funds already contributed to the individual account and existing severance pay arrangements, so that in theory employees did not lose out relative to their current position under any circumstances. Probably the main reason why legislation for unemployment insurance was not passed in the 1990s, however, was that it was not perceived as an urgent


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policy priority in a climate of strong economic growth and falling unemployment rates. In 1998 and 1999, however, the Chilean economy began to slow down, briefly dipping into negative growth in 1999 as a result of the Asian financial crisis. In the space of one year, the unemployment rate almost doubled. It was in this context that Ricardo Lagos had to run an election campaign. Consequently, it is not surprising that one of his main campaign issues was the employment situation.28 This included the promise of instituting unemployment insurance. The following quotation from his election manifesto, neatly illustrates how he had to address the conflicting interests of his electorate and employers. How is it possible that Chile today still has no [unemployment insurance], how is it possible that faced with a crisis . . . the increase in unemployment simply means hunger and privation for many, because we haven’t been able to agree on a formula for an unemployment insurance. This is unacceptable. . . . My government will legislate on unemployment insurance, learning from the mistakes made in other countries. We will turn this into an indispensable element for creating more social justice for the Chilean working class. So that it does not feel that it is dealt the worst blow when a crisis strikes.29

Running on an electoral platform committed to growth with equity and social justice, Lagos presented the insurance scheme in this context. He was trying to reassure those who feared that an unemployment insurance scheme based on personal savings would impose extra costs on workers without really providing them with sufficient income security. At the same time he was trying to reassure employers and the political right who feared the moral hazard associated with any insurance. Lagos therefore promised, “we will learn from the mistakes made in other countries.” We can thus see how the ideological and theoretical arguments of analysts, in particular of those opposed to unemployment insurance, discussed in the previous section influence the political discourse. Opinions from these analysts, such as “traditional unemployment insurance systems have failed in Europe” lead to promises such as “we will learn from the mistakes made in other countries.” This influence is even more evident in the discourse of the employers’ association, as we can see from this statement made by its president at the time: The experience has been extraordinarily negative. The majority of these countries— Spain, England, and other nations of Europe, and including the USA, are having great trouble reversing these systems, which only tend to encourage leisure [ocio] . . . . There is an increasingly larger group of people that makes arrangements to live off these benefits without any interest whatsoever for working within the formal economy. Moreover, many continue working informally and earning a double income . . . .it would be foolish [necio] on our part if we should wish to apply a system in Chile that has been proven, by other countries that came before us, to be wrong and negative.30

The Chilean government therefore found itself in a position where it constantly had to reconcile these conflicting, ideologically charged, and historically

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sensitive positions. The design of the new unemployment insurance scheme must therefore be regarded as a compromise solution. From all we have said so far, it is clear that the unemployment insurance was constructed around the idea of avoiding moral hazard. As a result it is based on individual savings accounts and not on collective risk sharing financed through taxes. If we compare this insurance scheme to the previous proposals, we must also note that the contributions to the scheme, originally set at 4.11 percent, were reduced to a total of 2.2 percent, so the money accumulated in the individual savings accounts is half of what it would have been under the previous proposals for this insurance. Two-thirds of this contribution is financed by employers, reduced from the 80 percent proposed by Protrac. So employers are paying a reduced proportion of a reduced contribution, a percentage that complies with their desire to institute unemployment insurance at the lowest possible additional cost to them.31 The main advantage of this insurance over the previous schemes proposed is that it includes a Solidarity Fund, which actually constitutes a real insurance component in what is otherwise a mandatory savings scheme. The idea of a Solidarity Fund is definitely better than the idea of a credit fund included in the first proposals from the early 1990s or the lack of any collective funding in the Protrac scheme. Although the payouts from the Solidarity Fund are related to a worker’s previous level of income, strict maximum limits are imposed. For workers who earned the minimum wage, these payouts will be rather low, starting at 50 percent of the minimum wage and decreasing over five months. Furthermore, workers can receive benefits from the Solidarity Fund only twice over a period of five years. In fact, all payouts that this insurance makes, whether from the Solidarity Fund or from individual accounts, decrease over time and are limited to a maximum of five payments. All of these provisions were designed to avoid moral hazard and to oblige the unemployed to reinsert themselves into employment as quickly as possible. As with previous proposals, this insurance also links the contributions made by employers to the individual savings accounts with the prevailing severance pay legislation. This mechanism was an essential feature of the insurance as it allowed the government to argue that a reduction of their severance pay liabilities would make the Chilean labor market more flexible for employers, especially during times of economic downturns. The government further argued that it would lead to better labor relations as it reduces the incentive for workers to get themselves dismissed for unjust reasons as opposed to resigning voluntarily if they wanted to change jobs. In reality, this claim is questionable because three-quarters of the severance pay still has to be paid at the time of dismissal. The link between contributions to the individual savings accounts and severance pay also complies with the condition of unions that the new unemployment insurance should not leave workers worse off than under the previous legislation. To convince the trade unions of the advantages of this insurance, the government also argued that this insurance would achieve more employment mobility, as workers would no longer fear losing their severance pay


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entitlements and would thus be able to seek better jobs more easily. Furthermore, in recognition of the low compliance with severance pay legislation, the government argued that this insurance would provide workers with greater certainty if they became unemployed, as at least a quarter of the severance pay due to them would have already been accumulated in their accounts. Again, these claims are questionable, first because a majority of severance pay still has to be paid as a lump sum upon the dismissal of a worker—so noncompliance will still remain an issue, and second, because a very low proportion of the unemployed will actually be covered by this scheme. Another argument that the government produced in favor of this unemployment insurance was that it would further increase the liquidity of the financial markets, just as the pension system had done. We must bear in mind one more relevant issue in the analysis of the political context of this unemployment insurance scheme, which is that the political and technical debate in Chile is so easily influenced by political and ideological bias because there is a lack of objective data. During the ten years that this legislation was discussed by the Chilean government, not a single survey was carried out to provide the necessary information, especially on the characteristics of the previous jobs of the unemployed. This is a political decision in itself that appears to be based on a desire not to admit officially to what extent the characteristics of employment in Chile have deteriorated.32 Overall, we can say that this insurance is certainly going to be successful in avoiding issues of moral hazard. However, whether it will really be able to smooth out the income fluctuations of the unemployed is more questionable, and as a result its effect on the efficiency and productivity of the labor market by allowing the unemployed more time to find the best possible job is also doubtful. Similarly, it is difficult to imagine that this insurance will have a significant impact on labor relations. 4.

Characteristics of the Employed and Unemployed33

As in most countries, unemployment in Chile is far from equally distributed across the labor force. Some groups are far more affected than others, and, as we will see, different types of unemployment (e.g., long term vs. short term) also need to be examined. The majority of the total number of unemployed in Chile is male (56 percent), although in relative terms, the female rate of unemployment is higher than the male rate (Table B.1). This pattern reflects the rates of most other Latin American countries (see ILO, 2002). In Chile, as in most countries, developing and developed alike, the young record the highest rate of unemployment. In terms of the age distribution, the great majority of the unemployed (55 percent) are aged between 20 and 35, with the proportion rapidly decreasing in the older age categories. This contrasts sharply with the overall age pattern of the workforce, which is more evenly distributed across age groups with only 36 percent gathered in the 20–35 range.

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Unemployment is by far the highest in the 14–20 age bracket, with a rate of almost 30 percent (Table B.2). This may be because young people are often still supported at least to some extent by their families (e.g., by living at home), so that they can better afford to be unemployed than the older generations, who are also more likely to have family responsibilities and no longer enjoy parental support. Overall, the unemployed have lower levels of education than the workforce in general, although this result is not as pronounced as might be expected. Several points must be highlighted here. By far the lowest rates of unemployment are found among individuals with higher education from academic universities (5 percent), and the highest rates, among secondary school leavers (of both technical and academic secondary schools34), who have not completed their secondary education (22.5 percent). All other education levels, including the illiterate and graduates from technical universities, have very similar unemployment rates of 14–17 percent, with the exception only of workers who complete their secondary education at an “academic” school (Table B.3). This result is surprising; one would normally expect unemployment to be lower at higher levels of education, yet according to this data, there is little difference between being illiterate and having a degree from a technical university. In fact, in terms of unemployment levels, the illiterate do significantly better than those who have reached some level of secondary education without having completed it. A possible explanation for these results may be related to the average income of households. As people with some level of secondary education are generally from wealthier households, they can afford the “luxury” of being unemployed and of spending time looking for a new job, whereas members of poorer households cannot afford to be out of work for any length of time and, therefore, like Germán, whom we met in the introduction, slip into the informal sector, accepting any activity that will provide them with some form of income, regardless of how minimal it may be. Three quarters of the unemployed are not heads of households (Table B.4). The rate of unemployment for heads of households (the primary labor force) is just under 10 percent, whereas other family members register a rate of over 16 percent. This discrepancy is largely explained by the fact that heads of households have better quality jobs than the “secondary” labor force, but this may also be explained by the greater level of deprivation that a family would face if the head of the household becomes unemployed. At this point we can only speculate that heads of households also do not appear as unemployed if they lose their jobs because they immediately switch to the informal sector. This would lead us to a similar conclusion as the point made above, that is, that some members of the labor force are under more pressure to avoid unemployment than others. However, a 10 percent rate of unemployment among heads of households must still be considered as high. The proportions of unemployed are spread relatively evenly across the economic sectors, roughly corresponding to their weight in the total economy, except for the construction sector, where unemployment rates are higher than in


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the other sectors, including the services sector, where they are noticeably lower (Table B.5.). This can probably be explained by the cyclical nature of the construction sector, which was particularly badly hit during this economic crisis, and by the nature of the services sector, which can more easily absorb extra labor. As discussed in section 2 of this chapter, the main conditions on which a workers’ entitlements from this insurance depend are the type of contract they held in their previous jobs (open-ended or fixed term), their previous level of income, how long they contributed to the insurance for, the reasons for their unemployment (“justified” or “unjustified” reasons), their age, and the duration of their unemployment. These are therefore the most important variables that we must look at if we are to determine how this unemployment insurance will work in practice. As table 6.1 below shows, over 95 percent of the unemployed are from the dependent categories of the workforce, that is, blue-collar workers, white-collar workers, and domestic service, reflecting the fact that unemployment rarely occurs as a visible phenomenon within the independent sector. Among the selfemployed, an economic crisis is more likely to be absorbed by lower incomes rather than a loss of employment through the cessation of business. In the wage-earning sector, an important discrepancy between the characteristics of the unemployed and the employed is related to the type of contract. The proportion of unemployed who previously had some form of an atypical contract or no contract at all is significantly higher than the proportion of these contracts among the total workforce. Only one-third of the unemployed had open-ended contracts in their last jobs, as opposed to 67 percent of the wageearning workforce. This means that the rate of unemployment among the labor force that did not have an open-ended contract is triple that of workers who did (roughly 30 percent vs. 10 percent). Table 6.1 Distribution (%) of the employed and unemployed by type of contract and level of formality Employed

Unemployed

Subtotal

Total

Subtotal

Total

Rate

Wages Workers Open-ended contracts Total atypical contracts (1 2 3) Fixed term (1) project/service (2) Honorario (3) No contract Subtotal waged workers

65.7 15.6 10.3 2.2 3.1 18.7 100.0

50.6 12.0 7.9 1.7 2.4 14.4 77.0

33.3 31.6 16.7 6.3 8.6 35.1 100.0

31.7 30.1 15.8 6.0 8.2 33.3 95.1

10.2 31.3 26.6 39.3 38.5 29.6 18.3

Independent Employers/prof. self-employed Self-employed Subtotal independent

17.7 82.3 100.0

4.1 18.9 23.0

22.2 77.8 100.0

1.1 3.8 4.9

4.7 3.5 3.7

Total

100.0

Note: Excluding all cases who did not know what type of contract they have or had.

100.0

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The reasons for this discrepancy are relatively obvious: it is in the nature of fixed term contracts that they terminate at some point, and that the worker then has to find a new job, generally passing through a spell of unemployment in the meantime. This is an important phenomenon that any unemployment insurance scheme should address, and we will return to this issue when discussing the scheme in the next section. As regards wage-earners without a formal contract, their rate of unemployment is similar to that of wage-earners with atypical contracts, which again seems to suggest that there are different types of informal salaried jobs: stable ones and unstable or transitional ones (see table 4.1 in chapter 4). These indicators of formality are reflected in the proportion of the unemployed who contributed to a health or pension insurance plan in their previous job (Table B.6). Only 55 percent of the unemployed were contributing, 10 percent less than among the workforce in general. This amounts to roughly all workers who had an open-ended contract and most of those who had an atypical contract (this result is confirmed by table 4.10, chapter 4). In terms of hours worked, the figures for the unemployed are roughly similar in that 42 percent worked the standard working week of forty-eight hours, 35 percent worked more, and the rest less (Table B.7). The proportion of unemployed who were only working part-time is slightly lower than among the employed workforce, but generally working fewer hours does not seem to be related to the probability of becoming unemployed. One last important characteristic of the unemployed to look at in this section is the level of income they had in their previous job, especially as this will determine the level and type of unemployment benefit to which they would be entitled under the new insurance scheme (Table B.8). As one would expect, the data shows that unemployment is far more likely among the lowest income categories, especially among workers who earn less than the minimum wage. The lowest income categories (workers earning two times the minimum wage or less) constitute 80 percent of the unemployed. The overall conclusion that we can draw from this comparison of the characteristics of the unemployed and the employed is that the former generally held jobs of a far lower quality than the latter. The comparison has shown that the unemployed are generally younger, less educated, were more likely to have been wage-earners with atypical contracts or none at all, with a lower rate of social security coverage than the labor force in general, and significantly lower levels of income. Workers with low quality jobs therefore not only work under worse conditions, they also face a higher probability of losing their work. This means that they have lower capabilities in the first place and then face a higher risk of seeing them wiped out completely when they lose their jobs. The explanations offered for these results are only speculative, based on qualitative rather than quantitative evidence, as this survey could not investigate in sufficient detail the motivations of respondents. One result that must be especially emphasized for the purposes of policymaking is that heads of households are less likely to be considered as unemployed by the official survey methods as they often cannot afford to be unemployed and thus undertake any work that


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they can find as quickly as possible, which frequently may mean working in “informal” jobs. This disguises the real level of unemployment among heads of households in the data and would mean that despite Chile’s level of development, the informal sector continues to play an important role as a form of unofficial unemployment insurance by absorbing the unemployed in times of crisis.35 These results have shown which segments of the labor force are most vulnerable to becoming unemployed and would therefore require more support from an insurance scheme. If the unemployment insurance scheme is to contribute to improving social justice in Chile and prevent workers from having to carry the burden of any economic crisis, as President Lagos suggested in his policy manifesto (quoted in the introduction to this chapter), this should be the main criterion by which the scheme should be assessed. We shall examine in the following section, whether this is going to be the case. Before explaining the following data, we need to remember that the total number of unemployed interviewed at the time of the survey was 185. As this is a relatively small sample if we begin to look at the characteristics of these individuals, for the purpose of the duration of unemployment, a second sample, which consists of all persons who were unemployed at any point during the last year, was created. Their unemployment is referred to as “historical unemployment”, and they add up to a total of 462 cases, a significantly larger sample size. As we will see, this not only has implications on how representative the data is, but it also changes the analysis. However, we should also bear in mind that the unemployed included in this sample are only those whom the survey methodology defined as unemployed. Workers who lost their jobs and switched into the informal sector are not included in this data. In practice, they would, however, form part of the group of potential beneficiaries from the unemployment insurance as its criteria are based on job loss as opposed to any particular definition of unemployment. This means that it is perfectly possible to claim unemployment insurance payments while working informally. Any future study of the unemployment insurance scheme should bear this fact in mind in the design of its methodology. The main point the table shows is that a high proportion of the historical unemployed find a new job within one month: 22 percent. If we look only at the current unemployed we do not capture the significance of this number as these short periods have little chance of occurring just at the time when the survey is held. Over the course of one year, however, they add up to a much higher proportion. And this is important to highlight because, as we have seen above, these individuals are excluded from the unemployment insurance scheme in the sense that they do not get a chance to claim benefits before finding another job. The data confirms that the majority of the unemployed (72 percent) find a new job within six months, during which time they would be covered by the five installments that the unemployment insurance pays, either through their accumulated savings or from payments from the Solidarity Fund should the savings be insufficient.36 And just under 30 percent of the unemployed would not be covered for the entire duration of their unemployment, 13 percent of whom must be considered long-term unemployed. These conclusions are confirmed by

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table 6.2, which shows that the average duration of unemployment fits well into the six-month period of coverage if we exclude the long term unemployed.37 It should also be added that these figures refer to a time of unemployment crisis during which one would normally assume a longer duration of unemployment than during periods of normal economic growth. Table 6.2 Distribution (%) of the unemployed by the duration of their unemployment Current unemployment: in Sept. 1999

Historic unemployment: between Sept. 1998 and Sept. 1999

Duration of unemployment

Total

Cumulative

Total

Cumulative

1 month 1–6 months 6–12 months 12 months

3.3 56.0 20.7 20.0

3.3 59.3 80.0 100.0

22.1 49.5 14.9 13.4

22.1 71.6 86.6 100.0

Total

100.0

100.0

Average duration of unemployment All cases 9 months Cases 12 months 4.3 months

7 months 3.5 months

Note: The period of “current unemployment” refers to the time that the unemployed had spent without work at the time of the survey. “Unemployment between Sept. 1998 and Sept. 1999” refers to all cases that were unemployed at any point in time during this year and includes a sample of the currently unemployed.

The next factor that we need to consider is the duration of the previous job that the unemployed had, as this determines the amount of savings that they will have accumulated. It is evident from table 6.3 that the unemployed on average have spent significantly less time in their previous jobs than the general labor force. A particularly worrying result is that 60 percent of the unemployed did not stay in their job for a period of one year—the minimum period they would theoretically need to contribute to the insurance scheme in order to claim benefits (i.e., unless they have funds accumulated in their account from a previous job). And only 9 percent of the unemployed were in their previous employment for a minimum of five years, a length of period that is considered sufficient to cover the average duration of unemployment. Table 6.3 Distribution of the unemployed and employed by duration of employment Unemployed Duration of employment Less than 6 months 7–12 months 1–3 years 3–5 years More than 5 years Total

% 44.0 15.6 24.0 7.4 9.0 100.0

Cumulative % 44.0 59.6 83.6 91.0 100.0

Employed % 19.0 7.3 18.5 13.5 41.7

Cumulative % 19.0 26.3 44.8 58.3 100.0

100.0

Note: The data refers to the duration of their previous job in the case of the unemployed and to their current job in the case of the employed.


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One of the main conditions that also impacts the level of benefits that an individual will receive from the unemployment insurance scheme is the reason for her unemployment. As explained above, people who had open-ended contracts and lost their job for reasons of the firm are entitled to payments from the Solidarity Fund should their own savings be insufficient, and in addition they should receive severance payments from their employer. Workers with atypical contracts made redundant for the same reason should in theory be paid out the salary due to them for the entire remaining period of their contract, which in practice, according to experts, never happens. All other workers who become unemployed are entitled only to withdraw the savings accumulated in their individual accounts, and they do not have access to the Solidarity Fund should these be insufficient. As we can see from table 6.4 below, 71 percent of workers with open-ended contracts are dismissed for reasons of the firm or firm closure, a proportion that drops to 51 percent if we consider the entire wage-earning labor force. This means that the other 49 percent of wage-earners are entitled only to a lower amount of benefits under this scheme.

Table 6.4 Distribution of former wage-earners with contracts by reason for loss of employment Reason for loss of employment Voluntary change Necessity of the firm Closure of the firm Expiry of contract Other Total

Open-ended contract

Atypical contract

Total wageearners

16.4 61.8 9.1 0.0 12.7

22.6 28.3 5.7 41.5 1.9

24.0 44.9 6.0 18.0 7.2

100.0

100.0

100.0

Note: Excludes cases that did not know which type of contract they had, those who maintained their jobs, and indefinite contracts who answered that their contracts had expired, which theoretically is an erroneous answer.

The Chilean government presents this insurance scheme in terms of who will be covered by it. But as we can see from the analysis above, such a presentation is extremely misleading. What has to be calculated is the level of coverage and benefits for each worker, in order to consider whether she will truly be covered in practice against the contingency of unemployment. As we saw from the description of the unemployment insurance, the levels of coverage can vary greatly: contributors can be fully covered by both the amount of saving they have accumulated as well as the severance payments that they may be entitled to, or they may receive such a paltry amount as a benefit that they will be no better off than under the present system, as would be the case of all workers with shortterm contracts. Table 6.5 shows to what extent hypothetical workers with different employment histories would be covered by the unemployment insurance

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scheme given their circumstances. The four variables that the cases consider are as follows: 1. 2. 3. 4.

Type of contract in the previous employment Tenure in previous employment Reason for unemployment Duration of unemployment.

For the sake of maintaining this comparison of cases as simple as possible, we will assume a monthly wage of 150,000 pesos for all workers (US$ 205 at an exchange rate of 730 pesos, which corresponds to the time when the unemployment insurance was implemented).

Table 6.5 Different levels of coverage under the unemployment insurance scheme Labor history of the worker

Amount of coverage

Contract: Open-ended Tenure: 1 year Reason: dismissed for reasons of the firm Unemployed: 3 months

Accumulates 40,571 pesos (US$ 56) in her account and can make one single withdrawal. Right to claim from SF, which would cover entire period of unemployment. In addition, right to severance payment: 109,429 pesos (US$ 150).

Contract: Open-ended Tenure: 7 years Reason: dismissed for reasons of the firm Unemployed: 4 months

Accumulates 334,374 pesos (US$ 458) in his account and can make 5 withdrawals and does not need money from SF, his period of unemployment is fully covered. In addition, right to severance payment: $715,626 (US$ 980).

Contract: Open-ended Tenure: 2 years Reason: dismissed for reasons of the firm Unemployed: 6 months

Accumulates 83,332 pesos (US$ 114) in her account and can make 3 withdrawals. Right to claim from SF. Would have no benefit for last month of unemployment. In addition, right to severance payment: 216,668 pesos (US$ 297).

Contract: Open-ended Tenure: 7 years Reason: voluntary Unemployed: 4 months

Accumulates 334,374 pesos (US$ 458) in his account and can make 5 withdrawals. No right to payment from SF. No severance payment. But period of unemployment adequately covered due to accumulated savings.

Contract: Open-ended Tenure: 2 years Reason: voluntary Unemployed: 6 months

Accumulates 83,332 pesos (US$ 114) in her account and can make 3 withdrawals. No right to claim from SF. The payments from his CIC account would be minimal for the first three months of unemployment and there would be no unemployment support thereafter.

Contract: Short-term Tenure: 10 months Reason: contract expired Unemployed: 3 months

Accumulates 45,900 pesos (US$ 63) in his account and can make one single withdrawal. No right to claim from SF. There would be no further support for his period of unemployment.

Contract: Open-ended Tenure: 10 months Reason: dismissed for reasons of the firm Unemployed: 4 months

Accumulates 33,660 pesos (US$ 46) in her account, but has no right to withdraw the funds nor to claim from the SF because he has not contributed to the scheme for a minimum period of 12 months. There would be no support at all for his period of unemployment.

Note: SF refers to Solidarity Fund. The calculations for this table can be found in Appendix A, table A.3. A simulator of the insurance can be found on the Website www.afcchile.cl38

Chapter Title

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5. Simulation of the Unemployment Insurance As discussed above, it is not enough to simply consider this insurance in the light of its coverage of the total workforce or of wage-earners. The most useful assessment of its coverage occurs if we look at the proportion of unemployed who will actually be adequately protected by this insurance. The tables that follow will assess the insurance scheme’s different levels of coverage in turn. They exclude domestic service workers as they are covered by a different savings scheme as well as all self-employed workers or employers who are excluded from the unemployment insurance ex ante. Table 6.6 illustrates what the coverage of this unemployment insurance would have been for all wage-earners, if the unemployment insurance had been fully functioning at the time when the survey was undertaken. It shows that 46.3 percent of all wage-earners would not be covered by this insurance. The two main reasons why so many wage-earners are not covered by the insurance is either because they do not have a formal written contract or because they would not have accumulated the contributions required to benefit from the insurance, if they became unemployed. Together, these two categories amount to 40 percent of wage-earners or 87 percent of wage-earners not covered by the insurance. There are also a smaller number of wage-earners (4.9 percent) who are working on a fee paid basis (honorarios), who also would not be covered by the insurance as they are excluded ex ante.39 The remaining proportion of wageearners not covered, are excluded mainly for reasons of age limits. Table 6.6 also shows that 53.7 percent of wage-earners would be covered by the insurance; 8.5 percent of the total wage-earners have atypical contracts and would be entitled to a one-off payment equivalent to approximately a third of their previous monthly wage. Only a small proportion of all wage-earners would actually have the right to receive benefits from the Solidarity Fund (3.5 percent), the remainder Table 6.6 Coverage of wage-earners Categories of wage-earners

%

%

Not covered No contract Open-ended contract with insufficient contributions, 12 months Atypical contract with insufficient contributions, 6 months Honorarios working as wage-earners Other reasons

44.6 22.6 19.8 10.7 2.4

20.6 10.4 9.1 4.9 1.1

Subtotal unemployed not covered by insurance

100.0

46.3

Wage-earners Atypical contracts covered by a single payment Right to Solidarity Fund Enough savings, no right to Solidarity Fund Subtotal wage-earners covered by insurance

15.8 6.4 77.8 100.0

8.5 3.5 41.8 53.7

Total wage-earners

100.0

Note: Calculation based on 1072 cases that were employed as wage-earners during the year preceding the date of the survey.

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(41.8 percent) would have accumulated more than two months’ wages in their savings accounts and would therefore not qualify for additional funding from the Solidarity Fund. They would instead be covered therefore by their own savings. The coverage levels of the unemployed, however, are very different from those of wage-earners. From table 6.7 we can see that 62.6 percent of the unemployed would not be covered by this insurance at all. Of this proportion the majority (58 percent) would not benefit because they did not have a formal written contract prior to becoming unemployed. Approximately 40 percent would not benefit because although they had either open-ended or atypical contracts, they did not contribute for the requisite amount of time. Only a very small proportion of those not covered by the insurance (2.7 percent) is disqualified from the insurance for age reasons. Table 6.7 also shows that 37.4 percent of the unemployed would be covered by the insurance. Of these, almost a third (31.5 percent) held atypical contracts prior to becoming unemployed and would therefore generally be entitled to a one-off payment equivalent to approximately a third of their previous monthly wage. One quarter (7.2 percent 18.9 percent) of the unemployed covered by this insurance either resigned voluntarily or lost their job for reasons that justified dismissal. The majority of these cases would find that their accumulated savings are not enough to cover their period of unemployment, as their tenure in years is not at least equivalent to their period of unemployment in months. Almost 10 percent (4 percent 5.4 percent) of the total unemployed or a quarter (10.8 percent 14.4 percent) of those covered by the insurance would Table 6.7 Coverage of the unemployed Categories of unemployed Not covered No contract Open-ended contract with insufficient contributions, 12 months Atypical contract with insufficient contributions, 6 months Other reasons Subtotal unemployed not covered by insurance Covered Atypical contracts covered by a single payment Just dismissal or voluntary Years tenure months resignation unemployed Years tenure months unemployed Right to Solidarity Fund 6 months 6 months unemployed Enough savings, no right to Solidarity Fund Subtotal unemployed covered by insurance Total unemployed

%

%

58.1

13.1

21.0

36.4

18.3 2.7

11.4 1.7

100.0

62.6

31.5 7.2

11.8 2.7

18.9

7.1

10.8 14.4 17.1

4.0 5.4 6.4

100.0

37.4 100.0

Note: Calculation based on 297 cases that were unemployed during the year preceding the date of the survey.


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have the right to receive payments from the Solidarity Fund. Of this proportion a majority would find that the payments from the Solidarity Fund would cover their period of unemployment, while slightly less than half would find that their period of unemployment exceeds the period of time that they would be covered by the Solidarity Fund. And finally, 6.4 percent of the unemployed (or 17.1 percent of those covered by the insurance) would find that they have accumulated more than two months’ wages in their savings accounts, and would therefore not qualify for additional funding from the Solidarity Fund. Three results that stand out from these simulations should be highlighted. The first is the generally low coverage of this insurance scheme, both as regards employed and unemployed workers. It covers only 37 percent of the unemployed and 54 percent of wage-earners. This low coverage can be attributed to the precarious working conditions of many workers, particularly those who become unemployed. The low coverage of social security systems in general in Latin America is often attributed to the large informal sectors (as defined by the ILO) that operate in these countries. However, the ILO’s definition of the informal sector includes the self-employed and domestic service workers, both of which are categories of workers that have been excluded from these simulations. The results presented here therefore suggest that the low coverage of this unemployment insurance must be attributed to the precariousness of jobs in the formal sector (e.g., workers employed without formal written contracts) and to the high levels of rotation of these jobs. The second important result is that the coverage of this unemployment insurance is further reduced if we consider who is fully covered by it. For example, atypical workers who receive a one-off payment equivalent to a third of their monthly wage will generally not find this payment sufficient to alleviate any situation of unemployment, unless it is very brief indeed. Thus, the proportion of workers who are either fully covered by their own accumulated savings or by payments from the Solidarity Fund is indeed low, only 15.8 percent. And the insurance element of this scheme, which is provided by the Solidarity Fund, covers an even smaller minority of the unemployed, only 9.4 percent. This suggests, therefore, that most workers, if they are covered at all by this scheme, are covered through its mandatory savings mechanism, not through its insurance component. The third result that we must emphasize is the inferior quality of jobs held by those workers who become unemployed compared to the workforce in general. This result has been demonstrated by all the empirical evidence presented in this chapter, particularly by the simulations of the unemployment insurance. We should note, however, that the total number of workers covered by this scheme, once it is fully functioning, will be slightly higher than this simulation suggests, as workers will be able to draw on savings from previous jobs. Workers who have had a short-term job, for example, whose tenure has not amounted to a total contribution period of six months, may be able to withdraw savings after a second job, if that job takes them over the six month savings minimum. This will slightly increase the proportion of workers with short-term jobs that will be covered by this insurance. However, this does mean that between the first and

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the second job, workers may be unemployed without any benefits whatsoever. The same principle would apply to workers with open-ended contracts that have not allowed them to accumulate twelve months of savings. Unfortunately, this additional percentage is difficult to estimate with the data currently available. This chapter has not entered into a discussion of whether the unemployed who do receive benefits from this scheme are appropriately covered in terms of the amount and the duration of benefits. It has merely tried to establish, as a first step, how many of the unemployed will actually be covered at all. We are not, therefore, arguing at this point that the conditions under which the unemployed can claim benefits are unduly restrictive in this scheme. We merely conclude that the inadequate protection of the unemployed under this scheme derives from the discrepancy between its theoretical stipulations and the reality of the Chilean labor market. Despite its innovations, the scheme is modeled on traditional forms of unemployment insurance and existing legislation in the Latin American region.40 For example, it is not unusual for unemployment insurance systems to stipulate that a worker must have contributed for at least twelve months before being entitled to unemployment benefit. The problem is that in the rather more precarious labor markets of developing economies, a large proportion of the workers rotate among highly precarious jobs and will thus never be able to comply with such a condition. 6. Evaluation of the Chilean Unemployment Insurance Scheme and Conclusions Reading through the literature produced by both Chilean analysts and government officials during the period in which this unemployment insurance was under discussion, one was often left wondering whether this insurance was being designed for the benefit of employers or workers. So much emphasis was given to its qualities in enhancing labor market flexibility and efficiency, and even to its role in enhancing the liquidity of the Chilean financial markets, that the idea of protecting workers from unemployment became very much a secondary concern. Furthermore, the empirical evidence suggests that the insurance will not even come close to fulfilling the purpose it was designed for according to the official public discourse, such as the claim of President Lagos that “This unemployment insurance project will guarantee the necessary protection in case of loss of employment for all workers in our country, through basic and guaranteed support for all beneficiaries. . . . At the end of my presidential term no worker in Chile will be without an unemployment insurance that will allow him to view the future calmly.”41 The analysis presented above shows that the unemployment insurance scheme will clearly not deliver on Lagos’ promise. In fact, we can confidently say that the functionings and capabilities of workers with the most precarious jobs and facing the greatest likelihood of becoming unemployed are the least protected by the unemployment insurance scheme. However, since the unemployment insurance was implemented, a shift has occurred within the official discourse, which became particularly evident during the election campaign of Michelle Bachelet in 2005. Her program for


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government recognizes that the unemployment insurance in its present form does not cover enough workers, and that the conditions for benefiting from its insurance component, the Fondo Solidario, are too restrictive. However, the program contains no specific proposals as to how her government will propose to improve the insurance.42 Perhaps the main problem with the insurance scheme is that it is called an “insurance” and that it is presented to the public as a social policy that will protect workers from falling into poverty. The term “insurance” is misleading as by no means all the unemployed will be able to benefit from its insurance element, the Solidarity Fund. Although all workers with a contract will benefit from this scheme through their accumulated savings, it bears more resemblance to a mandatory savings scheme. To sell this project as an unemployment insurance is a gross misrepresentation in political terms. The discrepancy between how the unemployment savings scheme is presented in the political discourse, and the real practical impact it will have is too great.43 However, as with so many long term policies, by the time the insurance scheme becomes fully functioning, and perhaps also before the insured become fully aware of its limitations, the present administration, which implemented the proposal, will not be in office any more to assume responsibility for its shortcomings. In short, as a piece of social security legislation, this unemployment insurance scheme is not going to be very effective. This begs the question why it has been widely portrayed as a model for other countries. There are several answers to this question. First, the structure of this insurance neatly fits into the ideological framework of the development thought that is currently fashionable. It is based on individual responsibility and demands only that the state function as a provider of last resort. Therefore, it is seen as a solution for countries which have limited fiscal resources for social security provisions. Second, the insurance potentially represents an alternative to the much reviled severance pay systems in Latin America, which could be gradually replaced by such an insurance. This would satisfy those policymakers and analysts who blame Latin America’s poor performance in terms of generating employment on the rigidities of its labor legislation. And finally, there is no doubt that this insurance scheme is very effective in reducing the risk of moral hazard to an absolute minimum. This is a significant advantage in countries with limited or malfunctioning institutional infrastructures. It is also important to recognize that this insurance scheme constitutes legislation in progress. Given the constitutional constraints together with the hostile environment in labor policy matters that Chilean governments have had to operate in (described in chapter 3), the Lagos administration opted for implementing a compromise solution to the problem of unemployment rather than nothing. As with the other labor legislation, the road is therefore set for continued negotiations at a later stage to try to improve the initial reforms in the hope that the political climate for social security legislation will improve.44 This means that we can expect a string of further reforms to this system, which will hopefully over time expand its coverage, contributions, and benefits, but we should expect the structure of the system to remain basically the same.45

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So if the system is to continue operating based on individual savings accounts and a contingency fund, this author would argue that the main improvements that should be made to the system are related to its institutional design and the linkages it establishes with other social security and labor market programs. To begin with, one improvement to this insurance that should certainly be made is to stagger the contributions, whether they be paid by employers or employees, according to the savings a worker has already accumulated in her account. This means that higher contributions should be paid by workers and employers for the first few years of a new job until a level of savings has been achieved that will help the employee over a minimum period of unemployment (e.g., three months). After this point, contributions can be reduced. However, the amount of employers’ contributions to the scheme is an issue that is closely related to the existing severance pay legislation in Chile, and further reform of the former is also likely to require reform of the latter. We should also consider that this unemployment insurance is neither means tested nor does it take into account whether the subsidy received will be sufficient to maintain the people who will depend on it, as the circumstances of the unemployed individual (e.g., size of a family or whether other family members are working) are not considered. Since a very basic welfare system does exist in Chile, it would make sense to establish the institutional linkages that can combine unemployment insurance with other welfare measures. This should be possible without too much additional cost since both employment and welfare offices are supposed to exist in every municipality in Chile. As Márquez writes: “unemployment insurance has a role as part of the safety net, but there is a need for complementary mechanisms that protect the poor who do not have protected employment contracts” (Márquez, 1999: 7). So at the very least, unemployment benefits and other social security mechanisms should be linked. This brings us to the very important issue of the institutional structure of this scheme. Policymakers should also recognize that any legislation relating to wage-earners and the prerequisite of formal written contracts is unlikely to cover the poor. As we saw in chapter 5, most of the working poor are employed as wage-earners without formal written contracts or engage in some form of unproductive self-employment. Their first port of call when they need help is their local municipal administration, which administers emergency healthcare, social assistance, and a range of other services. The municipal employment agencies are generally located in the same precinct, yet this does not mean that they share information on their beneficiaries. A fluid exchange of information should be established between the different branches of local social security offices and employment agencies, so that the former can pass their beneficiaries on to the latter when the opportunity arises. This kind of institutional set up, however, is impossible to achieve with the financial and technological resources available to the municipal employment agencies at the moment, as the next chapter shows. We should further note that this insurance system will not eliminate the need for emergency employment programs in times of economic downturns, principally because the scheme will not cover most of the unemployed. But such


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emergency employment programs should be designed with the purpose of increasing the human capital of those workers it takes on. Chile has begun to take such a step with its Pro-Empleo program, which subsidizes the creation of some jobs and requires workers to be trained (see chapter 7). Initial studies suggest that the effect of this investment is positive, as workers who have participated in the scheme are more likely to remain in the labor market longer and with higher levels of income than workers who did not participate in the scheme.46 Like all other labor market legislation in Chile, this insurance excludes the self-employed a priori. They cannot even participate voluntarily. Since the self-employed in Chile are not covered in the case of work related accidents or any other misfortunes that may prevent them from being able to exercise their profession, it would make sense to implement an insurance system that would cover them in all such eventualities. For the self-employed the inability to work can often cause severe deprivation.47 Given Chile’s institutional capabilities, it no longer has an excuse to exclude the self-employed a priori.48 They should be included in social security legislation just as they are in more developed countries and therefore also be given the same opportunities as wageearners, especially as regards their access to professional training and employment placement opportunities. This ties in with another institutional limitation of this scheme, which is that it was not designed as part of a coherent labor policy package. Although the unemployed are automatically registered with municipal employment agencies and are also given priority access to official training programs, there is no coherent program that will advise the unemployed as to their professional development. Furthermore, the training programs that the unemployed can participate in are designed as short courses that may update a workers skill set, but they will not be enough to either significantly change his job prospects or insert himself into a different form of employment. As it stands, this insurance also excludes the long-term unemployed, whom it defines as workers who are unemployed for longer than the six months that the insurance pays for, and who constitute almost 30 percent of the total unemployed. The unemployed who fall into this category can be assumed to be in very different situations to those who find new jobs relatively quickly. Helping the long-term unemployed to reinsert themselves into the labor market requires even more coordinated institutional structures that combine more extensive training with placements. In the course of further reforms to this insurance system, therefore, this issue should be considered. These criticisms tie in with another very important issue: the prevalent lack of data on the unemployed in Chile. The institution of this new unemployment insurance provides the country with a unique opportunity for gathering real data on its unemployed workers, who are required to fill out a set of forms when they register to withdraw money from their savings accounts. But the amount of data they have to provide about themselves and their employment history is limited indeed.49 Requiring beneficiaries of the insurance to provide more information that could then enable policymakers to design more effective social security

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and labor legislation should be seen as an important side-product of this insurance system. Chile has the institutional capability to implement all of these suggested improvements. At the moment municipal employment offices tend to operate in an institutional vacuum, and where linkages have been established with other institutions (such as training facilities), these tend to be weak. On a slightly more positive note, we can conclude that however low the coverage of this unemployment insurance scheme appears to be, it is higher than the unemployment subsidy that existed prior to its introduction (and that still operates for workers who are not yet part of the new insurance). The coverage of this subsidy generally extended to 10–15 percent of the unemployed, with benefits that would have been even lower than those paid out by this new scheme. In addition, we should credit the new scheme for at least making some institutional provision for covering workers with short-term contracts. That the scheme’s coverage is low has less to do with its design and requirements, but more with the types of jobs that are being generated by Chile’s labor market. Further discussion and research on this scheme should concentrate on how its institutional design could be improved to better suit the reality of the Chilean labor market.

CHAPTER 7

Vocational Training: Missing the Opportunities

T

his chapter brings up some familiar themes: The Concertación inherited a system of vocational training that was instituted under the military government in 1976 as part of its structural adjustment program. Since 1990, it has undertaken several legislative reforms to remedy some of the inequalities inherent in the system and has significantly increased the resources devoted to training. And while these efforts have brought about important improvements, especially in terms of the expansion of vocational training in Chile, they have not been enough to change the fundamental problems that vocational training presents: employers still complain about a lack of appropriately trained, technically skilled workers, and workers still lack basic skills as well as the opportunities to improve their functionings and capabilities. And the legislative changes that the Concertación introduced to the system have been halfhearted, paying lip-service to issues of equity and the agency of workers in training decisions rather than making any fundamental changes. This chapter will show how the Concertación is missing an important opportunity for truly taking on the country’s inequitable income distribution and the fundamental inequalities that shape its labor market. Vocational training is a neglected topic in the literature on the Chilean labor market, the literature has predominantly focused on the analysis of legislation and basic empirical evidence. While there are some studies that evaluate individual training programs or components of the system, there are few that analyze the system as a whole and ask whether its structure and setup are appropriate for achieving the level of skills needed for sustained human development and economic growth in Chile, which is precisely the question that this chapter aims to answer.1 As we will see below, this lack of analysis can partly be ascribed to data limitations, but also to the fact that the subject has not figured prominently on the political agenda of the Concertación. For the purposes of this chapter, the definition of vocational training is limited to the professional training that workers receive once they enter the labor

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market.2 This chapter will look at the two main types of vocational training that Chilean employment policy has tried to encourage over the last decades: the training of the general adult workforce and of specific vulnerable groups of the population, who find it difficult to insert themselves into the labor market. Adult workers who are already integrated into the workforce are normally trained by their employers, for which the government provides a tax credit, generally known as the Franquicia Tributaria. Since the neoliberal reforms of the mid-1970s, vocational training is provided mostly by the private sector and is almost entirely demand driven. This applies to the training of both school-leavers as well as the workforce in general. In addition to the general tax credit, the state has built up a series of programs to address the issue of social exclusion by helping vulnerable groups of the population such as the unemployed, young unskilled adults and the extremely poor upgrade their skills and find work. Sonia and Germán are examples of the type of workers targeted by these programs, which center principally on providing vocational training, but also include basic adult education and literacy programs. While they are financed, regulated, and administered by the government, the training itself is provided only by private institutions, including many nongovernmental organizations. The government’s efforts to train the workforce are overseen by the National Training and Employment Service, the Servicio Nacional de Capacitación y Empleo (SENCE), which was set up in 1976. SENCE administers the tax credit and vocational training programs targeted at vulnerable workers, and it regulates the training institutions and oversees the quality of their courses. The statute governing this agency has been reformed on a number of occasions since 1990 in order to respond to criticisms of inequity, lack of worker participation, and the widespread underusage of its available benefits. Despite these criticisms, the training carried out through SENCE since 1976 has increased by impressive amounts, especially since 1990, as the democratic governments emphasized the importance of investment in human resources. At this point, we should note that vocational training in the Chilean context refers to any type of professional training of the workforce. The definition that SENCE applies is very broad. It includes, for example, training on health and safety regulations as well as specific technical training (e.g., on the use of new machinery), and the more general development of human resources, which may include personal coaching and the development of interpersonal skills. Following the distinctions made by Becker, training according to the criteria applied by SENCE can be both company specific and general. 3 It even includes adult education, or nivelación de estudios as it is referred to in the Chilean literature. SENCE also does not lay down a minimum time period in its definition of training. A vocational training course can have a duration of anything from one hour to several weeks, months, or even years. The goal of enhancing a worker’s productivity through vocational training represents a potential common objective for both employers and workers. For the former it can translate into increased productivity, competitiveness, and

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profit, while for the latter it can increase the potential for personal and professional development, including higher earnings, and ultimately more capabilities. Politically also, vocational training is a much less controversial subject than unemployment insurance or other regulatory reforms, precisely because employers have a vested interest in increasing the quantity and quality of training. So, since collaboration between employers and workers on labor policy issues in Chile is not well developed (with the exception of a few economic sectors such as mining), vocational training thus constitutes an opportunity for enhancing the cooperation between business and labor that should not be missed. To analyze the effectiveness of vocational training in Chile, this chapter will begin by looking at some theoretical issues associated with vocational training, the historical development of vocational training in Chile, and the political background to the current legislation. It will proceed by examining SENCE’s main program, the tax credit, and look at the available data on training in Chile, before examining some of the other training programs run by SENCE for young adults, apprentices, and the unemployed. In particular, this chapter will look at the youth training program, Chile Joven, which has been the model for many such programs across the Latin American region. The main question that this chapter attempts to answer is whether the Chilean regulatory structure is appropriate for making the most of the opportunities that vocational training offers in terms of enhancing the capabilities of its workforce and thus increasing the productivity and competitiveness of the Chilean economy. 1. Theoretical Considerations and the Latin American context As we saw in chapter 2, human beings have few natural endowments that are as important to their capability set as their level of education, which essentially determines the type of employment they are able to get and its associated characteristics such as income, type of contract, and social security provisions. The connection between education and income has been abundantly studied and proven in countries all over the world. In the Chilean case, the well educated command an even higher premium in the labor market than in many industrialized nations, due to the relative scarcity of skilled labor, which is commensurate with Chile’s highly unequal distribution of income. The connection between education and other employment characteristics that generate capabilities, such as social security coverage or the type of contract, has been less well studied, but is equally obvious.4 So increasing educational attainments is of utmost importance in Chile as well as in other countries in the region in terms of helping them achieve a more equitable society and distribution of capabilities. As Marquez writes: “the increase in the demand for scarce skills over the last decade is clearly associated to a widening of wage differentials that is at the root of the lack of improvement of income distribution. Raising demand for skills and an inadequate supply combine to raise the wages of skilled workers and

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leave the uneducated poor in a bad job trap. The fact that after a decade those wage differentials have not shown a decreasing tendency indicates that our countries have been unable to increase the supply of skills.”5 One of the main reasons why Latin American countries have fallen behind their Asian competitors in terms of their human capital resources is that too many children have dropped out and continue to drop out of primary school.6 The quality of education in Latin America is patchy to say the least and, in most countries, highly inequitable as state run schools offer a substandard education compared to the private schools that wealthy children go to.7 And while the Chilean state has made impressive efforts to increase the general level of education of its young people since 1990 in terms of budgetary resources, teaching standards, materials, and curricula, the country still lags behind other developing countries in terms of its results in international studies.8 Marquez actually shows that a very high proportion of Chileans in the 15–18 age bracket are still in full-time education.9 So while the next generation of workers will undoubtedly be better equipped than the last, there will still be a huge gap between them and their better educated colleagues in, for example, Korea or China. There is therefore no denying that a solid basic education is the best preparation for a broad range of jobs. As Mazza argues, the initial educational disadvantage that low-skilled workers enter the labor market with is compounded by the inadequate investment that is then directed at the skills of these workers once they enter the labor market and by the low probability that they will reenter education at a later stage.10 And while vocational training is not by any means a substitute for a good general education, it can nevertheless complement it. And if the vocational training includes a measure of basic skills, then it can be even more useful in raising workers’ own resources (endowments). Once people have entered the labor market, their level of skills becomes at least as important as their initial level of education in terms of generating their capability set. In addition to improving a worker’s capacity to generate earnings, a higher level of skills also ensures that a worker has greater functional flexibility, both within a firm and between firms. This in turn generates a more stable employment trajectory with fewer and shorter bouts of unemployment or underemployment, which are the main causes of capability deprivation for workers. Vocational training, especially the kind that includes basic skills, therefore has an important role to play in generating capabilities for Latin American workers and represents an important opportunity that Latin American countries should not miss. In the Latin American context, vocational training has to cover a wide range of aims: for some segments of the workforce it means teaching basic skills and the requisite values, attitudes, and behaviors that would allow them to integrate themselves into the formal workforce, while for others it means adding new skills, learning a skill, or updating existing skills. These are two very different objectives that, as we will see below with regard to the Chilean case, require different policy measures. Generally, these objectives are formulated in terms of improving the productivity and competitiveness of an economy through investment in its human

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resources. A great part of the increased interest in vocational training that can be observed has to do with the challenge of keeping workers up-to-date with technological changes in a globalized market. The only way Chile, for example, can compete with China in a globalized environment is through greater productivity, either through a natural resource advantage or through better qualified workers. It cannot compete on wages.11 This argumentation, however, misses the point that the primary goal of the development agenda should be to increase human well-being, or to increase the freedoms of human beings to achieve a valuable life, as Sen would put it. This, of course, raises the issue of how economic growth is distributed and whether workers benefit from it in equal measure. This focus on human well-being highlights the important potential of vocational training in contributing to the improvement of this distribution and ultimately also leads to different policy priorities. The Inter-American Development Bank (IDB) has argued that “there are reasons to believe that good quality training generates at least as many positive externalities as general education. Hence training should be treated in the same way as education and a proper balance between expenditures for general education and training should be sought. There are no industrial countries in which the public budgets are modest.”12 However, the employment policy budgets of Latin American countries are only a fraction of what they are in developed countries, which means that we need to examine the financing of vocational training as well as its potential impact on productivity and human development.13 One of the big questions with regard to vocational training in terms of the theoretical debates is how much of it should be run and financed by the state and how much should be left to the private sector. Traditionally the more developed countries in Latin America, especially those that underwent extensive import substitution industrialization strategies, built up large state run training institutions that provided the bulk of technical training. Many of these have now been privatized or replaced as criticism mounted that they provided outdated training and were inefficient and bureaucratic. So private providers were brought into the market for vocational training, which was consistent with economic theory as it shifted away from protectionist development models. The logic was that employers know their own training needs best and can therefore take their own training decisions and hire appropriate training providers in a free market. Three problems emerged with this model, which was first implemented in Chile, as we will see in more detail below: first of all, the market for vocational training is hampered by significant information barriers, because small firms often do not have access to the same sources of information as large firms. The second problem is that in a labor market in which not all firms train in equal measure, employers fear that if they invest in training their employees, they will be poached by other companies who then reap the benefits of training they did not pay for. And the third problem is that, as Moura Castro puts it: “many firms are conservative, reticent about training or overwhelmed by more urgent demands, failing to benefit from increases in productivity that can result from higher

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levels of skills. In addition, firms tend to be shortsighted and do not usually foresee long-run economic trends or adjust their training to them.”14 The result of the combination of these three factors is that most of the vocational training is undertaken by large firms (who have better access to information, more resources, and generally also more foresight), while small firms ignore and are unaware of the opportunities that vocational training could present. In addition, most of the vocational training goes to workers with a high level of initial skills and education, where the investment in training generates the highest and quickest return. This evidently compounds the segmentation that characterizes Latin American labor markets between large and small firms, the skilled and the unskilled, the formal and the informal. Given these practical problems with the free market model for vocational training, it is widely accepted that there is a legitimate role for the state to play through intervention in order to channel training toward precisely those groups of the workforce that the market would ignore of its own accord. This is especially necessary given a rather contradictory phenomenon that is currently happening with regard to vocational training: on the one hand globalization is perceived as increasing the need for training policies. On the other, the increase in precarious jobs reduces the incentive for companies to invest in skills.15 The shorter the job tenures become, and the more jobs there are with fixed term contracts, the less incentive employers have to invest in training. In addition, if the cost of redundancies is reduced (e.g., by lowering the ceilings on severance pay), so do training incentives. One further theoretical issue must be considered in this context. Following the well-known theories of Becker, we have to distinguish between firm specific and general training.16 According to this theory, firms are more willing to invest in the former as this makes workers more immediately productive than an investment in general skills. Furthermore, firm specific skills are not as easy to transfer to other jobs, so they do not make employers as vulnerable to poaching as general skills do. The reluctance of firms to invest in general skills and the poaching problem combine to create a low-skill trap. Following the logic of this theory, however, would mean that general training is more effective at increasing the capabilities of workers as they improve their employment prospects in the market. Thus, investing in general vocational training or adult education is at least as important for the capability profile of workers as specific training, which may have a more immediate impact on their earnings. The combination of all these factors have led to widespread support for welltargeted and well-designed government programs to increase training levels, especially of the most marginalized workers, such as the long-term unemployed and underemployed, young people who have difficulty inserting themselves into the labor market, women who have been out of work for a time (often due to childcare responsibilities), older workers who have lost their work and have difficulty finding new work due to their age, and more generally workers with low levels of education and skills. And it is clear that there is much space for government sponsored adult education or general vocational training, especially since workers with low skills and low levels of basic education are much more difficult

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to train than the more skilled, and therefore much less attractive clients to private training institutions. For unemployed workers, vocational training is especially important as it can shorten the duration of their unemployment, improve the work that they find, and increase their potential earnings. Furthermore, it is also evident that there are particular situations in which vocational training can only be effectively provided by the public sector as the private sector would have no incentive to do so. These include economic shocks, for example, or the closures of specific industries, especially in areas where an entire geographical region or urban conglomerate depended on the industries that were closed. Such programs in particular are difficult to design as it is a challenge to find enough alternative employment opportunities for the displaced workers.17 This means that training programs need to be carefully constructed and thought through as well as constantly monitored and assessed. Fortunately, Chile has now developed the potential capacity to do this, as we will see below. There is one final point that should be highlighted with reference to the specific Chilean context and the potential of vocational training programs. The experience with vocational training programs in OECD countries has been very mixed. Some have been more successful than others in improving the income and employability of participants, and some have never been evaluated appropriately.18 There are many lessons that South American countries can learn from these experiences, but there is also a very important difference that distinguishes them from the more developed countries. The latter, especially European countries, often have a surplus of sometimes very qualified labor. In Latin America, there is a scarcity of qualified labor, and in high growth economies such as Chile, growth can be restricted by the unavailability of trained labor. This therefore creates a greater window of opportunity in Latin American countries than in many developed countries for enhancing the capabilities of the workforce through vocational training. The key to this process, however, is to turn unskilled workers into skilled workers. This means providing them with an opportunity for acquiring a qualification, not merely turning them into slightly less unskilled or perhaps semiskilled workers. 2. The Historical Context: SENCE’s Origins When considering vocational training, we should begin by noting that Chile does not have a significant historical tradition of vocational training. This is not a country where companies have been routinely taking on apprentices under formal training arrangements for centuries, has there been a tradition of companies developing comprehensive training programs for their new recruits or continuously investing in upgrading the skills of their employees, nor is it even a country where technical skills were taught extensively at schools and universities. Until the late 1950s, there was very little vocational training in Chile. As a result, Chile’s institutional structures still reflect these deficiencies. In particular, the corporate sector does not have a tradition of cooperating with other social actors in the design of vocational training programs. Historically, vocational training was something that happened at a training institute, if at all.

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Employers then hired its graduates, and any remaining training happened on the job. Graduates from technical degrees were generally classroom taught, and practical on-the-job experience was not routinely incorporated into their education. The second result was that employers rarely became directly involved in financing vocational training for school-leavers (through apprenticeships) or their employees (through continuous education), nor, as a general rule, were they historically involved in designing coherent curricula for either. Only some sectors, such as the metalworking industry, developed more thorough training strategies through their business associations. Chilean unions did not play a prominent role in building up the country’s system of vocational training either, so it was essentially up to the state to set up vocational training initiatives. A beginning was finally made in 1951, when the Chilean government signed a cooperation agreement with the United States, as a result of which a technical cooperation service (the Servicio de Cooperación Técnica, SERCOTEC), was founded in 1954. Between 1960 and 1966, this agency trained 2 percent of the workforce, which amounted to approximately 0.2 percent per annum.19 Following the earthquakes in the 1960s, SERCOTEC concentrated on training workers for the construction sector in order to accelerate the process of reconstruction. These programs were then expanded to other sectors, especially mining, industry, energy, communications, agriculture, and fishing. The expansion of these programs was achieved with the support of the ILO and some European governments.20 1966 saw the foundation of Chile’s first national training body by the state, the Instituto Nacional de Capacitación Profesional (INACAP), which replaced the SERCOTEC. From the beginning, its purpose was to focus on providing training for administrative personnel, unskilled workers and basic adult education. The training was focused on the mining and manufacturing sectors, all areas that the government was expanding in accordance with its policy of import substitution industrialization at the time. Simultaneously, it was expanding training in the agricultural sector, an area in which the government was also trying to bring about profound changes through land reform. INACAP was financed through the Corporación de Fomento de la Producción (CORFO), which was the government institution through which the ISI policy was being developed. It is thus clear that the main motivation for instituting vocational training in Chile was to train the workforce required for the industrialization process that the country was undergoing. All training provided by INACAP was free. INACAP also began to offer two-year technical degrees in areas such as mechanics and industrial electronics through agreements set up with national universities. It expanded its activities through further cooperation agreements with several European governments, which seems to have created a favorable environment of competition between the various participating governments to provide the best training and equipment.21 Despite this expansion of vocational training activities, only a small proportion of the labor force received training. Between 1967 and 1976, INACAP trained 45,000 workers (which still represented only just under 2 percent of the labor force at the time), of which

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approximately one-third were underprivileged young people. However, if we add up the number of all the workers who were trained through the various institutions at the time, it would amount to 700,000, which is 2.6 percent of the labor force per year. After the military coup in 1973, the training system became an almost immediate target for reform. The state’s activities in all areas of the economy were reduced as part of Chile’s policy of structural adjustment. So in accordance with the economic logic of the time and also because the INACAP’s training system had come to be criticized for being too rigid, the state abandoned its role as a direct implementer of training programs. In 1976, the National Training and Employment Service, SENCE, was instituted as a decentralized, technical body under the aegis of the Ministry of Labor, and INACAP became integrated into the new system as a private provider of technical education and vocational training.22 SENCE was set up so that it would not own or operate any training facilities. This means that there is no conflict of interests between SENCE and the training institutions, which allows the former to function as a regulator and administrator and to enforce quality standards. It has offices in every region and a national directorate based in Santiago. It is interesting to note that this change was implemented in 1976 before any labor reform was even seriously considered. (As discussed in chapter 3, the Pinochet administration did not implement a Labor Reform until 1979.) This is explained partly by the institutional linkage between INACAP and CORFO, which meant that INACAP was treated like a business that had to be privatized. But it also illustrates that the military government thought of vocational training as something that was primarily the responsibility of the private sector and therefore fell into the domain of economic not labor policy. Correspondingly, this means that INACAP’s traditional focus on young people from disadvantaged backgrounds was dropped in favor of a more narrowly targeted program that would be managed by SENCE. The initial statute under which SENCE was set up was very simple, and its basic structure remains the same today. It established a tax credit, the Franquicia Tributaria as it came to be known in Chile, through which companies could write off up to 1 percent of their total wage costs from their taxes if the money was used for training purposes. The purpose of this reform was to provide an incentive for employers to increase their overall expenditure on vocational training by means of a partial subsidy, to reduce the role of state to that of an administrator and a regulator, and to let the labor market decide its own needs for training. The system thus shifted radically from being supply driven to being demand driven. SENCE’s main responsibility is to administer this tax credit and to supervise and set standards for the private institutions that carry out the training. Companies can either carry out courses in-house or contract external training institutions, known as Organismos Técnicos de Capacitación (OTECs), to carry out training for them.23 The OTECs are private businesses that sell their services to the companies—their potential clients. SENCE merely provides companies with a register of all the approved institutes and their respective courses.

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Companies can either train individually, or they can pool their resources to form intermediary training organizations known as Organismos Técnicos Intermedios de Capacitación (OTICs). These are associations set up by economic or regional sectors with the purpose of supporting professional training within the sector. They are nonprofit organizations financed by the membership dues that their members have agreed upon, and they are obliged to spend at least 85 percent of their income on training after their first year of operation, leaving a maximum of 15 percent for administrative costs. Any unspent money must be offered as scholarships for employees of member companies. The membership dues are considered as direct training costs and are therefore tax deductible. The OTICs are prohibited from offering courses themselves. As we saw in the previous chapter, SENCE also works closely with local employment agencies, the Oficinas Municipales de Intermediación Laboral (OMILs), which are in charge of administering public employment and vocational training. In 1976, SENCE’s objective was formulated as follows: “To promote the development of the labor force’s skills in order to contribute to an adequate level of employment, improve the productivity of workers and firms, as well as the quality of processes and products.”24 It is very clear from this statement that SENCE’s mission was to improve the functioning of the economy and of the labor market, and not the capabilities of individuals, although it was assumed that the former would automatically benefit the latter. This formulation of SENCE’s mission still remains the first article of its statute today, a point we will return to in the conclusions of this chapter. Once the new statute was implemented, it soon became clear that companies invested much more in training the already highly qualified rather than those workers with fewer skills. In addition, large firms were investing more than smaller firms, though the latter employed the bulk of the workforce. The subsidy that the government was providing through its tax credit was therefore inequitable. In 1985, the first efforts were made to focus fiscal resources on smaller firms by allowing them to write off up to three minimum wages per annum, even if this represented more than 1 percent of their total wage costs. Conversely, firms were obliged to finance at least 30 percent of the cost of training workers earning more than twelve minimum wages. In 1988, this was increased to 50 percent of the cost of training workers earning more than ten minimum wages. In addition, 60 percent of the wage costs of apprentices could also now be written off, with a maximum limit of 60 percent of the minimum wage. Between 1976 and 1990, a small number of other training programs that specifically targeted particular groups of the labor force were also set up. One of these was a scholarship program for workers who did not have access to training through an employer, that is, mainly unemployed workers. And in 1988, an apprenticeship program was established. Under this program employers could hire young people under the age of twenty-one for a maximum period of two years. The apprentices were not subject to minimum wage requirements, were not attached to any unions or collective bargaining procedures, and could not

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constitute more than 10 percent of a company’s workforce. Sixty percent of their wage could be written off through SENCE’s tax credit for the first year of their contract period. Employers had to commit to assigning each apprentice an instructor from within the company and had to submit to controls by SENCE. The program was initially instituted as a potential solution to high youth unemployment rates, but it was widely criticized as providing employers with cheap labor without establishing minimum requirements and procedures as to the training that the program’s participants should receive.25 The program fell far short of its targets in terms of the number of participants that it attracted. Instead of the 10,000 apprentices that the government hoped to enroll, it attracted only 532. This shortfall is attributed mainly to a lack of information about the program provided to both employers and young people. Nevertheless, participants of the program—both employers and apprentices—evaluated it positively. One of the reasons that it seems to have been unsuccessful in the long run is because it involved neither employers’ associations nor unions. 3. Vocational Training under the Concertación: Reforming SENCE’s Statute Reforming the SENCE statute was not an immediate labor policy priority of the new democratic government, which, as shown in the previous chapters, focused primarily on labor reform and on increasing the legal minimum wage. However, several studies were undertaken during the early 1990s that highlighted the system’s shortcomings that are typical of the free market training models described above. A number of problems with vocational training were identified: most importantly, as the use that companies made of the tax credit increased, it became abundantly clear just how inequitable the system was. Most of the government’s money was being spent on well-qualified workers who earned relatively high incomes and worked for large companies. Conversely, only a small proportion of money was spent on smaller companies and less skilled employees, that is, on those areas that most require training and can least afford it, despite the fact that these categories represent approximately 75 percent of the workforce. Furthermore, it was clear that the spending on vocational training was highly cyclical as employers cut costs during economic downturns, while the opposite would have been the better approach. Second, the expenditure on the Franquicia Tributaria was highly concentrated in only a few areas of training and economic sectors. Administration, computing, and English were the subjects that the workers were most frequently trained in, while some economic sectors, such as mining and financial services, trained much more than others. Several surveys undertaken at the time highlighted the shortage of practical, technical skills, especially in sectors such as manufacturing and industry.26 “The scarcity of skilled manpower is a reality in almost all productive sectors. . . . the issue is about workers with technical skills, who have acquired a specialized skill through work experience or through internal training programs.”27

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The typical problems associated with demand oriented or market-based vocational training systems, which the legislative changes in 1985 and 1988 had already attempted to address, thus persisted in the 1990s. In addition, the SENCE system was also criticized for being entirely employer oriented. Workers themselves had no part in the training decisions, which increased the likelihood of money being spent on highly skilled, high income workers. By the mid-1990s, it was also evident that although the overall expenditure on training had increased significantly, still only a quarter of the available tax credit was being used. This meant that many firms decided not to train their employees. Analysts pointed to several reasons for this: small companies simply did not think about training, they concentrated on running their business, could not afford to spare workers for training or to outlay the cost of training, did not see the advantage of training, feared that the Franquicia Tributaria would lay them open to closer scrutiny from the tax authorities, and above all feared that if they trained their employees, they would be poached by other firms.28 Despite these concerns, surveys showed that 56.8 percent of all companies wanted the 1 percent limit of the Franquicia Tributaria to be increased. The flow of information with regard to training was also criticized. For training institutions, it was much more profitable to sell training packages to large firms who would buy significant amounts of training. It was also much easier and less costly to market training to large firms. So the training institutions had very little incentive to go to small companies and market their services until they had saturated the market of large firms. During the first half of the 1990s, the main policy initiatives of the Concertación regarding vocational training consisted of instituting a number of publicly financed programs for groups of vulnerable workers such as the unemployed, young people from disadvantaged backgrounds, female heads of households, or for specific economic sectors such as port workers or agricultural workers. The most important such program, the Programa de Capacitación de Jóvenes (Chile Joven), will be discussed below. In 1997, the Concertación finally enacted a reform that attempted to address the problems identified with the Franquicia Tributaria.29 The main purpose of the 1997 reform was to better focus the fiscal resources devoted to vocational training on unskilled workers in low-income employment and to attract small companies to the subsidy so that they too would train their workforce. Two specific measures were introduced to achieve this. Smaller firms were allowed to deduct a much higher amount from their taxes, which could add to as much as their entire wage costs, and the tax credit was staggered to allow firms to write off a higher proportion of their training costs for workers with lower wages. Thus, companies would only be able to write off 15 percent of the cost of training a high income worker, 50 percent of the cost of training a medium income worker, and 100 percent of the cost of training a low income worker. And to remove the liquidity restriction facing smaller companies in particular, the reform also established a method of rapid reimbursement of the cost of training programs that does not oblige them to wait until the beginning of the new tax year for the restatement of their costs.

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Pre- and post-contract training expenses also became eligible for financing under the Franquicia Tributaria due to this reform. This meant that employers could send an employee on a training course before they actually started working for the firm. Similarly, they could write off expenses incurred for training after the employee leaves the firm.30 The 1997 reform further proposed a number of institutional changes in an attempt to foster closer cooperation between employers and unions on training needs. It instituted a National Training Council (Consejo Nacional de Capacitación), a tripartite organ consisting of representatives of the government at ministerial level, employers’ associations, and the unions. Its task is to formulate a policy on vocational education and training so as to provide training that is better adapted to the requirements of the modern labor market. The institutional structure of this training council was also replicated in Chile’s regions. The reform also introduced a National Training Fund (the Fondo Nacional de Capacitación, FONCAP), which is administered by SENCE and financed by the general budget, to provide supplementary subsidies for the most vulnerable workers in the labor force. The fund provides scholarships so that these workers can take part in courses at the OTECs free of charge. Once instituted FONACAP became the funding mechanism for existing social programs run by SENCE, programs such as the Programa de Capacitación de Jóvenes (Chile Joven) or the apprenticeship program. It can also subsidize training for small firms with sales below a set maximum, or who have only been operational for less than eighteen months. FONCAP relies on potential beneficiaries of these programs being brought to it either through the municipal employment agencies (OMILs) or through the training institutions (OTECs) themselves. In an attempt to increase the involvement of workers in training decisions, the reform made it obligatory for companies with more than fifteen employees to constitute internal training committees (Comités Bipartitos de Capacitación) These have to consist of three representatives each of management and the workforce, and their purpose is to evaluate the training programs of the company and agree it with the company’s management of training. Training programs agreed by the committees were made tax deductible by an extra 20 percent, although the maximum overall limit of 1 percent of total remuneration costs was maintained. SENCE itself was put in charge of enforcing this legislation. This part of the reform was presented by the government as an important innovation at the time in order to foster a culture of cooperation regarding training inside the companies. Many analysts, however, were skeptical as to whether this part of the reform would be enforceable, given the reluctance of employers to involve unions in training decisions. The 1997 reform also modernized the institutional structure of SENCE by creating a national register of all training institutions and attempted to reduce the companies’ transaction costs related to the Franquicia Tributaria to a minimum. This required institutional changes and investments that were designed to reduce errors in the processing and calculation of the Franquicia Tributaria and to make access to SENCE’s information systems easier. Telephone help lines were set up in

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1998 as well as an initial Internet facility through which the administrative process of applying for tax credit was greatly simplified. Cooperation with other governmental departments was also increased in order to reduce the companies’ paperwork in dealing with SENCE and the internal revenue service. While the 1997 reform was about structural changes, an equally important change followed in 1998 that introduced a centralized internet system, which greatly facilitated the bureaucratic procedures that employers had to go through in order to benefit from the tax credit. The system has been gradually expanded since then and simplified even further, so that all administrative steps relating to training procedures and tax accounting can now be carried out via the Internet. Problems emerged with this system in 2002 in the shape of a series of fraudulent claims that were made by the OTECs for training sold to very small firms, often run by self-employed individuals, that had never taken place. All in all, 30,000 fraudulent claims were brought to the institution’s attention. As a result, the government then instituted new changes to the SENCE statute, which obliged all small firms to apply to FONCAP for funding for training instead of directly to SENCE, and also subjected the OTECs to new regulations.31 As a consequence it has become much more difficult for small firms to apply for funding as they have to go through an application procedure, as opposed to being part of an automatic funding procedure. 4. The Evolution of Vocational Training in Chile Aside from a numerous range of studies that assess specific SENCE programs, we have two main sources of information on vocational training in Chile: the first is SENCE’s own data collected on a number of participants in its programs (including the Franquicia Tributaria), and the second is survey data, especially from the CASEN, which allows us to relate the characteristics of individuals with information on training. This section uses these two main sources in order to present an overview of the distribution of vocational training itself and of the characteristics of the workers trained. 4.1. Empirical Evidence on Vocational Training: The Official Data Table 7.1 presents a summary of the historical development of SENCE’s programs since 1977. The data shows the impressive increase of vocational training that has been achieved in all areas. Almost from the outset when it was first instituted, SENCE trained more workers than INACAP did before 1976. The data includes the number of people and the expenditure covered by the emergency employment programs that the military government ran in order to assuage the effects of the economic crises of 1975 and 1982. These programs employed a significant amount of workers until 1985, even though the expenditure on “other SENCE programs” had already begun to decline after 1979 as a result of the massive reduction in fiscal expenditure in response to the 1982 crisis. Overall, the proportion of the labor force trained under the military

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government hit a ceiling of about 4.5 percent. This changed almost as soon as the Concertación took over the government in 1990. Already in 1991, the proportion of the labor force trained jumped above 6 percent and continued to increase gradually thereafter by about 0.5 percent on average every year. Some of this increase is due to the introduction of programs such as Chile Joven, which began in 1991 and account for the significant increase in government expenditure on “other SENCE programs” at the time. Since the economic downturn in 1999, however, the percentage of workers trained has increased much more rapidly. Most of this increase has come from the increased use of the Franquicia Tributaria, as the government sponsored training programs never exceeded 1 percent of labor force, even at the height of the unemployment curve in 1999. Overall, by 2002, Chile was training 16 percent of its labor force, eight times the number of workers trained when SENCE began and almost four times the number trained when the Concertación took over the system in 1990. It is difficult to come by comparative data on vocational training across Latin America. Márquez (2000) presents comparative data from the World Business Environment Survey on the percentage of firms in Latin America that train their workers. According to his information, Chile is not training its workers more than the Latin American average (much less than Brazil, Colombia, The Dominican Republic, Panama, and Uruguay, for example), but more than Ecuador, El Salvador, and Peru. Table 7.2 shows how the current levels of vocational training break down into different subjects of training.32 First of all, it shows that the largest proportion of training is carried out in administrative subjects, accounting for almost 30 percent of total training. The other subjects that attract a high number of participants are computing, languages and communication (which in Chile mainly means people learning English), and transport and telecommunications. The average length of the courses is not very long. If we consider that forty hours represents a full week of vocational training, then the average course length in almost all subjects is much less than one week (the actual average is twenty-nine hours). The only exceptions to this rule are the courses that lead to school qualifications, which average about five weeks. However, the length of a course by itself is not a good indicator of its quality or of how much a worker would be able to learn in that time. Forty-three hours, the average length of language courses, may not be enough time to teach a worker English as a foreign language from scratch, but it may well be enough to update a secretary’s vocabulary in a particular specialized field. Overall, it is clear that the vast majority of workers trained through the Franquicia Tributaria are men, which is, of course, related to the higher participation rate of men in the workforce. In fact, in some subject areas, almost all the workers trained are men, due to the dominance of male workers in economic sectors such as traditional agriculture (not the seasonal work of fruit picking and packing), construction, forestry, mining, and industrial production. The only subject areas that train more women than men are tourism, catering, and education.

184

Table 7.1 Historical development of the Franquicia Tributaria and other SENCE programs Franquicia Tributaria People trained % Increase 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

22,640 59,546 68,795 97,223 93,236 88,171 105,452 122,890 136,783 138,125 162,849 174,724 186,857 199,604 265,403 297,261 328,864 397,158 417,255 451,934 482,914 476,436 504,436 620,235 756,080 846,870 866,204 856,751

Average % Total 8,367,945

163.0 15.5 41.3 4.1 5.4 19.6 16.5 11.3 1.0 17.9 7.3 6.9 6.8 33.0 12.0 10.6 20.8 5.1 8.3 6.9 1.3 5.9 23.0 21.9 12.0 2.3 1.1

Expenditure % Increase 1,425 4,141 6,726 8,613 11,545 9,087 10,061 11,271 10,229 8,704 10,832 11,859 13,259 15,041 16,165 19,545 22,726 32,144 37,983 45,165 45,906 44,002 48,369 61,113 84,780 97,536 85,984 62,529

16.92

190.6 62.4 28.0 34.0 21.3 10.7 12.0 9.2 14.9 24.5 9.5 11.8 13.4 7.5 20.9 16.3 41.4 18.2 18.9 1.6 4.1 9.9 26.3 38.7 15.0 11.8 27.3

FT as % of labor force 0.8 2.0 2.3 3.0 2.9 3.0 3.3 3.7 3.7 3.5 4.1 4.1 4.2 4.5 5.8 6.2 6.6 8.0 8.3 8.5 9.0 8.8 9.3 11.5 13.8 15.3 15.3 14.6

Other SENCE Programs People trained % Increase 32,525 48,897 51,853 51,853 21,133 20,885 19,639 21,682 21,984 14,807 13,571 9,835 13,091 6,684 26,451 25,378 33,038 25,569 22,214 31,376 32,755 46,464 56,320 52,688 47,775 38,290 51,823 63,247

21.17 756,531

50.3 6.0 0.0 59.2 1.2 6.0 10.4 1.4 32.6 8.3 27.5 33.1 48.9 295.7 4.1 30.2 22.6 13.1 41.2 4.4 41.9 21.2 6.4 9.3 19.9 35.3 22.0

Expenditure % Increase 2,137 3,358 4,753 4,516 3,463 2,550 1,291 1,258 1,024 913 895 678 923 485 8,132 10,348 14,327 11,217 8,656 12,050 13,206 16,935 17,587 15,258 14,378 14,687 14,146 15,050

12.00 756,531

57.1 41.5 5.0 23.3 26.4 49.4 2.6 18.6 10.8 2.0 24.3 36.1 47.5 1576.8 27.2 38.5 21.7 22.8 39.2 9.6 28.2 3.9 13.2 5.8 2.2 3.7 6.4

Total SENCE training

Other SENCE as % of labor force

People trained

% Increase

Expenditure

% Increase

Total SENCE as % of labor force

1.2 1.6 1.7 1.6 0.6 0.7 0.6 0.6 0.6 0.4 0.3 0.2 0.3 0.1 0.6 0.5 0.7 0.5 0.4 0.6 0.6 0.9 1.0 1.0 0.9 0.7 0.9 1.1

55,165 108,443 120,648 149,076 114,369 109,056 125,091 144,572 158,767 152,932 176,420 184,559 199,948 206,288 291,854 322,639 361,902 422,727 439,469 483,310 515,669 522,900 560,756 672,923 803,855 885,160 918,027 919,998

96.6 11.3 23.6 23.3 4.6 14.7 15.6 9.8 3.7 15.4 4.6 8.3 3.2 41.5 10.5 12.2 16.8 4.0 10.0 6.7 1.4 7.2 20.0 19.5 10.1 3.7 0.2

3,562 7,499 11,479 13,128 15,008 11,636 11,353 12,529 11,253 9,617 11,728 12,537 14,182 15,526 24,297 29,893 37,053 43,361 46,639 57,214 59,112 60,936 65,956 76,372 99,157 112,223 100,129 77,579

110.5 53.1 14.4 14.3 22.5 2.4 10.4 10.2 14.5 21.9 6.9 13.1 9.5 56.5 23.0 24.0 17.0 7.6 22.7 3.3 3.1 8.2 15.8 29.8 13.2 10.8 22.5

2.0 3.6 4.0 4.6 3.5 3.7 3.9 4.3 4.3 3.9 4.4 4.3 4.5 4.6 6.4 6.8 7.3 8.5 8.7 9.1 9.6 9.6 10.4 12.5 14.7 16.0 16.2 15.7

60.90 756,531

12.88 756,531

Source: SENCE, 2005. Expenditure in millions of Chilean Pesos of 2004. Labor force data from Laborsta, ILO. More detailed calculations can be found on the author’s Web site.

16.07 951,154

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The data shows that on average, the state is financing more than three quarters of all vocational training undertaken in Chile. The only areas in which private finance exceeds public finance is mining and ecology. In some sectors, the high contribution that the state makes to vocational training is clearly related to the low wages that workers in this sector earn on average. These are also the sectors where the state is financing most of the training through the 100 percent subsidy that applies to lower wage-workers. Finally, we should also note that on average the cost of an hour of training is around 3,500 Pesos (just under US$ 6.00), which is below the maximum of 3,800 Pesos (approximately US$ 6.50) that the Franquicia Tributaria reimburses per hour of training. That training through the Franquicia Tributaria appears to be quite a good business is shown by the increase in training institutions, which has outdone even the growth in the amount of workers trained. SENCE authorized an average of over 600 new OTECs every year between 1994 and 2004, slightly more than half of which operate in the metropolitan area of Santiago. As for the training committees, 94.5 percent of the companies that used the Franquicia Tributaria in 2003 did not have such a committee for training matters.33 And this average is distorted by the Third Region where the mining sector predominates. The mining sector not only undertakes the most training of all sectors but also has a high number of companies with bipartite committees (20 percent of the total). In the other regions, the proportion of companies with training committees reaches a maximum of only 5 percent. The data further shows that even in those companies that do have such a committee, a large proportion of training is not preagreed with them. This means that despite the additional incentive that the Franquicia Tributaria pays in order to encourage the establishment of the committees, the system is failing to encourage the participation of workers in training matters.34 All economic sectors apart from commerce are now training more people through the employers’ associations established for coordinating vocational training, the OTICs, than through individual training contracts between companies and the training institutions. Overall, the OTICs are now organizing almost 60 percent of vocational training. Furthermore, the number of OTICs has increased significantly since 1990 to a total of twenty-seven now.35 Overall, the data provided by SENCE shows impressive increases in the amounts of training provided at all levels. But this data does not allow us to come to any conclusions about how vocational training is distributed in Chile, nor whether the 1997 reform has had an impact. Unfortunately, SENCE does not publish data on the distribution of training by size of firm, level of the worker’s income, by age group, educational level, years of work experience, or type of contract. In particular, SENCE does not undertake any follow-up of workers who were trained, so we cannot see whether the training has had any effect on their level of productivity, their income, or even just their personal or professional development. This means that any evaluation of the impact of the Franquicia Tributaria and other training programs has to be carried out through survey data.

186

Table 7.2 Use of Franquicia Tributaria by subject matter in 2003 Subjects of training Administration Agriculture Livestock Food, gastronomy, and tourism Art, handicrafts, and graphics Science and applied science Commerce and financial services Computer sciences Construction Ecology Education and training Electricity and electronics Nuclear energy Aquaculture Forestry Languages and communication Automotive mechanics Industrial mechanics Mining Industrial processes Health, nutrition, and diet Personal services Transport and telecommunications General education for school qualifications Total

N Courses

N Hours

Total participants

62,109 5,477 1,725 5,292 737 17,587 4,938 45,689 2,549 735 8,374 2,462 58 325 457 19,225 4,068 1,424 1,707 3,248 3,762 10,369 24,029 174

6,731,235 505,336 166,588 680,474 105,809 1,730,955 541,460 4,159,532 378,431 66,503 1,625,187 357,371 6,483 40,044 43,647 2,049,426 365,271 225,439 233,362 357,558 496,312 1,503,870 2,605,540 143,138

290,567 15,743 2,721 32,594 2,306 83,846 24,873 105,058 10,681 3,281 53,767 9,081 272 1,777 2,137 47,274 8,484 6,615 8,861 11,604 29,500 70,631 43,779 752

226,520

25,118,971

866,204

Table 7.2 Continued Training financed Subjects of training Administration Agriculture Livestock Food, gastronomy, and tourism Art, handicrafts, and graphics Science and applied science Commerce and financial services Computer sciences Construction Ecology Education and training Electricity and electronics Nuclear energy Aquaculture Forestry Languages and communication Automotive mechanics Industrial mechanics Mining Industrial processes Health, nutrition, and diet Personal services Transport and telecommunications General education for school qualifications Average

Hours/Course

Proportion of men

Proportion of women

100% by FT

50% by FT

15% by FT 7.2

23 32 61 21 46 21 22 40 35 20 30 39 24 23 20 43 43 34 26 31 17 21 60 190

4.7 2.9 1.6 6.2 3.1 4.8 5.0 2.3 4.2 4.5 6.4 3.7 4.7 5.5 4.7 2.5 2.1 4.6 5.2 3.6 7.8 6.8 1.8 4.3

66.7 89.5 88.2 44.2 63.8 85.9 55.7 65.1 94.2 87.5 48.6 97.6 83.8 81.4 98.7 67.2 90.9 98.1 98.0 80.7 61.4 65.2 82.3 86.3

33.3 10.5 11.8 55.8 36.2 14.1 44.3 34.9 5.8 12.5 51.4 2.4 16.2 18.6 1.3 32.8 9.1 1.9 2.0 19.3 38.6 34.8 17.7 13.7

78.1 96.6 97.6 99.1 88.8 83.6 82.3 84.4 90.5 69.7 89.0 65.6 78.3 83.3 86.5 65.0 83.5 75.1 50.8 86.5 87.3 92.8 89.8 98.1

14.6 1.7 1.5 0.7 9.6 12.2 12.1 11.7 7.6 21.0 10.8 29.8 18.4 12.6 10.4 19.6 15.1 21.5 39.7 10.5 10.3 6.0 5.3 1.9

0.9 0.2 1.6 4.1 5.5 3.9 1.9 9.3 2.3 4.6 3.3 4.1 3.0 14.1 1.3 3.4 8.5 3.0 2.5 3.1 0.9 —

29

3.8

68.9

31.1

82.7

12.2

5.1

187

Continued

188

Table 7.2 Continued

Subjects of training Administration Agriculture Livestock Food, gastronomy, and tourism Art, handicrafts, and graphics Science and applied science Commerce and financial services Computer sciences Construction Ecology Education and training Electricity and electronics Nuclear energy Aquaculture Forestry Languages and communication Automotive mechanics Industrial mechanics Mining Industrial processes Health, nutrition, and diet Personal services Transport and telecommunications General education for school qualifications Average

Proportion of pubic expenditure

Proportion of private expenditure

Proportion of total expenditure by sector

Cost of every hour of training in pesos

72.2 91.5 97.0 96.2 87.6 73.7 75.6 82.6 83.4 49.4 84.4 62.3 57.0 72.3 80.7 67.7 86.0 62.5 40.0 76.0 65.1 88.5 95.0

27.8 8.5 3.0 3.8 12.4 26.3 24.4 17.4 16.6 50.6 15.6 37.7 43.0 27.7 19.3 32.3 14.0 37.5 60.0 24.0 34.9 11.5 5.0

29.2 2.0 0.7 2.3 0.4 6.6 2.3 18.1 1.5 0.3 4.0 1.6 0.0 0.1 0.2 8.5 1.5 1.1 1.3 1.6 2.4 5.6 8.5

3,844 3,449 3,471 3,029 3,200 3,366 3,840 3,861 3,564 4,628 2,193 4,017 4,942 3,027 3,053 3,675 3,653 4,197 4,786 3,917 4,278 3,276 2,892

91.0 77.9

9.0 22.1

0.2 100.0

1,344 3,563

Source: SENCE, 2005. More detailed calculations can be found on the author’s Website.

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4.2. The Empirical Evidence on Vocational Training: Data from the National Household Survey (CASEN) In 1996 and 2003 Chile’s household survey, the CASEN, asked respondents whether they had received any vocational training during the last year prior to the interview. The question specifically asks after vocational training courses, which means that it excludes on-the-job training. However, the CASEN does not ask anything about the length of courses or any other detail. So as with SENCE’s own data, the results presented below could be referring to a one-hour safety training as well as to extensive, long-term courses. However, as we see in table 7.2, the average duration of training courses is quite long, so we can assume that most of the training referred to in the household survey also refers to courses of reasonable length. Table 7.3 shows how the answers to this question pan out across different groups of the employed population. It is interesting to compare the data from 1996 with that from 2003 as the first survey was carried out before the 1997 SENCE reform. This allows us to assess whether SENCE’s policy of trying to increase training among smaller firms, less educated and lower income workers have been successful. The data generally confirms the trends presented above based on SENCE’s own data but adds more detail regarding specific categories such as the occupational status of workers, the size of their employers, and other variables. However, we must note that the 1996 survey did not apply the question about vocational training to workers over the age of fifty. The data from 2003 has therefore been adjusted for comparative purposes.36 We should also bear in mind that this data may underestimate the extent of vocational training carried out as the CASEN is often answered not by workers themselves but by other household members (proxies). Studies in the United Kingdom, for example, have shown that proxies are not always informed of training and tend to underestimate the overall rate by a significant amount.37 The (unadjusted) data from the 2003 CASEN shows that 20.5 percent of the labor force participated in some form of vocational training course. This means that slightly more training is undertaken in Chile than SENCE’s own data shows, suggesting that not all training is carried out through the Franquicia Tributaria and the training institutions registered with SENCE. However, if we exclude workers over the age of fifty, the rate of vocational training increases to 21.8 percent as workers over the age of fifty are trained less frequently than younger workers. In 1996, the rate of training was 15.6 percent, which reflects the overall increase in training during the seven years since then. In general, table 7.3 shows an increase in training across all categories of workers. The ratios show the proportion of training carried out in 2003 over the proportion of training carried out in 1996 and allow us to assess at a glance which categories of vocational training have increased the most. Apart from the overall increase in training, it is noteworthy that men and women were trained in roughly equal proportions in 2003, whereas in 1996 there was still more of a difference between the training rates. This means that Chile seems to have overcome the typical gender gap that is often associated

190 Table 7.3 The development of participation in vocational training courses 1996

2003

% Increase

Total

15.6

21.8

39.7

Sex Men Women

14.7 17.4

21.5 22.3

46.6 28.5

Level of education None Incomplete primary school Complete primary school Incomplete secondary school Complete secondary school Incomplete technical secondary school Complete technical secondary school Formacion tecnica incompleta Formacion tecnica completa Instituto profesional incompleta Instituto profesional completa Incomplete higher education Complete higher education Postgraduate education

8.5 3.1 5.8 8.8 16.8 15.8 23.8 19.3 31.4 17.9 32.0 30.4 37.2 40.2

5.5 6.6 9.6 12.9 20.4 22.7 29.9 29.0 34.7 29.8 36.1 28.5 45.0 57.7

35.2 116.2 64.7 47.0 21.0 44.0 25.9 49.8 10.8 67.0 12.6 6.2 20.9 43.3

Economic sector Manufacturing Financial services Commerce Construction Mining Agriculture Transport Services Others

14.2 32.6 11.1 8.7 34.2 5.8 12.6 21.8 28.1

19.8 31.2 17.6 15.3 52.9 11.8 23.9 27.5 35.9

39.7 4.4 58.5 75.4 54.4 103.0 89.9 26.0 27.8

Age group 15–19 20–24 25–34 35–44 45–50

5.4 11.9 17.3 17.5 13.8

7.1 16.8 24.8 22.8 20.9

31.2 41.1 42.8 30.4 51.2

Income levels 1 minimum wage 1–2 minimum wages 2–3 minimum wages 3–4 minimum wages 4 minimum wages

5.6 8.8 17.0 23.9 29.9

10.2 20.7 31.8 34.4 38.6

80.5 135.3 86.9 44.0 29.0

Working day Full-time Part-time

18.7 13.5

25.4 20.8

35.8 54.6 Continued

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Table 7.3 Continued 1996

2003

% Increase

Income decile I II III IV V VI VII VIII IX X

6.1 5.2 5.8 8.4 12.8 14.8 20.3 24.9 29.9 30.3

8.5 10.6 11.0 15.5 18.4 22.4 29.1 31.5 36.1 40.0

39.0 102.2 90.2 85.1 43.7 51.1 43.6 26.4 20.5 32.1

Tenure 6 months 6 months– 1 year 1– 2 years 2– 5 years 5– 11 years 11 years

9.4 13.4 12.9 17.4 17.3 21.6

11.5 18.8 20.4 22.7 27.5 28.0

21.7 39.9 57.3 30.6 58.9 29.7

Size of company 1 worker 2–5 workers 6–9 workers 10–49 workers 50–199 workers 200 workers

13.3 5.7 8.9 12.2 19.3 22.3

7.2 9.5 13.2 20.8 28.0 41.5

45.8 65.5 48.2 70.7 45.3 86.0

Occupational status Open-ended contract Fixed-term contract Apprenticeship Temporary service contract Project-based contract Fee-based employee (Honorario) Employer Professional self-employed Self-employed Armed Forces Non-remunerated family worker

22.8 12.3 — — 6.2 — 16.7 17.8 5.7 24.7 4.7

31.8 27.9 18.1 22.4 16.5 19.3 16.2 14.6 8.3 42.3 5.3

Source: Author’s own elaboration with CASEN data from the 1996 and 2003 surveys. More detailed calculations can be found on the author’s Website.

with vocational training, although the typical gender biases of certain economic sectors do of course remain. If we look at workers according to their level of education, however, major differences emerge. It is clear that more educated workers are much more likely to receive training than the less educated, and although the level of training has

192

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increased in almost all categories, except among workers without any education and those with incomplete higher education, these increases have been spread relatively evenly across all educational categories. Overall, workers with postgraduate education, for example, are more than ten times as likely to have undertaken some form of vocational training than workers without education. To close the gap in training between the lowest and highest levels of education, the amount of training imparted to less educated workers would have to increase by a much higher multiple. A significant increase of training occurs at the level of complete technical secondary education. One consistent pattern among all categories of workers is that those with a complete level of education are more likely to undertake further vocational training than workers who did not complete their education. A more detailed look at the data shows that approximately half of the training received by the three lowest educational categories is run through the social programs that the Chilean government has implemented for vulnerable groups of workers. However, the less educated are not much more likely to participate in these programs than the more educated. In fact, of workers with a postgraduate education 5 percent participated in such a social program, as opposed to 1.6 percent of workers without an education or 2.2 percent of workers with incomplete primary education. This suggests that SENCE’s efforts to target less educated workers with additional training opportunities are not particularly effective. Table 7.3 shows that the data on economic sectors confirms SENCE’s own data: the mining sector undertakes the most training, over half of its workers received training during the year prior to the survey, followed by financial services. The sectors that train the least are agriculture and construction, although both have increased their levels of training by more than average. In terms of the age distribution of training, the data shows that training is clearly concentrated among those in the 25–44 age bracket. The age group with the lowest level of training are in the 15–19 age bracket, precisely the group of workers that should be receiving the most training in order to increase their chances of a successful professional development. This age group also receives the least training through state run programs. Only 1.4 percent of them were part of a state sponsored training program as opposed to approximately 3 percent of workers in other age groups. And although those in the 20–24 age bracket receive slightly more training than the youngest workers, they also receive less than the average. The complete data for 2003 shows that the amount of training workers receive once they have reached the age of fifty-five drops significantly. This is consistent with human capital theories that suggest a low return to training at this age. The data on workers by level of income, whether they are split up by decile or by multiples of the minimum wage, tells the same story: low income workers are trained much less than high income workers, and the higher the level of income the greater the likelihood that workers receive training. In fact, workers in the highest income decile are almost five times as likely to receive training as those in the lowest decile. However, the data does clearly show that the

Vocational Training

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193

amount of vocational training undertaken in lower income categories has increased proportionately more than in higher income categories. This means that the legislative changes, designed to encourage the training of lower income workers, that were introduced to the Franquicia Tributaria’s statute in 1997 are having some effect, but not enough to significantly impact the training practices of employers, who still focus the vast majority of their resources on higher income workers. In addition, an important point to note is that workers in the lowest deciles are not much more likely to have benefited from state sponsored training programs than workers in the higher income deciles. The same picture emerges if we examine the likelihood of having participated in state sponsored training programs by category of minimum wage. SENCE’s programs are all supposed to be targeted at specific vulnerable groups of workers but the data shows that it is only training approximately 3 percent of all workers in each income category, which suggests that its attempts to target its resources at the poor and least skilled are not very effective. These results are consistent with the data on educational levels discussed above. It seems that SENCE’s social programs are poorly targeted. We can observe that full-time workers are more likely to receive training than part-time workers, although the difference is not very significant. Overall, vocational training for both categories of workers has increased in roughly the same proportions. The data on training by length of tenure is consistent with what we have seen so far: the longer workers remain in a job, the more likely they are to be trained, although 14 percent of workers who have been with a firm for under a year do receive training, which may very well reflect the proportion of induction training. The likelihood of receiving vocational training increases fairly consistently with increased tenure, although workers who have been with the same company for a very long time (over twenty-six years) receive less training, which is probably related to their age profile. The data on training by size of company shows a very important jump in the amount of training undertaken in firms with more than ten workers. So while SENCE has had some success in spreading vocational training among very small firms, there is still a significant gap between their levels of training and that of larger firms. Another significant jump occurs in firms with more than fifty workers, which also confirms that larger firms train more. The ratios show that SENCE’s efforts since the 1997 reform to promote training among small firms has been ineffective. Smaller firms have not increased their levels of training by more than larger firms. Perhaps the only variable that throws up some surprises in terms of the distribution of training is the variable occupational status. First of all, there is a predicable trend in that more stable types of contracts receive the most training. It is furthermore predictable that workers without a written contract receive significantly less training, and also that the proportion of workers trained has not increased between 1996 and 2003. The surprising results, however, are that workers with fixed-term and project-based contracts receive almost as much training as those with open-ended contracts. The training they have received has

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increased by twice the average amount between 1996 and 2003. To a certain extent, this may be due to induction training, which suggests that in 1996 workers did not receive as much induction training as they did in 2003. One noteworthy fact that should be highlighted here, but that will also be discussed in more detail in section 5.2, is that only 18 percent of the apprentices asked stated that they received vocational training during the last one year. This contradicts the whole purpose of apprenticeships, which are supposed to be based on vocational training. The independent sector, on the other hand, has not significantly increased the amount of training it undertakes. Even employers and the professional selfemployed only undertake an average amount of training, which is surprising as these categories of workers normally have higher rates of education, which would normally also suggest more vocational training. Detailed information on training shows that employers and the professional self-employed finance most of the training they undertake themselves, while the self-employed who are not professionals undertake most of their training through state run training programs. Nevertheless, the figures show that if SENCE wants to contribute to increasing the productivity of the independent sector, especially of the nonprofessional selfemployed, through vocational training, it will have to provide it with either better incentives or information on the benefits of further qualifications. To sum up, the data from the household surveys shows that a disproportionate amount of vocational training is still being received by high income workers who have a high level of education to start with and who have more stable jobs, better contractual positions, and who work in larger firms. An important result to highlight is that SENCE is not succeeding very well in targeting the resources of its social programs at the most vulnerable segments of the workforce. It also appears that while the 1997 reform has had some impact in terms of increasing the amount of training undertaken by smaller firms, and also by low-income workers, this effect has by no means been significant. 4.3. What the Data Does Not Tell Us and Other Conclusions so far As this section illustrates, the data from Chile’s household survey tells us much more about how training is distributed among the workforce than SENCE’s official data. However, it still leaves us with a number of unanswered questions. To begin with, the way the CASEN phrases the question on training gives workers no definition of what is meant by training. The survey merely asks: “Did you participate in a vocational training course during the course of the last year?”38 So while, on the one hand, the proportion of training that results from the CASEN survey may be underestimated, on the other hand, because many surveys are not answered directly by the workers themselves it may overestimate training, if the definition of the survey’s respondents differs from that of official sources. In addition, we cannot tell from the CASEN what proportion of workers is being trained repeatedly. There is an important difference between training the same workers every year and training different workers every year. The former

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would suggest that training is concentrated among a privileged few, while the latter would mean that the entire workforce is being trained, only not as frequently. The data also tells us nothing about the quality of the training received, of the relevance of the courses to the worker’s job, and of the impact the training has on the worker’s professional development. In the author’s own survey, only a very small proportion of the workers asked, for example, stated that the training they had received had caused a direct benefit, such as a change of job, promotion, or a salary increase. Seventy percent stated that the training had only served their personal development, while 20 percent stated that it did absolutely nothing at all for them. Finally, the other important aspect of training that SENCE is not monitoring, and that is not asked in the household surveys either, is the extent to which workers are trained on the job, or through internal mechanisms of the company that are not formal training courses, which can be written off through the tax credit. Such data is, of course, difficult to come by as it would probably involve complicated surveys of use of time while at work, but it would give us a much more comprehensive idea of training patterns. SENCE has not instituted any mechanisms for monitoring the effect of training on companies themselves. Evidence from the United States suggests that there is a significant positive link between training and a firm’s profitability, so it would be interesting to observe whether such a link exists in Chile too and how significant it is.39 Establishing evidence of such a link could serve as an important argument for explaining to smaller firms how it might help their productivity levels to train their workers. So far, the only analysis that has been undertaken of the effectiveness of the Franquicia Tributaria relates training to workers’ earnings.40 But the link between training and earnings is a rather incomplete measure of the effectiveness of training, even though economists resort to such measures in the absence of better evaluation techniques. While a proportion of training is carried out in order to enhance a worker’s skills and enable her to take on additional or more complex functions, a large proportion of training is simply necessary for a company to continue functioning and remain competitive. Its effect on workers therefore does not always translate into increased wages, but often simply into job maintenance. So although economists view vocational training as earnings enhancing, human resource managers often look baffled at the suggestion of such an established link. And workers, who are very much aware of the connection between different levels of education and future earnings, only rarely make the connection between vocational training and earnings once they have entered the labor force, unless they are specifically acquiring a skill that they know will allow them to perform a more highly rewarding job. This lack of awareness of the connection between training and potential income increases probably explains to a large extent why workers themselves are not more proactive in undertaking further vocational training once they are established in a particular employment situation.41 This is a point that we will come back to in the concluding discussion of this chapter.

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5. Targeted Vocational Training The introduction to this chapter mentioned that SENCE is responsible for running two different types of vocational training efforts: the tax credit on the one hand, and targeted programs that aim to improve the employment perspectives of specific groups of the population, on the other. This section will examine three such programs in an attempt to understand the extent to which they are fulfilling this objective. 5.1. Chile Joven Of all SENCE’s targeted programs, the one that has attracted the most attention is Chile Joven, the training program that the Concertación launched in 1991 for young people aged 15–24 from low-income families.42 Although Chile Joven as a program in its own right was discontinued by the government as part of a general strategy of consolidating its numerous (and confusing) active labor policies in 2002, it is discussed here as it constitutes a perfect example of the type of social policy and active labor policy that the Concertación implemented after 1990.43 Of the various targeted programs that SENCE has run, it has been one of the most important, in terms of both the number of people it has trained and the amount of money that was invested. It was also one of the first programs the Concertación established, so it thus ran for the longest period of time, which means that it is also one of the best studied in terms of its effect. Also, on a familiar theme, the program has become something of a model throughout the Latin American region as a successful active labor market policy.44 Until 1997, it was partially financed by the IDB, which has made information about it widely available to other Latin American countries, in which it has helped set up similar programs. Chile Joven further serves us as an example because although in many ways the program has been very successful, as we will see, it also illustrates the typical limitations associated with targeted social policies. Chile Joven was instituted because the economic crisis of 1982 had affected young people disproportionately: they were among the first to become unemployed as the economy slowed down and the last to be employed as it recovered. As a result the unemployment rate among young adults in 1990 was more than double the total unemployment rate.45 The program was designed to provide vocational training with both a theoretical and a practical component for young people with complete primary education from low-income families, who were unemployed, underemployed, or inactive and wanted to work. The program consisted of four subprograms: vocational training with work experience designed to insert young people into salaried employment, vocational training for self-employment, an apprenticeship program, and a program for young people with psychosocial problems.46 The bulk of the participants in the program took part in the training for salaried employment, which consisted of approximately six months of classroom training and a three-month internship in a company. The program was administrated at a local level through the local employment agencies (OMILs), which were in charge of assessing whether

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the participants really came from low income families, helping them find the right courses and find work upon completion of the program. The program provided its participants with a small subsidy that would cover their travel expenses and lunches and, at the end of the course, with a certificate of participation but not with a certified level of technical specialty. Due to the reduced duration of the courses these were by no means equivalent to a technical higher education degree. The component of Chile Joven that prepared participants for selfemployment consisted of almost nine months of classes and a supervised work experience for which the training institution had to obtain a loan on behalf of the participants.47 The apprenticeship program was started in 1994 and consisted of an apprenticeship, which could last from six months to two years, with a firm and complementary technical courses. Firms received a subsidy for the complete duration of the training contract. The courses offered to the participants were designed and taught by private training institutions, which could be the same ones that ran courses for the tax credit. In some cases the institutions were also NGOs that specialized in social programs for young people. These institutions were responsible both for setting up the courses and their curricula as well as for the internships with local companies that were part of the program. SENCE’s role was to monitor the quality of these courses and make sure that participants received appropriate work placements as well as to support the training institutions in their work. The combination of classroom training with practical work experience has been widely recognized as the key component that made this program successful and lead to its replication in other Latin American countries. Overall, Chile Joven has been positively evaluated in the literature. It has trained over 160,000 participants, who have evaluated the program very positively.48 Studies evaluating the impact of the program suggest that the insertion of participants into the labor market after the program is 20 percent higher than that of a control group, and that their salaries were also higher than those of the control group, especially 12 to 18 months after having completed the program. It seems that the program was successful in familiarizing young workers with the discipline of good work habits. In addition, it was successful in generating institutional expertise in training young people from disadvantaged backgrounds.49 However, it also appears that the success of program participants in inserting themselves into the labor market depends to a large degree on variables that are related to factors other than their participation in Chile Joven, such as their prior work experience, their age, their sex, and their level of education. The ILO describes the program as “extremely effective for those young people who needed a little ‘push’ in order to break out of marginality, while it had trouble reaching those with more serious problems.”50 Chile Joven also illustrates a number of problems that are typical of programs of its type. As mentioned above, the central purpose of this program was to insert young people into the labor market by combining training in technical skills with work experience. The success of the program therefore depends to a

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large extent on the quality of this work experience, on whether it fosters good work habits, motivates the interns, and especially on whether they learn to apply their newly learned skills in a relevant work environment or end up sweeping the floor and making coffee. Although this program is considered successful in having achieved a degree of cooperation from companies to participate in this program by providing internships, it has nevertheless proved difficult to ensure the quality of these internships. This is a typical problem associated with targeted social programs of this type: employers ideally want cheap labor for a short period of time, while the program participants require an employer willing to further their training and hopefully take them on upon successfully completing their internship. Problems of motivation also occur if companies tell workers that they cannot keep them on, even though this may have been understood and explicitly stated from the beginning. One of the difficulties highlighted in early studies of the program were its high desertion rates, which were associated with the difficulty of obtaining timely internships after the participant concluded the theoretical courses.51 If too much time passes between the theoretical courses and the internship, then the participants loose their motivation and desertion rates increase. Bravo and Contreras (2001) show that the payment of an additional incentive to the OTECs during the second phase of the program—if they could prove that participants had concluded the full program—decreased drop out rates. Evaluation studies have also pointed out that SENCE does not have the resources to enforce rigorous quality standards in the training courses. Since it is not a provider of training itself but outsources these programs to external training providers, this is a particularly important point. The quality of courses will inevitably vary depending on the resources of the provider as well as its motivation. Often NGOs provide better training for specific groups of participants, but they may not be technically as well equipped as private providers, who undertake training as a business. The latter, however, may be better equipped, but their main motivation in bidding for the provision of training for such programs may be profit, as opposed to providing the best training possible. There is obviously a difference between putting participants through a program for the sake of profit or because you are really interested in giving people an opportunity to improve their lives. Another problem typically associated with programs such as Chile Joven is that participants who successfully complete the program only receive a certificate of participation and not a certificate that gives them a real qualification. This leaves them with a kind of semiqualification that may not be all that useful to them in the labor market. In addition, programs such as Chile Joven are set up with a short-term perspective to provide workers with a stepping stone. Once they have completed the program, participants lack a clear path (and often the resources) for obtaining further qualifications, which would help them improve their long-term employment perspectives. Establishing such a career development path is especially important for those who did not find a job after completion of the program or for those who find only temporary work. Often targeted programs such as Chile Joven are useful to workers for bridging a gap

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during a period of unemployment, but they do not help to build a career. Nor are they meant to. They may help to push people out of poverty but do not take them much beyond this. And follow-up studies of participants typically assess their situations 12–24 months after the completion of the program, but not beyond that. In addition, these programs lack an emphasis on teaching general skills with a view to putting participants back on track to complete their high school education, which is such an important prerequisite for successful professional development. These problems are compounded by the lack of resources and preparation that the staff of local employment agencies can provide for participants. While the agencies may be able to orient young people toward the program, their support can rarely go beyond this to helping them find subsequent jobs. Ideally, however, their role would be that of a career advisory service that could not only help participants find work, but also monitor their progress, and above all show them the path to increasing their skills.52 Programs such as Chile Joven should be tied in with credit facilities for participants who would like to go to study a skill, as well as with adult education programs, should the participants prove capable of completing their high school education. The employment agencies clearly do not have the resources to provide program participants with a longer-term perspective. One final point must be mentioned with regard to programs such as Chile Joven. While they may be successful in providing participants with knowledge, work ethics, skills, and work experience, they cannot and do not solve structural problems of the labor market. If there is simply not enough demand for labor or if employment is of bad quality, even the most successful participants will end up disillusioned if they cannot find work that meets their expectations at the end of the program. In the case of Chile Joven, for example, the program has not in any way resolved the youth unemployment rate, which actually increased in the decade during which the program was operating. 5.2. Apprenticeships As mentioned in the introduction to this chapter, Chile does not have a strong historical tradition of apprenticeships as part of its vocational education or training system. Apprenticeships contracts were first introduced into Chilean labor legislation at the end of the 1960s but were not used widely. The first dedicated program for apprentices was then instituted in 1988, and it has been continued since then. The German agency for technical development, Gtz, helped both establish and expand the program. Nevertheless, the number of young people who train through an apprenticeship is not significant compared to, for instance, those who undertake technical high school or college education. The importance of the apprenticeship program lies not in the number of students but in its potential. Apprenticeships represent a unique opportunity for employers and unions to develop a vocational training strategy. Original legislative dispositions stipulated that the contracts could not exceed a duration of two years and could not be extended to workers over the

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age of twenty-one. Wages were not subject to minimum requirements and could be “freely agreed” between individuals and their employers. These contracts cannot be part of any collective agreement. Employers have to commit to teach apprentices a profession according to a preagreed program, either teaching them themselves or through a third party. A tutor from within the firm was to be assigned to the apprentice, one who would guide the student through the learning process. These contracts were furthermore subject to SENCE controls and reviews. A Company cannot have apprentices constituting more than 10 percent of its workforce. Employers could further write off 60 percent of an apprentice’s wage cost through the Franquicia Tributaria for the duration of one year, with a maximum limit of 60 percent of the statutory minimum wage. The apprenticeship law originated in 1988 out of a concern for youth unemployment rates. It really constituted a reactivation of the legislation that existed beforehand. The original objective was to train 10,000 young adults under these provisions in 1988, but the results were very meager. Only 532 apprentices were hired by ninety-two firms in the three regions where the plan was first implemented.53 The government clearly had problems in making the program known and therefore had difficulties in recruiting both young people and employers into it.54 The apprenticeship law was criticized because it did not stipulate a minimum wage and could not be included in collective bargaining arrangements. Critics objected that apprenticeship wages would thus be dictated by employers without regard for minimum requirements, and that this lay apprentices open to the risk of being used as cheap labor by employers who were not committed to providing them with real training. In fact the entire program was not coordinated with unions, who on the one hand welcomed the measure but on the other viewed it with suspicion as it meant competition from cheap labor that was excluded from collective bargaining arrangements.55 Furthermore, no attempt was made to bring employers’ associations and unions together in order to set up the best possible training. Nevertheless, initial studies suggested that the participants who did take part in the program rated it very positively. As we saw in chapter 4, the data from the CASEN household survey shows that apprenticeship contracts constitute only 0.07 percent of the labor force.56 The majority of apprentices are women (54 percent). In terms of their level of education, most have either complete or incomplete secondary education; the largest proportion has incomplete technical secondary education (34 percent). Apprenticeship contracts are most common in the manufacturing (28 percent) and commercial (40 percent) sectors, although the services, transport, and financial services sectors employ approximately 10 percent each. In terms of their age, most apprentices fall into the 15–24 age bracket (63 percent), although 25 percent are in the 25–34 age range. Half of the apprentices (50 percent) earn the equivalent of one minimum wage or less, while another 39 percent earn between one and two minimum wages. Eighty-seven percent of the apprentices come from the five lowest income deciles and 26 percent from the lowest decile. In terms of their social security contributions, the situation of apprentices is the most precarious among workers with formal contracts. Thirty-six percent of

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them have no health insurance and 25 percent do not contribute to the pension system either. This constitutes a blatant violation of the law, as apprenticeship contracts are not exempt from contributions to social security. Another very interesting point to note with regard to apprentices is that the duration of their jobs is very low indeed. Seventy-three percent have held their job for six months or less, another 22 percent have been employed for less than a year. This means that apprenticeship contracts, which can last up to two years, are generally used by employers as very short-term contracts. There is a limit to what a young person can learn about a technical profession in six months. This suggests that young people who have completed an apprenticeship program will come out of it at best semi-skilled. The data also shows that apprentices have a history of high job rotation as 71 percent of them state that they have held more than five jobs during the three years prior to the survey date, this indicates that they have no stable employment history. Apprentices are relatively evenly distributed among firms of different sizes. Fifteen percent of them work in very small firms with fewer than ten employees, 20 percent in medium sized firms with 10–50 employees, and the remainder work in larger firms with more than fifty employees. Provided that the apprentices working in small firms are receiving adequate training, this is a reasonably good result as it suggests that small firms are hiring cheaper labor in exchange for imparting a skill, although they are not doing so in line with the proportion of the labor force that they employ. However, the short duration of the contracts noted above suggests that apprentices are being used principally as cheap labor. This hypothesis is supported by the fact that 81 percent of apprentices state that they have not received any vocational training during the year prior to the survey. This result should cause labor policymakers grave concern, as the whole purpose of the apprenticeship program is to provide vocational training. Overall, these results suggest that the apprenticeship program as it currently exists is not fulfilling its purpose or potential. Young workers will not be attracted to a program that is of a very short duration, does not systematically train them for a specified skill, and pays wages that are as likely to be below the specified minimum as not. We will return to this issue in the concluding section of this chapter. 5.3. Emergency Employment and Vocational Training: ProEmpleo As a response to the 1998 economic crisis that had seen the unemployment rate increase by 50 percent in the space of a year from 6.3 percent in 1998 to 9.8 percent in 1999, according to official statistics, the Chilean government implemented a series of employment generation programs in order to help the unemployed. Participation in these programs increased very rapidly during the course of 1999, from approximately 7,000 workers per month at the start of the year to almost 100,000 per month at the end of the year. At its peak, employment was being provided for approximately 2 percent of the Chilean labor force in order to maintain the official unemployment rate below 10 percent. During 2000 the average number of participants dropped to 45,000 workers per month,

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while the number of participants increased again during 2001. Between 2001 and 2003, the number of participants averaged approximately 100,000 workers per month, with maximum participation reaching over 160,000 during the winter months of each year.57 The ProEmpleo program was officially instituted in 2001 in order to bring the various existing programs into a coherent framework. Specifically, it introduced two subprograms: the Inversión en la Comunidad and the Programa Bonificación para el Aprendizaje. The first is an employment program run by the public sector designed to generate temporary jobs to build local projects that would benefit the local community, and the second was designed to improve the employability of workers by developing their basic skills as well as their professional skills in order to help them find better paid work at the end of their participation in the program. This program involved both private sector firms and NGOs. Once instituted, approximately a third of all beneficiaries passed through the Programa Bonificación, which is the most interesting component of ProEmpleo due to its efforts to combine emergency employment with productive jobs and vocational training. Under this program, workers are hired by the private sector at the minimum wage while the public sector subsidizes the wages of these workers by 40 percent for a period of four months. In addition, employers receive a one-off payment of 50,000 Pesos for training purposes.58 Companies that participate in the program have to comply with the same requirements as companies participating in the Franquicia Tributaria. Participating workers had to be unemployed for at least ninety days and preferably be heads of households. The former was certified by the local employment agencies (OMILs) or through a sworn notarial declaration, while the latter was not verifiable. The program was administered through SENCE, which was also in charge of all enforcement aspects. Bravo (2004) evaluates this program positively overall in terms of the impact it has had on the likelihood of workers being employed, their expected wages, and the overall generation of employment. An interesting and important aspect to highlight is that workers participating in the program received a measure of vocational training, which they would otherwise not have received. This is the first time that an emergency employment program has been linked to a training requirement, which represents an important step in the right direction. However, the impact of this training has not been studied yet, and it is unlikely to be significant as the program is of such a short duration while the training component is minimal. 50,000 pesos is barely enough to put a worker through a basic course on his rights or on health and security regulation, but would not be enough to impart any skill. Rather typically, also, the evaluation of this program was carried out by survey method rather than through direct data gathering from the program’s beneficiaries and participating firms. 6. Conclusions and Policy Recommendations The problems Chile experiences with vocational training are common to many if not most countries in the world, regardless of their state of development.

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Although recent Chilean governments have been very successful in expanding the amount of vocational training undertaken, most of the training goes to the more educated workers who also earn more, which makes the tax credit inequitable. The state is finding it very difficult to channel more resources to poor, uneducated workers who most need to upgrade their skills.59 Also, most training is concentrated in administrative areas and not in technical areas, because these require investment into machinery and equipment, even though the labor market lacks skills in precisely these areas. And in addition, vocational training is highly concentrated among larger firms, which would most likely train their workers anyway, even without a tax credit, while smaller firms are much less likely to make use of the tax credit, although they most need to train their workers in order to increase their productivity. Chile also has some very common problems of how to ensure the appropriate regulation of the vocational training sector in order to enforce uniform high standards, and of how to measure the amount of training that is actually taking place. And while public policies are trying to compensate for this unequal access to training opportunities through specifically targeted social programs, these are minimal given the real needs of the Chilean workforce, both in terms of the amount of training given to each individual and in terms of the number of individuals encompassed by the programs. The solution put forward by recent Chilean governments has been to increase the resources of these programs and indeed to increase their number. However, despite efforts to bring all these programs together under FONCAP as an umbrella fund, the system is highly fragmented and lacks a coherent strategy. Despite this fragmentation, individual programs, paradoxically, are not flexible enough to respond to the needs of very different individuals and their circumstances. While the linking of practical work experience with theoretical training represents an important step in the right direction in terms of the design of these programs, this link will not produce the desired results unless the quality of the training and work experience are coordinated with individual needs. The problem of attempting to balance the role of the free market in education through targeted social programs for unskilled, low-income, and otherwise vulnerable groups of workers in Chile is first of all that the training has to make up for a widely varying degree of educational deficit that workers bring to the labor market. Second, a developing country will always have problems committing enough public funds to make a genuine impact. Third, these programs will never be able to outweigh the concerns that stop employers, especially small firms, from training their workforce, especially their unskilled workforce. Fourth, the existing government run training programs risk perpetuating the very negative image associated with state run training that dates back to the 1960s and early 1970s when INACAP’s training courses were considered outdated and irrelevant to practical employment realities. State run training programs have to produce positive results and real skills if the government wishes to convince employers to cooperate with its programs and provide work experiences for the participants of these programs. As it exists at present, both the institutional structure of Chile’s vocational training system and the resources

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devoted to it are fundamentally unsuited to achieving the levels of training that the government would like to achieve, and that are necessary in order to increase the country’s chances of remaining competitive in the long-term. The solution that most Latin American countries and many Asian ones have devised for this problem is to levy a general payroll tax to finance vocational training.60 This solution has even been proposed by representatives of Chilean employers themselves.61 A generalized payroll tax means that employers who do not use the money available to spend on training lose out. This would also make it easier to redistribute money from larger firms to smaller firms, especially within sectors in order to raise training among the latter to the same levels as among the former. A proportion of the tax levied could be earmarked for training vulnerable groups, either through direct programs or through scholarships, thus providing a pool of funds for a purpose that could make a genuine impact. This would allow the government to expand training for disadvantaged segments of the population, expand the apprenticeship system, and raise more funds for adult education in general. Chile has established an important model through Chile Joven by combining classroom training and work placements in a single training program. It should take advantage of this experience to expand the opportunities that these training programs can provide on a much larger scale. Barring such a payroll levy or massive public resources (which Chile does not have), training is likely to drift upward in terms of both the clienteles and the markets addressed, thus leaving the structure of vocational training inherently inequitable. In fact, the concept of such a payroll levy is actually a mechanism that already exists in Chile, as much of the training currently carried out is run through the associations formed by companies in particular economic sectors, the OTICs, which essentially function on the basis of a 1 percent payroll levy. As we saw above, the proportion of training carried out through the OTICs has increased very rapidly over the last decade, to the point where 60 percent of training is now being run through them anyway. And since the OTICs also devote 20 percent of the resources that they spend on training to smaller companies or scholarships for their sector, thus creating a kind of Solidarity Fund, the idea of redistributing funds toward smaller companies is also not a new one. Most importantly, the microentrepreneurs of a sector could themselves be trained through such a program. This is a fundamental first step to spreading vocational training to smaller firms, as employers are unlikely to recognize the value of training if they lack basic business management capacities. The apprenticeship programs could also be run far more efficiently through the OTICs than through a SENCE scheme, which only benefits a negligible amount of participants, and is not publicized widely enough. It also does not make sense that the OTICs are barred from offering and running training courses themselves. They are effectively doing so already as most have founded their own private training institutions (OTECs), through which they carry out most of their training. One of the largest employers associations, the Sociedad de Fomento Fabril (SOFOFA), for example, formed its own OTIC (the Corporación de Capacitación y

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Empleo Socied de Fomento Fabril) and has also set up an OTEC (the Fundación de Capacitación Sofofa), which provides training courses for its members. Given their superior information on the requirements of training, this makes a lot of sense. It would also make sense in view of the difficulty that SENCE is having in ensuring the quality of training. Training courses run by OTICs can be assumed to be of an appropriate standard as these organizations would be unlikely to waste the money of their own members, so it would make sense to allow them to self-regulate. At the moment it would appear that the potential of the OTICs is not being fully exploited. However, any changes to the existing legislation would have to include mechanisms that prevent the OTICs from recycling the funding they receive for training by channeling it into training institutions owned by their members who then make a profit out of the state’s subsidies. Switching from the current tax credit to a generalized payroll levy would be a major change in the structure of vocational training in Chile. Another modification to the system would be equally important: Employers have repeatedly complained that the 1 percent ceiling that the Franquicia Tributaria imposes limits the expenditure on training. Large firms spend more than that on training anyway so the ceiling for them is irrelevant, and for many small firms a 1 percent limit is not enough while they cannot afford more unless they could also write it off. The question should be asked whether an upper limit on training expenditure should be imposed at all. It would make more sense to simply treat any investment in human capital (beyond what is financed by a payroll levy if it were to be instituted) in the same way as investment in fixed capital, which can be depreciated over time, as most countries do. At the very least, small companies should be able to write off any expenditure on training without a maximum limit. Alternatively, the Franquicia Tributaria itself could be staggered, reducing the available tax credit for large companies who are likely to train their workers anyway, and increasing it for smaller companies, who would benefit from a higher investment in vocational training.62 It is already clear that the legislative reform of 2002, which made it more complicated for small firms to train their workers because of the application procedures they now have to go through with FONCAP, has stifled the investment of smaller companies in training. In any future reform of SENCE, one of the most important aspects that needs to be considered very carefully is the institutional structure of the vocational training system, including the employment agencies that channel workers with training needs into this system. A study undertaken by SENCE itself of the municipal employment agencies (OMILs) reveals their desperate lack of technical and human resources.63 At present many of the OMILs have to function with outdated computers that frequently break down, insufficient telephone lines, old photocopiers and fax machines that break down, and Internet connections that require disconnecting the telephone (that is, if there is an Internet connection, which in 25 percent of the OMILs surveyed in the study is not the case), and insufficient staff specifically devoted to helping them. Some even complained that they always ran out of paper. Others have access to technical

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infrastructure such as faxes, printers, and Internet, but have to share them with other municipal offices, which limits their availability. Very few have telephone help lines or websites that people looking for work can use. In most cases, this therefore means that the offices are not equipped to undertake even their own administration, let alone to help unemployed job seekers who hope to use their resources. In a country where many job seekers are unlikely to have access to basic facilities such as telephones, Internet, computers, and printers for writing resumes and applications to help them find work, it is essential that they go to an employment office, where these facilities are available. A consequence of such a lack of resources is, of course, that neither employers nor workers seek the help of the OMILs if they are searching for staff or work. As we saw in the introductory chapter to this book, workers such as Germán find it much more efficient to look for work through their network of friends, family, and colleagues than to refer to an OMIL, a strategy that is confirmed by the data presented in chapter 4, which showed that only 2 percent of the Chilean workforce found its employment through an employment agency or other municipal office. Many studies have highlighted the important role that labor intermediation services can play in the smooth functioning of labor markets. Chile clearly has a lot of catching up to do in this area, as do its Latin American neighbors.64 Unfortunately, the OMILs not being attractive also means that workers are unlikely to find out about the state run vocational training programs that are available to them, as these are also administered by the OMILs. On the positive side, however, unemployed workers claiming unemployment insurance through the Solidarity Fund (see chapter 6) have to go to the OMILs in order to claim these funds, which means that at least a proportion of the unemployed will have to seek out their local employment agency. Also, as the employment agencies are generally located within the general precinct of the municipal offices, people who refer to the municipality for other reasons (e.g., to seek free healthcare) can easily be referred to the employment agencies by other municipal staff. The question is, however, to what extent the other municipal staff does this. No official study exists on how well these linkages work, but anecdotal evidence suggests that they are tenuous.65 This is an issue we will return to in the concluding chapter of this book. Another problem with the vocational training in Chile is that in many cases bids are accepted for state run training programs for which the OTECs have to compete and find participants. However, unless the OTEC happens to be an NGO with expertise in helping certain vulnerable target groups, the OTECs in general have no expertise or motivation to find those people who most need to participate in these programs. And if in addition, the OTECs are paid according to how many participants successfully complete a training program, as was the case with Chile Joven, then they have even less motivation to find the most needy and vulnerable participants, since this would most likely lower the completion rates of their courses, and thus their fees. The data discussed above with regard to how well state run training programs are focused on the most vulnerable shows that there are many unresolved problems in this area.

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An additional important step in improving vocational training in Chile would be to expand the certification system that has been initiated by the Fundación Chile to all economic sectors.66 This system specifies certain tasks within different economic sectors, referred to as Unidad de Competencia Laboral (UCLs), for which workers can obtain a certification after passing an evaluation of their skills. So far, a certification system has been established in the sectors of construction, mining, tourism, agriculture, metalworking manufacturing, information technology, viticulture, food processing, and transport and logistics. By 2004, over 350 such UCLs had been specified. Expanding this system would allow Chilean policymakers to set clear targets in terms of the level of skills that the workforce should achieve over a particular period of time (just as the United Kingdom has done).67 Certification mainly solves an information problem by making the quality and quantity of skills clear to workers and potential employers. It would make workers much more aware of the benefits of training by showing them the linkages that exist between qualifications and income, in the same way that they are aware of the extent to which their general level of education determines their income. It would also enable workers to understand more easily what level of skill they would achieve with a given technical education or vocational training course. Certification also requires a strong institutional participation of firms, workers, and unions in the design of the content, standards, and the mechanisms for certification, which would provide a welcome boost to the level of cooperation between the different social actors in Chile. This would also contribute to resolving some of the issues that SENCE has in enforcing rigorous quality standards on training providers. It would make the system more transparent, set out clear goals as to the achievements required for each level of certification in a manner that all the actors involved could understand, and also set out a clear path for workers who lack orientation in terms of how to progress in their chosen career, especially for school-leavers or drop outs. This would also tie in with establishing a clear training for life policy in Chile that brings together general education with vocational training and adult education. So far, adult education is mainly targeted by small programs run by the Ministry of Education, and the Franquicia Tributaria plays only a minor role in financing these efforts. Furthermore, these programs are not yet well connected with the vocational training system and practical work experience opportunities. Many countries have now established general training for life policies and set clear targets for their workforces, which allows them to plan for and estimate better the resources needed to achieve their goals.68 However, the most important advantage of establishing a nationwide certification system that spans all economic sectors in a country such as Chile, where technical and vocational training is essentially regulated and run by free-market forces, is that it would provide a framework within which all vocational training can be classified and integrated. As mentioned above, certification solves informational problems for both firms and their employees. But it would also allow the government to integrate its targeted vocational training programs,

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such as Chile Joven, the apprenticeship scheme, or the emergency employment program, with established standards. Above all, such a system would set clear standards for all actors in the business of vocational training, ensuring uniform standards and easing the job of quality enforcement for the government, as ideally each economic sector would regulate itself and set its own standards.69 One final but very important point should also be mentioned with regard to the vocational training system in Chile. The quality of information on vocational training has improved immensely in recent years. In fact, SENCE’s Website is one of the best government Websites in Chile in terms of the information and number of studies it makes available to the public. However, much information is still not being gathered. SENCE should make a much more concerted effort to obtain better information both on the training undertaken and on the workers being trained. It would not be difficult to administer a simple questionnaire to training participants at the outset of their training in order to gather information on the characteristics of their employment, their educational background, and work experience. In particular, SENCE should try to establish to what extent workers are trained repeatedly. At the moment, the data gathered allows us to calculate only overall training rates, so we cannot tell whether the workers being trained are the same workers every year or different ones. By the same token, follow-up should also be undertaken in order to monitor the quality and relevance of the training received as well as its long-term effects on the worker’s employment situation. These points are relevant not only for the training that is undertaken through the Franquicia Tributaria, but also for the targeted training programs. Both the payroll tax proposed above and the establishment of a generalized certification system would contribute to establishing a culture and mentality of training among workers, employers, and unions alike. It is clear that much still needs to be done to achieve a training culture among some segments of the labor market, in particular among smaller firms and lower income, less skilled workers. The challenge in the particular context of Latin America, and especially of Chile, of course, is to integrate the participation of workers and unions into this process. Otherwise one would lose vital channels of communication that allow workers to express their own ideas and to share their experiences on ways to improve productivity and efficiency. One step toward achieving this would be to establish vocational training as a regular component of the collective bargaining agenda of unions. In other countries, studies have shown that unions have a substantial positive impact on the quantity of training, and that they are also more effective in making sure that training reaches the unskilled.70 This opportunity for improving the equity of access to vocational training should not be lost. Another opportunity that Chile risks missing is that of using vocational training to improve its general labor relations. It is clear from the data presented above that the training committees that Chilean firms are supposed to establish (the comités bipartitos) is not working out, despite additional financial incentives. A better strategy may be to emphasize the development of national, regional, and sectoral training committees in order to coordinate training efforts. Such committees were established and are functioning in order to run

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the certification programs in sectors where they already exist. The success of the existing training associations, the OTICs, established by employers, illustrates the potential for such cooperation. The government has an important role to play in bringing all the social actors together and fostering such cooperation. Vocational training represents an important opportunity for improving the labor relations that at an official level are often extremely antagonistic in Chile (as we see in chapter 3). Numerous studies have shown that countries with harmonious labor relations perform much better in terms of both their economic growth and human development, than those that have hostile labor relations.71 The reform of Chile’s vocational training system is a much less controversial topic than other labor reforms since it is in the interests of all social actors to increase vocational training. It should therefore be used as a platform for establishing more and closer cooperation between workers and employers. Overall, we can conclude that Chilean labor policy has probably made the most progress in the area of vocational training mainly by significantly increasing the proportion of workers trained. However, the structure of the vocational training system is inherently inequitable as large, well-run companies will inevitably invest more in training than small firms, and more qualified workers will inevitably receive further training while the least qualified fall further behind. And while the Chilean government has made important progress in establishing targeted programs for training the least qualified, these programs cannot in any way compensate for the inherent inequities of the system. SENCE’s mission statement quoted in section 1 is an important pointer as to the institution’s role because it illustrates that the SENCE’s official mandate does not go beyond stimulating the efficiency of the labor markets. It is a mandate to enhance Chile’s productivity, competitiveness, and the functioning of its economy. It is not a mandate for enhancing the capabilities of individual workers. Failing to change this mandate and the policies it generates means missing some invaluable opportunities for improving Chile’s bleak record on social and economic equity. The program that Michelle Bachelet has put forward for her government recognizes some of the weaknesses of the training system in Chile, and proposes to address some of the challenges that it poses, in particular with regard to focusing more training on the unskilled. However, it is clear from the formulation of her proposals, that her government intends to continue working with Sence’s current institutional structure (which is inherently inequitable), rather than undertaking any structural reforms.


CHAPTER 8

Measuring the Quality of Employment 1. The Need for a Quality of Employment Indicator In 1999 Mahbub ul Haq, the originator of the Human Development Index (HDI), wrote: “We need a measure of the same level of vulgarity as GNP—only a number—but a measure which is not as blind to the social aspects of human life as is GNP.”1 This book takes the view that “a measure of the same level of vulgarity as the unemployment rate is needed, which would not be as blind to the other aspects of employment as the unemployment rate.” It has therefore used the capability approach as a framework of thought to think about employment in the same way that it has been used to think about human development. Although at first skeptical of ul Haq’s view, Sen, in his own words, later came to appreciate his position, as he accepted that no combination of tables would be able to replace the convenience of a single number, so in order to broaden the debate, this single number would have to simply incorporate several components. 2 Proponents of the HDI argue that “a basic distinction needs to be made between the means and the ends of development. Human beings are the real end of all activities, and development must be centered on enhancing their achievements, freedoms, and capabilities. It is the lives they lead that are of intrinsic importance, not the commodities or income that they happen to possess.”3 If we consider this statement in the light of all the evidence and arguments that this book has presented so far, it is apparent that such a statement can be applied to the labor market. Chapter 2 discussed the theoretical arguments about how employment is important only as a means to achieving greater freedoms and capabilities for individuals. It also showed how the capability approach breaks up traditional perspectives of the labor market, particularly those centered on the unemployment rate, and proposes quality of employment as an alternative concept. It defined quality of employment in theoretical terms as the capabilities and functionings generated by a job, which the individual has reason to value, leaving the practical definition of the concept to follow the discussion of the

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empirical evidence. The latter has now shown us just how many facets of employment are important to the individual worker and impact her well-being. It has further demonstrated that the characteristics of a job impact the individual’s well-being beyond her period of employment to include periods of unemployment and retirement, when the level of protection depends on the type of job held previously. The data analyzed in the previous chapters now gives us the ability to translate the theoretical definition of quality of employment into practical terms. The index proposed in this chapter reflects the approach developed by the proponents of the HDI, as it is mainly intended to summarize a large number of tables in one figure so that a broader range of variables is taken into account. While the index aims to reflect reality as faithfully as possible, it also maintains a certain simplicity, which makes it easy to understand, apply, and replicate. Above all, it hopes to constitute an additional measure of labor market performance to the predominant unemployment rate, which first, as we have seen, does not capture all those people who are effectively unemployed, and second, neglects to mention the problems of those who do have jobs, but the jobs are of such low quality that they provide the worker (and his family) neither with a decent standard of living nor with any form of social security. One other point should be clarified, however, before entering into the details of how this indicator is constructed. The methodology with which this indicator is constructed is simple and by no means statistically sophisticated. Developing an appropriate methodology would in itself require a study and that is not the purpose of this book. The intention of this chapter therefore is primarily to suggest a practicable list of variables that can be combined into an indicator and to demonstrate what the uses of such an indicator can be for public policy purposes. The chapter first briefly discusses a few methodological issues that have to be taken into consideration together with how other indicators have addressed them. It then goes on to discuss the construction of the quality of the employment indicator proposed in this chapter, before going on to demonstrate its uses and practical applications.

2. Methodological Issues and the ILO’s Decent Work Indicators While different theoretical frameworks, such as the basic needs, social exclusion, or the capability approaches, emphasize different priorities in their discussions, once formalized and applied in practice, they are likely to look very similar. Saith has pointed out that the basic needs and capability approaches can be seen as very similar, especially when we restrict the latter to a list of “basic capabilities,” and the end of both can be seen as achieving a “minimally decent life” for all.4 Achieved functionings could be portrayed as fulfilled needs. Furthermore, when it comes to practical application, there is often very little difference between the results of either approach as they use very similar variables to

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measure levels of well-being (e.g., the HDIs could be theoretically backed by either approach). As regards practical indicators, we will always have to define a list of variables to constitute an indicator, as no direct measure of utility, capabilities, or basic needs exists. Perhaps measures of basic needs are the easiest to define because they refer to specific issues and not well-being in general, but we will always be able to criticize them for being arbitrary selections of variables. And utility has traditionally been measured by indicators of income, expenditure, or some other measure of preferences, while capabilities have to be reduced to indicators of functionings from which capabilities can be estimated, and this list of functionings, at the end of the exercise may not look all that different from a list of basic needs. So, if all these approaches have to be watered down to such an extent and if none of them offer a perfect solution, we may well ask what the difference is between the two, given that what we end up looking at in practice is always a specific list of variables. This question is difficult to answer if we compare the practical applications of these approaches, and this explains why analysts so often ask what the capability approach actually adds to the other approaches.5 The answer to this question therefore has to lie with the theoretical explanations presented in the previous sections, which determine the selection of variables, the methodology with which they are combined, and the interpretation of an indicator’s results. The second obvious problem with applying the capability approach to the labor market is that employment indicators are not as clear-cut as the standard of living and well-being indicators that Sen looks at. For example, we can pretty much agree that the longer we live, the better. This means longer life expectancy and lower mortality rates are desirable. The same goes for education: it is difficult to disagree with the intrinsic value of education. Similarly, it is difficult to reject the idea that a higher level of income generally offers poor people the opportunity for realizing more functionings and enhances their capabilities. The desirability of different job characteristics, however, depends largely on the personal needs and circumstances of the worker. A couple of simple examples will illustrate the point: a part-time job requiring late afternoon shifts may be perfect for a student wanting to earn some extra cash even as he pursues his university course. Yet the same job would probably be a highly unsatisfactory one to the same student once she has graduated and is aiming to build a career. Similarly, a job offering a short term contract for the duration of a project may be perfect for a young person not yet sure of what she wants to do and without significant financial commitments. Yet the same job with a high degree of insecurity may be a huge cause of stress to a worker who heads a household and has to provide a steady flow of income to finance, for example, a mortgage, the education of children, and the provision of healthcare for her entire family. As for social security, how many people would prefer not to pay their contributions and rather run the risk of falling ill or growing old without protection, simply because cash in hand now is preferable to cash in the future? In the case of Chile, 75 percent of the self-employed prefer having cash in hand now.

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So even the objective criteria for labor markets are not particularly objective. In addition, we have to take in the criteria that would perfectly legitimately form part of the concept of quality of employment, while being totally subjective. These include job satisfaction, career development, personal fulfillment, job stability, levels of responsibility, and other such factors. Again, one can take the view that these can be measured objectively, if one were to assume average criteria, but, by and large, the criteria are subjective by nature. So where do we draw the line? First of all, it should be emphasized at this point that any measure of the quality of employment has to limit itself to the characteristics of work and cannot pretend to measure functionings or capabilities themselves. If all the characteristics of employment are to be taken into account, together with all the different potential sets of individual needs or preferences that generate the associated functionings (so that we can assess the capabilities that they can generate), we would then indeed end up with a practically inapplicable research task.6 Budgets and time constrains restrict us to taking a more limited view. In the view of this author, the solution to all of these issues is to maintain simplicity, follow the example of the HDI, and concentrate on a few select variables that best sum up the characteristics of employment that can in turn generate functionings and capabilities. Developing countries face severe data limitations. Publications by international organizations dedicated to gathering data on the labor markets testify to this.7 Rarely do their data go beyond participation rates, unemployment rates, and wage levels. In devising an alternative measure of the labor market we have to bear in mind realistic goals of what data can be made available. The component variables of such an indicator should therefore be as basic as possible so that they are likely to be included in standard labor market surveys. (And if they are not included in these surveys, the variables should be simple enough to enable governments to include them in their surveys without great additional cost.) The following section presents such a list of characteristics. The quality of employment indicator presented in this chapter cannot be presented without first acknowledging previous efforts that have been made to produce similar indicators, most notably by the ILO, and also without a discussion of the limitations of these efforts, which justify the presentation of yet another indicator based on a theoretical framework with yet another methodology. Despite initial resistance to the process of producing an indicator of decent work, the ILO’s Latin American headquarters produced such an indicator in its 2002 Labor Overview of the region.8 The index comprises seven component indicators that refer to employment, income, and social protection. Specifically, these components are 1. the unemployment rate 2. the level of informality (based on the ILO’s definition of the informal sector) 3. industrial wages 4. minimum wage


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5. the wage gap between men and women 6. social security coverage 7. the number of working hours The index registers improvements in decent work conditions when the unemployment and informality rates diminish, when the purchasing power of both the industrial and minimum wages improves, and the income gap between men and women diminishes, when it increases social protection, and when the number of effective working hours in each country is adjusted to national legislation and to the development of the effective situation in each region. The results of the index are analyzed from two perspectives: first the evolution of the index is tracked on an annual basis, and second the changes experienced by each country are related and compared to developments in the other countries of the region. Countries are ranked in five different categories, ranging from higher to low-quality employment. The ILO has for the Latin American region brought together data that compares the year 1990 with 2000 and concludes, for example, that the decent work indicator improved over this period in Chile, Panama, and El Salvador, while it deteriorated in Brazil, Argentina, Uruguay, and Ecuador. In all other countries of the region, the indicator did not show any change. The creation of such an indicator is a great step forward in how labor markets are viewed as it shows that a broader range of variables is being considered. As any analyst of Latin American labor markets will be able to confirm, bringing together these variables from a large number of countries in a single indicator represents a tremendous achievement. The purpose of this index appears to be to attract attention to the debate on decent work as well as to rank countries according to their performance on this indicator. It was a source of pride to the Chilean Ministry of Labor that the ILO had classified Chile as a high-quality labor market.9 However, like the HDI, this index is a macroeconomic indicator, which looks at national data (such as the unemployment rate). It is not based on data for individuals, and this limits its uses for national policymakers. At best, the ILO’s indicator could be replicated for the regions of its component countries, should the data be available, but it cannot be used to undertake any analysis of particular segments within the labor market such as economic sectors, age groups, workers with specific levels of education or who work for companies of different sizes. In its Labor Overview, the ILO also does not justify why it has included certain variables and not others in the index, although it can be assumed that the availability of data would have been the main concern. For example, a number of issues are excluded even at the macroeconomic level, such as the agricultural sector, youth unemployment, or differing unemployment rates between men and women. This index is clearly based on a compromise between what makes sense, the limited data available, and on what is practicable, not so much on what ideally needs to be known. Otherwise it would not limit itself to wages in the industrial sector, for example, even though the service sector is now a larger part of most economies, or to minimum wages as opposed to the proportion of

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workers earning less than the minimum wage. The index has also clearly excluded all variables that cannot be summed up in a single figure, which means that it has excluded the variable type of contract, which, as we have seen, is so fundamental to the overall security of jobs and their working conditions. These drawbacks are the consequence of basing the indicator on particular statistics simply because they are available, rather than on those variables that would be most important, but would require specific studies or surveys. So although this particular indicator of decent work does attract attention to the quality of employment debate, its usefulness for policymaking is limited by its component variables. It can only really serve as a measure of the relative performance of the countries in the region. In 2003, the ILO published a series of articles that suggested different methods of measuring the concept.10 It is an indication of the complexity of the subject and the endless possibilities of how this can be done that the ILO has not proposed one single standard measure of decent work, but has presented several options. These articles represent an important contribution to the debate on the quality of employment. However, their applicability and usefulness is nevertheless limited in the context of developing countries as the data that they require are generally too sophisticated. One of the articles, for example, combines a series of rather complex variables (such as employment opportunities, freedom of association, discrimination at work, social dialogue) that in turn are divided into further subvariables by means of a Borda ranking.11 While such an indicator considers a broad range of variables that would appropriately capture the sort of capabilities that employment generates, it requires sophisticated labor market data of the kind that most developing countries do not gather in their regular labor market surveys. Furthermore, using a Borda ranking means that the indicator is useless to local policymakers who might be trying to allocate resources according to specific regional labor market needs. At best, they would be able to replicate the ranking for local regions (if such detailed data is available), but they would not have specific figures that would allow them to determine how much better a particular region or industry generates employment than another. Borda ranking is not very useful to policymakers who need to track progress on development issues over time as it does not provide a precise measure of a concept, merely a comparative ranking. Another proposal that the ILO makes for a decent work indicator employs a set of more straightforward variables, which makes more sense in the context of developing countries.12 But the article uses a methodology of trimmed averages to combine them into a single indicator (with a lot of data actually missing), a methodology that produces results that are rather counterintuitive. The authors conclude that Russia, Romania, Tanzania, and Nepal have better labor markets than Italy, Spain, or Ireland! A third proposal in the same volume of articles is perhaps the most useful for local policymakers and uses a sound methodology based on the model of the HDIs, but it again requires very complex input variables that would go beyond the information normally available in developing countries.13


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In addition, all of these papers present indicators that are intended to be applicable across the entire spectrum of ILO member countries, ranging from Scandinavia to Sub-Saharan Africa, which in itself is not a realistic expectation as it is difficult enough to combine variables from a similar region with similar legislative structures and data gathering capacity into a single indicator in a meaningful way. International comparisons and rankings, such as those proposed by the ILO, can be interesting and useful for international organizations (provided that they are based on a sound methodological construction and available data), but they are probably not as useful to local policymakers who need indicators that allow them to analyze their own labor markets in more detail and with greater levels of precision. The main conclusion that can be drawn from an analysis of the ILO’s proposals for a decent work indicator is that although they make a valiant effort to capture a sophisticated range of variables associated with decent work in the broadest sense, a simpler indicator that concentrates only on the most relevant and easily measurable variables is required for developing countries given the limited amount of data that they produce. A simple indicator that can be applied in practice, understood by all the social actors, and used by policymakers will ultimately have a greater impact on the capabilities of a labor force than a more complex indicator that captures more characteristics associated with work but is too complex to be practicable both in terms of methodology and practical application. 3. Construction of an Alternative Quality of Employment Indicator The indicator presented in this section aims to avoid some of the pitfalls that a discussion of the ILO’s indicators identifies, although methodologically this indicator too can be improved upon. Like the ILO’s decent work indicator that was presented in 2002 for Latin America, it is based on a compromise between the data that would be included in an ideal world in terms of its importance for workers and the data that is available. The data used to construct this indicator is from the CASEN household survey, as it is the only survey undertaken to have repeatedly included the four variables selected to form this indicator. However, the data is limited to the surveys carried out in 1996, 2000, and 2003. The year 1998 cannot be included because the survey that year did not ask questions about tenure and vocational training. There are further minor problems with the data that arise from the inconsistency of the CASEN questionnaires, which will be discussed in turn below. Another important criterion in the selection of variables for this indicator was that its coverage must include the entire labor force, which meant including variables that apply to both independent and dependent workers. This meant that the indicator, for example, excluded issues of worker representation, which could be measured by unionization levels. Not only are questions of unionization not included in the CASEN surveys, but they would also apply only to the formal sector workers. This means that the variable has not been included in this indicator.

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This section first presents the index in descriptive form before explaining how the variables were measured and the reasoning for constructing it in this way. 3.1. Description and Composition of the Quality of Employment Index The variables selected to constitute this index are the following: 1. 2. 3. 4.

Occupational status and social security coverage Income Tenure Vocational training

These variables were standardized into two or three subcategories, each of which were awarded zero, one, or two points. The points scored for each variable by the members of the sample were then added up thus allocating every person in the sample an individual score. This also means that all variables included in the index are all equally weighted, an issue that is discussed below. The scores of each individual can then be added up and divided by the total number of people in the sample in order to produce a figure that represents the overall quality of employment for Chile at a particular time. The same can be done for particular regions, municipalities, or economic sectors in order to show how the quality of employment is distributed. Alternatively, workers can be grouped into different categories of low, medium, or high-quality employment in order to determine the overall level of poor-quality employment in Chile. These categories can in turn be crossed with other variables in order to determine relationships between them. Section 4 will discuss and illustrate these examples of the indicator’s use. The four component variables of this index and the rankings of their various subcategories were chosen for the impact they are likely to have on the functionings and capabilities of the individual, either due to the nature of the variable itself or due to the regulatory issues attached to it. The arguments for such a selection have to be qualitative and not quantitative since we do not have a specific measure of capabilities. As discussed above, the principal purpose of this indicator is simply to provide a summary of its component variables to orient public policy. Table 8.1 shows the different scores that were allocated to form the indicator, and the following sections will look at each variable in turn to explain how it was measured and why it was included in the index. 3.2. Occupational Status and Social Security Coverage The variable occupational status follows the pattern explained in chapter 4. It considers the type of contract the worker has in the case of wage-earners, and the category of self-employment in the case of independent workers, together with their contributions to the pension system. As we see in chapter 4, the


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Table 8.1 Construction of the quality of employment indicator Occupational status and social security Indefinite contract with social security Indefinite contract without social security Atypical contract with social security Atypical contract without social security No formal written contract Employer with social security Employer without social security Professional self-employed with social security Professional self-employed without social security Self-employed with social security Self-employed without social security

Score 2 1 1 0 0 2 1 2 1 1 0

Tenure Less than 1 year 1–5 years More than 5 years

0 1 2

Income level Less than 2 minimum wages 2–4 minimum wages More than 4 minimum wages

0 1 2

Vocational training Yes No

1 0

Quality of employment categories Very low-quality employment Low-quality employment Medium-quality employment High-quality employment

Points 0–1 2–3 4–5 6–7

contractual status of a worker must be considered as one of the most important aspects of the employment relationship because the individual’s legal protection is largely determined by the type of contract and indeed its very existence in a written form.14 A salaried job without a contract is considered the worst situation, even though the job may be relatively stable or relatively well paid, simply because the worker would not be covered by the labor statutes. In addition, a written contract or documented income is a prerequisite for subscribing to any health or pension insurance plan, so that not having a contract automatically also implies a lack of protection in that sense. Apart from that, for employers the reason for not giving their workers written contracts is to avoid the payment of social security contributions, while for the employee the motivation for accepting such work is often to take home more pay in cash by not paying the contributions. An indefinite contract scores more points than an atypical one (i.e., a short term, project-based, temporary apprenticeship, or freelance contract), not because it is considered preferable per se, but because it constitutes a legal entitlement to severance pay and unemployment insurance in case of loss of

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employment. For the majority of workers with atypical contracts, it can be assumed that they are obliged to look for a new job every year as, in theory at least, it is forbidden to renew short-term contracts more than once. This leaves them facing unemployment at regular intervals without any form of income support, as they are not entitled to any compensation for the loss of their jobs when their contracts terminate. In an efficient labor market, this aspect should be compensated for by means of higher wages, but in practice, their wages are lower (as shown by table 4.2 in chapter 4). In the case of the independent sector, employers and the professional selfemployed score the highest points, mainly because their status implies a high level of protection due to the income levels they are likely to be earning, and also because they are essentially part of the formal sector by means of their legal status (declared and legal activity, payment of taxes, etc.). In chapter 4 we saw that a majority of the employers or professional self-employed were in the highest income category. They also have a sufficient level of knowledge to make informed choices regarding their social security. The nonprofessional selfemployed are, however, considered as a lower quality of employment classification. A number of factors contribute to this ranking. They include instability of income, a low rate of social insurance contribution as they are not obliged by law to contribute either to pension or health insurance, and little consideration by employment legislation. A combination of low income, lack of insurance, and informal status leave them highly vulnerable in any kind of emergency situation, wherein they are rarely able to cover financial demands by means of their own resources alone. The main advantage of being self-employed is the degree of independence on the job and the much lower risk of unemployment. However, the latter is to an extent undermined by income instability if times go bad. This variable also considers whether a worker contributes to a pension system. As we saw in chapter 4, although social security contributions are very much related to the occupational status of a worker, an open-ended contract, for example, does not guarantee that a worker will also be contributing to social security. Conversely, some self-employed do contribute, and these workers should be awarded a higher score than the self-employed who do not contribute. Therefore, for a worker with an open-ended contract to obtain the highest score on this variable, he has to be contributing to social security as well. As the correlation between contributions to a health insurance scheme and a pension scheme is almost 100 percent, since employers deduct contributions either to both or to neither from the worker’s wage, only one of the variables is used in the index. Including health insurance separately would effectively mean according health a double weighting. The pension system is also a better indicator of a person’s social security contributions than health insurance, as each worker has to contribute individually. In the case of the health insurance system, family members can be covered by the insurance policy of another worker, and the variable thus loses its value as an indicator of a job’s quality or formality. In general, the variable occupational status is also important because many other aspects of employment are highly correlated with it. For example,


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open-ended contracts are likely to be held in larger companies with independent work establishments, systems for accident prevention, nurseries for children, mechanisms for worker representation, and other such facilities. Those holding jobs without contracts and those working as self-employed, on the other hand, are often found in smaller companies, in small workshops, at home, or in the open air under inadequate health and safety conditions or without appropriate sanitary facilities. A number of other variables that would perhaps normally be considered to be part of social insurance are excluded from this index. These include insurance for accidents and illness at work, unemployment insurance, and other forms of benefits or income support (e.g., family allowances). In Chile, any insurance related to accidents and health risks at work is covered by a separate insurance system that the employers pay for. It can generally be assumed that all salaried workers with some kind of a written contract are covered by such an insurance, so the issue should be covered by the variable contractual status, as are family allowances. As regards unemployment insurance, we saw in the previous chapter that the best way of capturing its coverage is through the combination of the variables type of contract, tenure, and level of income. This aspect of the quality of work is therefore covered by the variables in this indicator. All other social security benefits that individuals may be entitled to are generally independent of a person’s employment situation and depend on personal need and available funds and are therefore not considered by this index.15 Most importantly, the variable occupational status introduces issues such as the type of contract, the informalization of the salaried sector, levels of atypical contracts, and lack of social security payments into the labor market debate. This variable can only be constructed from 1996 onward as no detailed questions were asked then about the types of contract that workers held. They were merely asked whether they had signed a contract or not. The variable type of contract evolved gradually in the CASEN surveys during the 1990s, and it consists of several questions. 3.3. Income The data on income included in this indicator refers to the last monthly wage received by the respondent.16 Wages were then divided into three categories defined as multiples of the minimum wage: less than 2 minimum wages, 2–4 minimum wages, and more than 4 minimum wages.17 They were calculated on an hourly basis net of taxes and other deductions. In the case of income, the choice of the variable and its scores are relatively obvious: income covers basic needs and creates functionings and capabilities, and more income is generally preferable to less. The individual subcategories of the variable expressed in multiples of the minimum wage were chosen as arbitrary cut off points and because it would not make sense to use multiples of the poverty line for an indicator that measures the quality of employment. The first income threshold of two minimum wages may seem rather high at first. But if we consider that one minimum wage would leave an average Chilean

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worker and his or her average number of dependents (2.6) with an income approximately equivalent to the urban poverty line, this threshold appears as the minimum income necessary. However, in families of the lowest income quintile, an average of 4.7 people depend on one single income from a job. So in this quintile, the minimum wage would leave a worker with this average number of dependents only just above the income level that defines indigence in urban areas. This means that at least two minimum wages would be required to lift these households above the poverty line. The next income level for this indicator is defined as ranging between two and four minimum wages. This income level still lies below the total average wage of Chilean workers in 2003, which as we saw in chapter 5, is distorted by the earnings of the highest income decile. This income bracket therefore captures median earners in Chile. The upper income threshold, defined by this indicator as at least four minimum wages (462,592 Pesos), still lies significantly below the total average wage of Chilean workers and captures the approximate average earnings of the fourth income quintile. These income requirements that feed into a worker’s final quality of employment score are therefore not particularly demanding, especially not if we consider that families from all deciles except for the tenth are liable to fall below the poverty line due to sudden changes in their circumstances.18 Ideally the stability of income should be included in this indicator as well, but this variable is more complicated to measure than the level of income. It is therefore assumed that the stability of income will be picked up by the other component variables, such as tenure and type of contract. One of the reasons why self-employment scores fewer points than the salaried sector is because its income flow is less stable and predictable. Also, whether the individual is contributing to social security or not is an indicator of income stability as workers with irregular incomes generally do not contribute. Of course, there are also political reasons for including the level of income as a variable in this indicator, as it will basically attract attention to the proportion of the working poor who form a portion of the employed that is generally ignored. 3.4. Stability of Employment: Tenure Employment stability for the purposes of this index was measured by the tenure of the current job held. The different lengths of tenure were then divided into three separate categories: less than one year, between one and five years, and more than five years. The variable tenure was included in the index because, as we saw in the previous chapter, it determines the level of compensation payments and benefits from the unemployment insurance scheme that salaried workers are entitled to. Within this variable, only more than five years of tenure is considered to be the quality category, an assumption that is based on the structure of the unemployment insurance, which, as we saw in chapter 6, assumes the average duration of unemployment during noncrisis times in Chile to be five months.


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In the case of the self-employed, the length of time they have been exercising their occupation is also an indicator of stability as it can generally be assumed that the longer the self-employed work in the same occupation, the less their business is likely to go bankrupt resulting in loss of employment. For the selfemployed, the survival of their business is absolutely crucial as they would not be entitled to any form of unemployment benefit or income support should they lose their means of income. Again the scores allocated to the different options of this variable reflect a judgment on the risks that the individual faces in each occupational position, rather than a value judgment per se. Of course, a relatively short tenure may well be a positive sign for some segments of the labor force as individuals change jobs in order to improve their prospects, income, or further their career in general. However, in a labor market such as the Chilean one, this would be the case in only a small proportion of the turnover. The majority will be moving out of necessity rather than desire as we saw in chapter 6, and it is the purpose of this index to consider the weakest the most. This variable also implicitly considers a worker’s periods of unemployment as workers with short job tenures are likely to pass through unemployment every time they switch jobs. These workers therefore score a lower score than those with longer job tenures. This is a particularly serious consideration as the general political debate about employment policy almost universally ignores issues of employment rotation, the instability of jobs, and the consequences that this has for workers and their families, as seen in chapter 6 in the discussion of the policy debates regarding unemployment insurance. 3.5. Training The fourth variable that the index considers is whether the interviewee has received any formal vocational training during the last year or not.19 Since there are only two possible options for this variable, only zero or one point can be awarded. The variable training is included in this indicator as it is the best measure of personal skill and career development of the individual. In comparison with the possibility of earning more money or the risk of losing one’s job without being entitled to any form of unemployment insurance, the issue of training could be considered as secondary. Yet at this point it is important to remember that we are considering the labor market from the capability perspective. What is training if not one of the most important means of enhancing the capabilities of the individual? In the case of training, it is not the prospective risks that this approach is interested in but the associated benefits of vocational training, which are discussed extensively in the previous chapter. Furthermore, as seen in the previous chapter, vocational training is clearly associated with higher-quality jobs, and SENCE is finding it difficult to spread training to workers with lower levels of education and income. It is therefore extremely important to include the variable training in this indicator, especially since its purpose is to broaden the labor policy debate and draw attention to the typical characteristics of poor-quality employment.

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One methodological consideration must also be borne in mind with regard to vocational training. First the CASEN surveys did not ask about vocational training consistently, which limits the available data to the years 1996, 2000, and 2003, as in other years workers were not asked whether they had received vocational training. But in addition the question about vocational training was applied to different age groups in each survey. The 1996 survey asked only workers aged 50 or less whether they had received training, the 2000 survey asked workers aged 60 or less, and finally the 2003 survey asked all workers. This is emblematic of the inconsistency of CASEN survey questions and illustrates why the survey is not an ideal source of labor market data. 3.6. Weighting and Other Methodological Issues The component variables of this index are all equally weighted. Many different methods of weighting could be chosen, but ultimately any method for calculating an indicator such as this one is necessarily subjective. In a paper on the possible ways of “operationalizing” the capability approach, Saith discusses potential methods for assessing various functionings in order to make interpersonal comparisons of welfare.20 He discusses a number of possibilities such as partial ordering, methods for determining a complete ordering, Borda rule ranking, and composite indices where the individual functionings are all given a normalized value thus producing a scalar measure that can then be averaged by using an arithmetic mean. But all of them have a major disadvantage that makes them inappropriate for the purpose of this indicator, especially as the data used is predominantly categorical and not ordinal. The problem that we face with this choice of variables is that we have to combine variables that have specific numerical results (income and tenure) with categorical variables (type of contract or occupational position, social security coverage, and professional training). This means that it is impossible to use the same methodology as used by the HDIs. For his decent work indicator, Ghai overcame this problem by suggesting an indicator based on Borda ranking (Ghai, 2003). But while a Borda ranking would allow us to decide which types of contract or social security are preferable, although the index would rank every individual, it would not allow us to judge the extent of the differences between individuals. We would know that x is better than y, but not how much better x is than y. And this would limit the potential uses of the index. Another methodological possibility is the one proposed by Bescond, which averages out the percentages of the component variables of the indicator (Bescond et al., 2003). This method would also be possible here, but it would limit our options to binominal categories within each variable: for example, the proportion of the workforce with an open-ended contract and social security coverage. However, this method would disregard distinctions between different types of contracts and occupational positions, which would make it much less sensitive to different levels of quality of employment. Similarly we would have to define one single income level to determine an acceptable or nonacceptable level of income, and the same applies to the variable tenure. As the indicator


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presented in this paper aims to capture the capabilities associated with employment, this methodology would therefore be too limiting and imprecise, as it does not allow for necessary distinctions. Evaluating the importance of different functionings is, of course, a highly personal issue. Individuals will differ as to which functionings they would choose out of a given set of capabilities. Is it better to have an indefinite contract and low income or a job without a contract with higher income? This could be determined by including a question in the survey to this purpose. A number of studies have suggested this method as being more in tune with the philosophy of the capability approach (e.g., Chakraborty (1996) is mentioned in Saith’s paper). This method was tested during the pilot phase of the author’s own survey with questions such as “What would you change about your job?” or by asking respondents to rank the characteristics of their jobs according to the importance they attach to them. However, the unanimous priority of those questioned was the level of their income, with relatively little importance attached to the other characteristics of their jobs. While this method would have been more democratic, it would also have been much less useful in terms of policymaking, as the desire for a higher income would obscure the importance of other variables that in the long term can be more important to the development of the individual’s capabilities, such as vocational training or job stability. Methods of equal weighting such as those that have been used for creating the HDI or the quality of life indicator produced for children in Chile have an advantage in that they reduce any interference from the method of calculating the weights to a minimum. They are also a convenient solution when there is no consensus view on how the variables should be weighted, as is the case in all of these methods mentioned above. In the case of this index, maintaining simplicity has also been a concern. It is vital that policymakers understand the index and its purpose. Furthermore, it is essential that the indicator be replicable both over time and across different countries. With all of these criteria that form part of this index, it is clear that one could argue that they are not as straightforward as they seem. Not having a contract does not necessarily imply job instability. Or having a short-term contract could also be positive if that is what the individual wants. Or short-term duration may be due to positive career progression. And so on. This indicator does not resolve this problem, nor does it intend to do so as it is based on public policy priorities rather than individual preferences. If a worker chooses to forego health and pension insurance in favor of a higher current income by avoiding a formal contract, for example, and then falls ill or is unable to continue working as he or she grows older, then ultimately it is the government that has to pick up the bill for emergency health care and a minimal pension. It is therefore up to the state to consider these issues in the light of the future expenditure it will incur, even if this means obliging a worker to contribute to social security and health insurance against his own preference. After all, who likes paying taxes? So it is the value judgments that are relevant for public policymaking that the index is based on and that this chapter has concentrated on explaining rather

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than attempting to determine a statistically appropriate way of calculating its weightings. 4. Practical Applications of the Quality of Employment Indicator The indicator proposed in this chapter allows for several different types of analysis. First of all, it allows us to calculate an overall score for the quality of employment of the entire labor force. If calculated on an annual basis, an impression can be obtained of how the labor market has developed over time. Similarly, the distribution of the quality of employment can be calculated for the entire labor force, which would enable us to track how different quality jobs are distributed among the population. Second, since it allocates each individual a score, we can analyze the quality of employment of particular groups of the labor force and observe how they develop over time. For example, it would be possible to determine how the quality of employment develops in specific economic sectors, regions, or types of companies. The advantage of such an analysis is that it enables policymakers to identify precisely which regions, types of companies, or segments of the economy are generating better jobs than others. This, in turn, can give useful hints regarding which of these should perhaps receive additional policy support to enable them to expand, while also showing which sectors of the economy need closer monitoring, different legislation, or other types of support in order to help them improve the types of jobs they are generating. Third, the index allows us to group individuals into categories of high, medium, low, or very low-quality employment. These categories can then be analyzed and related to other variables included in the survey (e.g., age, sex, education, economic sector, size of company), so that we can analyze which groups of the labor force are particularly affected by low-quality employment. Like the analysis described above, this would enable policymakers to focus attention on those groups of the population that are most disadvantaged by the labor market and need additional support. All of the methods of analysis described above would also provide us with extremely important information on the types of jobs that are likely to generate unemployment or the groups of the population most likely to suffer from it, since we have seen that people with low-quality jobs are far more likely to become unemployed than others. Finally, if such an indicator were to be produced in several countries (e.g., in the whole of the Latin American region), we would be able to rank countries according to their labor market performance and track their relative and absolute performance over time.21 This would provide governments with an additional incentive to improve their labor conditions, which are increasingly being monitored by the international community as an input factor into unfair trading conditions and as a sticking factor in the negotiation of free trade agreements. The ranking and comparison of different countries is the main purpose of the HDI, and while debates are still going on about whether such rankings


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have actually had an impact on the policymaking decisions of governments, it is obvious that such indicators are of interest at least to international organizations who have to allocate funding and identify the weakest aspects of a country’s development that need the most support. The ILO’s decision to produce a similar indicator to measure decent work (discussed in detail in section 4) is proof of the importance of such information. The component variables have all been chosen with the possibility of reproducing the index in other countries in mind. The variables required for the index are likely to be part of standard household or labor market surveys, and if they are not, they should be included, as they are absolutely fundamental to any labor market analysis. If the variables should not be available in existing surveys, they can easily be produced by adding a few simple questions to existing surveys. Also, given that the legislative frameworks of Latin American labor markets are relatively similar, as are the problems that they face, the variables can be applied to other countries without much adaptation to the local scenario. Of course, apart from allowing us to undertake international comparisons, one of the main functions of the index has to be to enhance the analysis that can be done of a particular labor market, such as the Chilean one in this case. The following section will provide an example of the type of analysis that such an indicator can allow us to do. 4.1. Segments of the Labor Force with Low-Quality Employment Table 8.2 shows that the proportion of very low quality employment has decreased slightly between 1996 and 2003, from 22.5 percent to 19.4 percent. Both the categories of low and medium-quality employment have increased slightly, while the proportion of high-quality employment has not changed. However, most importantly this indicator reveals the sheer extent of low quality jobs in Chile. Almost two-thirds of the labor force must be categorized as lowquality employment, while less than 12 percent is considered to be high-quality employment. Another interesting fact to note about this data is that while the unemployment rate in 2000 is almost double the rate in 1996, the proportion of low and very low-quality work did not increase as a result. In fact, the overall value of the indicator shows that there was a slight, but statistically significant, improvement in the quality of employment between 1996 and 2000, although it registered almost no improvement between 2000 and 2003. If we look at the components of the indicator, we can see that between 1996 and 2000 there was an improvement in the overall occupational structure of the workforce, although this deteriorated again between 2000 and 2003. The indicator for the variable tenure, on the other hand, improved consistently between 1996 and 2003. The indicator’s income component, however, deteriorated significantly between 1996 and 2000, and declined further, although minimally, in 2003. And while the variable training deteriorated minimally between 1996 and 2000, it does nevertheless register a significant improvement between 1996 and 2003. The next question would obviously be what caused these different

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Table 8.2 Quality of employment of the labor force 1996

Quality of employment categories Very low-quality employment Low-quality employment Medium-quality employment High-quality employment Total

2000

2003

%

Cumulative %

%

Cumulative %

%

Cumulative %

22.5 34.0 32.0 11.5

56.5 88.6 100.0

18.7 36.2 33.9 11.2

54.9 88.8 100.0

19.4 34.9 34.2 11.5

54.3 88.5 100.0

100.0

100.0

100.0

Value of indicator Occupational position Tenure Income Vocational training

3.13 1.28 0.93 0.76 0.16

3.23 1.30 1.10 0.68 0.15

3.24 1.23 1.13 0.67 0.20

Unemployment rate

5.7

10.2

9.8

component indicators to move in different directions? Are they related to economic growth, or have the developments of the unemployment and participation rates influenced them? That is exactly the kind of questions that this indicator hopes to prompt and illustrates how it will contribute to broadening the public debate, as more factors gradually are taken into account and analyzed in more depth. While the data below can only represent a crude analysis as the surveys do not provide us with time series data on a quarterly basis, which would allow us to follow the reaction of the labor market to economic swings in much more detail, it does, however, demonstrate the usefulness of such an indicator as it shows that employment quality and unemployment can move in opposite directions. It would therefore make much sense to replicate this indicator on a quarterly basis so that changes in the quality of employment can be tracked in the same way that the unemployment rate is monitored. Table 8.3 shows how the indicator can be used to monitor employment developments in Chile’s different regions. Some regions, namely the Second, Eleventh, and Twelfth region as well as the Metropolitan Region clearly have better-quality employment than for example the Sixth and Seventh regions, which post the worst-quality employment. In addition, some regions have registered significant improvements in their quality of employment, for example the Sixth, Seventh, Eleventh, and Twelfth regions, while the First region has experienced a deterioration in the quality of employment. Such an analysis is an important result as it prompts the question as to why some regions have better quality of employment than others, or indeed why some have improved or deteriorated more than the others. Often, this is related to the economic sectors that operate in each region. For example, the Second


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Table 8.3 Quality of employment by region Region

1996

2000

2003

Tarapacá, I Antofagasta, II Atacama, III Coquimbo, IV Valparaíso, V Bernardo O’Higgens, VI Región del Maule, VII Región del Bío, VIII La Araucanía, IX Los Lagos, X Aysén, XI Magallanes, XII Región Metropolitana

3.63 3.68 3.14 2.77 3.13 2.47 2.35 3.01 2.76 3.00 3.02 3.22 3.40

3.11 3.86 3.14 2.94 3.12 2.78 2.88 3.12 3.14 3.13 3.27 3.72 3.40

3.09 3.63 3.16 2.96 3.13 2.75 2.82 3.09 2.98 3.23 3.46 3.44 3.45

Source: CASEN 1996, 2000, and 2003.

region largely depends on the mining sector, which as we will see below, generates better jobs than other industrial sectors, and thus this is reflected in the region’s overall quality of employment score. In addition, this analysis allows the central and regional governments to identify regions that might benefit from public training programs or other specific employment policies in order to improve the quality of employment, for example, by attracting investment in those economic sectors that generate better jobs. Needless to say, these results can also be replicated with municipal data, so that the same kind of analysis with regard to employment policies can be undertaken at the local level. Table 8.4 shows how the proportions of high, medium, low, and verylow-quality jobs are distributed among different groups of the workforce. The proportions of men and women, for example, who hold jobs in the different quality categories are roughly similar. Women hold slightly more very-low-quality jobs and slightly fewer high-quality jobs, but conversely they hold a lower proportion of low-quality jobs, while their proportion of medium-quality jobs is equal to that of male workers. This finding suggests that the overall differences in employment quality between men and women are not as high as may be assumed given the numerous studies that have shown that women earn less than men and that the overall quality of their employment is inferior to that of their male colleagues.22 The overall values of the quality of employment indicator for men and women confirm this result. Men have slightly, but statistically significant, better jobs than women, but the quality of employment has improved for both men and women in roughly equal amounts. Such a finding would have to be examined in more detail, however, as there clearly are segments in the labor market where low or very low quality is highly concentrated among men or women. For example, seasonal jobs in the agricultural sector, which is known for its low-quality jobs are predominantly held by women, or employment in the construction sector for

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Table 8.4 Quality of Employment Values of the indicator for each year

Total

Very low quality

Low quality

Medium quality

High quality

Total

1996

2000

2003

11.6 11.2

100.0 100.0

59.4 40.6

61.9 38.1

65.0 35.0

63.4 36.6

62.6 37.4

3.17 3.05

3.27 3.15

3.29 3.15

34.2

11.5

100.0

100.0

100.0

100.0

100.0

100.0

44.9 41.8 38.0 37.0 29.4 18.6 7.1

24.9 28.6 35.2 34.3 41.8 37.0 41.7

1.0 1.7 6.0 8.5 17.4 38.4 48.8

100.0 100.0 100.0 100.0 100.0 100.0 100.0

1.9 36.7 37.1 14.5 5.1 4.5 0.2

1.6 30.7 37.5 14.8 7.4 7.6 0.3

0.9 21.5 35.5 14.0 10.8 15.5 1.8

0.1 3.8 17.9 10.4 13.4 48.0 6.4

1.2 25.6 34.5 14.0 8.8 14.3 1.5

2.23 2.17 3.01 3.39 3.92 4.79 5.02

2.43 2.44 3.01 3.23 3.91 4.80 5.19

2.45 2.55 3.00 3.11 3.81 4.65 5.34

19.4

34.9

34.2

11.5

100.0

100.0

100.0

100.0

100.0

100.0

Very low quality

Low quality

Medium quality

High quality

Sex Men Women

18.4 21.1

34.5 35.6

35.5 32.1

Total

19.4

34.9

Level of education None Primary education Secondary education Technical secondary education Technical higher education Higher education Postgraduate higher education

29.2 27.8 20.9 20.1 11.3 6.1 2.4

Total Economic sector Agriculture and fishing Mining Manufacture Utilities Construction Commerce and catering Transport, communication and storage Financial services Services Other

32.2 8.4 16.7 8.4 30.9 15.9

36.0 22.9 35.1 29.9 35.3 44.0

28.3 31.1 37.5 36.0 27.3 33.6

3.5 37.6 10.7 25.7 6.5 6.5

100.0 100.0 100.0 100.0 100.0 100.0

22.5 0.6 11.7 0.2 13.9 16.1

14.0 1.0 13.7 0.5 8.8 24.8

11.3 1.4 15.0 0.6 7.0 19.3

4.1 4.9 12.7 1.3 5.0 11.1

13.6 1.5 13.6 0.6 8.7 19.7

2.14 4.32 3.22 4.14 2.49 3.05

2.49 4.64 3.42 4.06 2.53 3.14

2.53 4.51 3.33 4.09 2.66 3.12

15.1 10.0 17.9 2.0

35.4 26.5 30.4 42.0

38.8 40.6 35.3 36.3

10.7 23.0 16.5 19.7

100.0 100.0 100.0 100.0

6.1 3.6 25.1 0.0

8.0 5.3 23.7 0.2

8.9 8.3 28.1 0.2

7.3 14.1 39.1 0.3

7.8 7.0 27.3 0.2

3.23 4.20 3.49 3.53

3.25 3.98 3.44 4.06

3.37 4.02 3.48 3.87

Total

19.4

34.9

34.2

11.5

100.0

100.0

100.0

100.0

100.0

100.0

Age group 15–19 20–24 25–34 35–44 45–54 55–64 65 y más

55.4 34.5 20.5 17.5 13.8 11.1 9.0

40.6 48.9 35.9 32.0 30.8 32.0 36.0

4.0 15.8 34.8 37.5 37.7 40.4 45.0

— 0.7 8.8 13.0 17.7 16.5 10.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0

7.2 18.8 27.7 24.8 14.3 5.6 1.5

2.9 14.8 27.0 25.2 17.7 9.0 3.3

0.3 4.9 26.7 30.1 22.1 11.6 4.2

— 0.7 20.2 31.2 30.9 14.1 2.8

2.5 10.6 26.3 27.5 20.1 9.8 3.2

Total

19.4

34.9

34.2

11.5

100.0

100.0

100.0

100.0

100.0

100.0

Size of company 1 worker 2–5 workers 6–9 workers 10–49 workers 50–199 workers 200 workers

16.3 23.6 25.6 22.8 20.6 12.6

46.3 38.6 34.5 29.9 30.7 26.2

36.0 31.3 30.7 34.5 32.8 38.4

1.4 6.5 9.2 12.9 15.9 22.8

100.0 100.0 100.0 100.0 100.0 100.0

18.8 23.4 8.5 20.4 13.9 15.1

29.4 21.0 6.3 14.6 11.4 17.2

22.9 17.1 5.6 16.9 12.2 25.2

2.6 10.7 5.0 19.0 17.7 45.0

22.0 18.9 6.4 17.0 12.9 22.8

Total

19.1

34.7

34.6

11.6

100.0

100.0

100.0

100.0

100.0

100.0

1.27 2.27 3.07 3.58 3.91 3.81 3.67

1.45 2.23 3.10 3.46 3.66 3.72

1.38 2.12 3.13 3.40 3.68

2.76 2.67 2.91 3.30 3.49 4.06

2.76 2.67 2.91 3.30 3.49 4.06

2.99 2.90 2.89 3.19 3.36 3.92

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men. This illustrates how this indicator can draw attention to particular conclusions and prompts further questions and debates that in turn require an analysis of the component variables of this indicator. The quality of employment is clearly related to the workers’ age. Workers in the 15–24 age bracket hold almost no jobs that would be considered high quality and register very low overall scores. The proportion in the category of highquality jobs only increases in the next age group (25–34-year-olds) and then peaks among workers between 45 and 54. Workers over the age of 65 also have a lower chance of holding a high-quality job, although their overall score is the best, which indicates a greater concentration in the medium-quality jobs. If we look at the segment of very low-quality work, then these trends are even clearer. Young people are much more likely to hold low-quality jobs than their older colleagues, and the quality of employment scores, of course, reflect this. In terms of the overall quality of employment scores, there is no clear trend. The quality of employment of no particular age group has either significantly improved or deteriorated. This result should also prompt further research and discussion. We already knew that young people were more likely to be unemployed than older workers, that they earned less and that they are less likely to hold open-ended contracts. But what factors can these differences be attributed to? In the same way the higher youth unemployment rate should prompt a policy debate on whether young people have the appropriate skills and training to set themselves up in the labor market, the much lower quality of their jobs should prompt the same questions. The quality of employment is clearly linked to education, which should not come as a surprise to any policymaker. A shift in terms of the quality of employment only occurs in the category of workers with technical higher education, who have a good chance of achieving at least a job of medium quality. It is noteworthy that significant proportions of high-quality employment are achieved only at the level of some form of academic higher education. The highest proportion of high-quality jobs is held by workers with a postgraduate degree (46 percent), followed by those with university education (33 percent). These two categories also achieve the highest overall quality of employment score. Even workers who have a technical degree do not achieve high-quality jobs in a significant proportion (only 13 percent). We should also note that there is almost no difference between having a primary school education and having no education. Both categories end up with similarly poor jobs, as is shown by their poor overall scores also. This means that it is vital for Chile to increase the coverage and retention rates of its secondary school system, if the quality of employment is to be improved in the long-term. Table 8.4 also shows that there is a clear difference in quality between jobs generated by the different economic sectors. Agriculture, fishing, forestry, and construction have the highest proportion of very low-quality jobs, and the lowest overall scores. This is a matter of grave concern as the agricultural, fishing, and forestry sectors are precisely those that have generated a large part of Chile’s export growth over the last decades. This is partly counterbalanced by the mining


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sector, which has the largest proportion of high-quality jobs and the highest overall score. Unfortunately, the mining sector, despite its importance to the Chilean economy, does not generate a large number of jobs. Table 4 further relates the quality of employment to the size of the employer and clearly shows that larger companies generate better jobs, although their overall quality scores have deteriorated slightly since 1996. A significant shift in terms of the quality of employment really only occurs in companies with more than 200 employees, which generate significantly better jobs than even those companies with 50–199 workers. This ties in with much anecdotal evidence and also with evidence from numerous qualitative interviews that the author carried out with employers. Only the very large firms in Chile have a human resource policy and, consequently, invest in the professional development of their employees. In companies of a smaller size, the employment offered is clearly of a lesser quality, with the highest concentration of very low and low-quality jobs found in the category with five employees or fewer, or among those who work completely independently. While this conclusion reinforces the idea that the better jobs can be found in what the ILO classifies as the “formal sector,” it is important to note that much of this “formal sector” actually consists of jobs that are not very good either. The empirical evidence presented in this section was also tested by means of an ordered probit model, which is presented in Appendix C. The results of this model confirm those presented here. None of the results described above are particularly surprising. In fact, they mirror those sectors (described in chapter 4) where the labor force is split up according to type of contract and occupational position. Similarly, an analysis of the same data by income category would also reflect this picture, as would an analysis by size of company or type of social insurance. What is different about this index is that it summarizes these results in a single variable. And this variable draws attention to a group of highly vulnerable workers, such as Sonia and Germán, who are not often explicitly considered by a labor policy that focuses mainly on the unemployed. Table 8.4 allows us to consider a number of important questions that any comprehensive labor market policy should address. It shows which economic sectors are producing higher-quality jobs, that men hold better jobs than women (although perhaps not as consistently as some analysts would have us believe), and that larger companies generate better jobs than smaller companies. They also show that older people are vulnerable to having poor-quality jobs, as well as younger workers who are in the crucial stage of family building. The results can thus help to identify particular areas that should be the focus of policymaking. This index has not been designed to replace the variable unemployment. Instead, it is intended to be used in addition to the unemployment rate, following the logic that the unemployed face different problems than the employed and should therefore be subject to different policy measures. However, it is very important to note that the unemployed score very poorly on the variables considered by this index if we look at the jobs they held before they became

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unemployed. One of the main conclusions to be drawn from this analysis is therefore that the more the proportion of high-quality jobs increases in the labor force in general, the less likely people are to become unemployed, and the lower the unemployment rate will fall over time. This is a long-term policy consideration that is completely ignored by all employment measures that are designed to reduce the unemployment rate in the short-term. As such it requires long-term strategic planning about which jobs should be fostered and which should be discouraged. Policies aimed at lowering the unemployment rate in the short-term are not likely to solve this problem in the long-term.

4.2. Individuals in the Index The above paragraph explains how the index would work in theory and the conclusions that the empirical evidence allows us to draw. A case study from the survey will serve as an example to illustrate how it would work in practice. Carla lives in La Pintana, a working class area of Santiago. Until approximately a year before she was interviewed she worked in a shoe factory as a machine operator. She worked the regulation 48-hour week from Mondays to Saturdays, earned the minimum wage, contributed to the public health insurance system and to a pension scheme and had an open-ended contract. She had to spend a total of about three hours traveling to and from work every day. She then lost her job, roughly three weeks after her partner lost his. The compensation for dismissal that she received was enough to cover about two months of living expenses, a period during which she was unable to find a new job. Carla thus took to making pan amasado (bread rolls) in an oven made out of an old oil barrel and fuelled with scrap wood in her front yard (photos of Carla and her makeshift oven can be found on the author’s website). She began selling the rolls to her neighbors at 50 Pesos each (~10 cents), and soon discovered that she was working far less (approximately two shifts of three hours each a day) and earning more than she did in her previous employment. Nor did she have to spend endless hours traveling to and from work in overflowing buses. She was no longer contributing to either a health insurance system or to her pension scheme, but those were the least of her worries. Carla was happy with her situation. Not only was she no longer unemployed, she was earning more and working less, and she was now working independently, free to do whatever she wanted when she wanted. She would accept a formal job again only if it paid more. Carla’s preference is thus clear. Yet integrating Carla’s case into an index on the quality of employment means making a value judgment regarding her situation, based on a range of objective criteria that may not necessarily come to the same conclusion as she did. If we assess her case according to the criteria that constitute the quality of employment index, Carla remains in the same overall category of “very lowquality employment.” Her occupational status has declined and the increase in her income was not enough to compensate for that deterioration. Furthermore,


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she has lost her health and pension benefits. The other criteria remain the same as she held her previous job for less than three years during which she received no training either. The deterioration in her quality of employment score is therefore due to two value judgments that I am making based on objective criteria that consider her personal welfare. Her new job basically implies greater risks than her old job did. First, being self-employed in an informal (actually illegal) job is worse than being a wage-earner with an open-ended contract because it implies a loss of legal protection and status. Should she accidentally burn herself with her precarious oven, for instance, she will have no insurance against accidents at work. Should she have to cease her activities for whatever reason, she will have no insurance against unemployment (in the form of compensation payments such as she got in her old job). And theoretically, she could even be fined (approximately US$ 80 or 20 nights in jail!) for her illegal activity. Second, even though Carla herself may not be worried about her lack of social insurance at present, the index considers this to be a disadvantage, not only because she has ceased to contribute to a pension plan, but also because she now falls into a category of emergency services that the national health service provides only to the very poor. One final point to make is that the reduced number of hours that Carla now works is integrated into the calculation of income, which is pro rata-ed on an hourly basis so that the difference in working week is taken into account automatically in this index. Carla did not have a good job in the first place, and the index does not register an improvement for her new job, although she clearly prefers it to her former job. Her case shows the value judgments that this indicator makes at the risk of being accused of ignoring her own preferences and of patronizing her. Given the short-term perspective with which many workers in Chile manage their lives, this has to be considered as a justifiable risk. Having looked at an individual case and explained how the index would function and the sort of data it would provide still leaves open the question “So what?” As a tool of public policy, what does the index add? Table 8.5 answers this question. It shows how workers with different combinations of variables would be classified according to this index. The first five cases end up being classified as having either low or very low-quality jobs. As a result they would have a very low level of capabilities. Yet there is no government labor policy that focuses on cases like these simply because they are all employed. The people described in the table were all taken from the author’s own survey. The first five cases all voiced frustration about their working conditions and described their inability to improve their situation without temporary support from an alternative source. Rosario, for example, explained that she can barely make ends meet as she has to support a large family. If she could obtain more qualifications, she could charge a higher price for her services and thus earn more, but the loss of income that she would experience during her period of training makes this an impossible option. A loan with low interest rates from the government would enable her

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Table 8.5 Classification of workers according to quality of employment indicator Contract and social security (ss) Juano, baker Julio, construction worker Verónica, 3 jobs as a maid Rosario, massage therapist Andrés, sells fruit in the streets Carlos, computer technician Marco, TV production assistant Claudia, supermarket manager Alfonso, oncologist

Indefinite and ss Atypical and ss None Self-employed, no ss Self-employed, no ss Prof. self-employed, no ss Atypical (Honorario), no ss Indefinite, ss Indefinite, ss

Income

Tenure

Training

Quality of employment category

Min. wage Min. wage 1.5 min. wage 2.5 min. wage 1 min. wage 3 min. wage

4 years 9 months 7 years 6 years 5 months 5 years

None None None None None Yes

Low Very low Very low Low Very low Medium

8 min. wage

2 years

Yes

Medium

8 min. wage 10 min. wage

2 years Yes

Yes Yes

High High

to overcome this difficulty, but there is no such program in Chile for the self-employed. Verónica voiced concern about her lack of pension and health insurance. Every time she or one of her children is ill, she has to go through a process of obtaining a certificate that allows her to receive free medical care, which she says is of very low quality. Yet she cannot contribute to either a pension scheme or a health insurance, first because she would not be able to afford it, and second because she cannot prove that she has regular income, as none of her employers have offered her a contract, and she dare not ask them for fear of losing her employment. In addition, she would lose income if she were to go through all the time-consuming bureaucratic steps in order to obtain some sort of a more regular health insurance, as she would not be able to work during this time. Julio, on the other hand, mainly complains about his contract. He has to look for a new job at least once a year and never knows exactly how long each contract will last. Although his health and pension contributions are covered, it is unlikely that he will accumulate enough funds in his account to qualify for a minimum pension, and he thus considers his pension contributions a waste. He also complains that he simply does not earn enough to put aside money for the periods when he is without work. He lives with his family in his mother’s house and during periods of unemployment relies on his mother’s support. In between jobs, he always spends a couple of months traveling all over Santiago and asking at the various building sites whether they need help. He says his friends are the most useful source of information about prospective employment. Although municipal jobs centers do exist in Chile, Julio claims they are useless as employers hardly ever advertise their jobs there. He has given up going to them. One of the most important reasons for creating this index is to foster public debate and to focus attention on cases such as the ones described above or on people such as Sonia and Germán who were introduced in chapter 1. In a country such as Chile, which despite having attained a certain degree of development still offers the unemployed no benefits or security to speak of,23 the question of having a job or not having one predominates the labor market debate, almost to


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the exclusion of all other topics. While government and public concern about this is certainly justified, it is also shortsighted. The quality of employment is what will ultimately ensure the development of the economy, foster growth, social cohesion, and welfare. A low unemployment rate is merely a component of this. Creating an index of the characteristics that constitute quality of employment should hopefully reduce the issue of unemployment to the status of a “component variable” and have the same effect of broadening public debate that the creation of the HDI did. Ultimately, if human functionings and capabilities are to be enhanced, this requires a long-term view and a broad, inclusive one at that. Aside from stimulating debate, the proposed index will hopefully also provide useful information to public policymakers. Its main purpose could be to help identify those sectors of the economy, or regions of a country, that are generating better jobs than others, or those segments of the workforce that are particularly marginalized. A similar index on the quality of life of children is being used in Chile by the Ministry of Planning to identify regions and municipalities in which the basic necessities of children are not covered.24 The index constitutes an important policy tool for allocating public resources according to the perceived need. A quality of employment indicator could serve the same purpose. The index could even help foster an internal and competitive labor market as its users need not be limited to public policymakers and labor market analysts. It could equally well serve employers and employees by providing them with more and better information on available jobs so that they can take more informed decisions. Just like unemployment rates can vary from sector to sector or according to geographic location, it is perfectly possible that some sectors within an economy may have better ratings than others or improve their rating while others decline. By the same logic, some regions may improve their quality of employment while others deteriorate. This sends important signals to policymakers as to which areas should receive particular attention. In addition we should consider that unemployment rankings may differ substantially from quality of employment rankings, in the same way that the human development indicator varies from plain GNP rankings. The strength of the quality of employment indicator is that it will pick up on issues that the unemployment rate simply does not consider. A particular region could perhaps register a very low unemployment rate, but this may be entirely due to atypical contracts or short-term contracts such as those that are used in areas with activities predominantly in the agricultural or mining sectors, which could mean that the region is particularly vulnerable to job losses in situations of economic downturn.25 Or a region may have a very high unemployment rate although its quality of employment indicator is very good. This may indicate to public policymakers that the unemployed in this region do not have the qualifications needed in order to integrate themselves into the labor market, so special training programs or relocation programs could be designed to better match the skills of the labor force with the requirements of their environment.

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Similarly, trends over time may vary. For instance in the Chilean case, where unemployment rates dropped steadily over a long period of time, this positive development almost completely distracted attention from the fact that increasingly jobs were being created with inferior qualitative characteristics. Ultimately, this has even led to a failure on behalf of the government to legislate appropriately. If it had been aware of declining durations earlier, perhaps the unemployment insurance would have been implemented sooner or designed in a different manner. Or perhaps it would have legislated sooner in order to ensure that subcontracted workers or workers with atypical contracts enjoy the same degree of legal protection as workers with open-ended contracts. Ideally, an indicator such as the one proposed here would also help raise public awareness, increasing the workers’ own emphasis on issues such as training, having a formal written contract, or making up-to-date social security contributions. Especially given the context of the economic crisis, workers were satisfied with merely having a job and did not consider any other aspects. A cultural change would also lead to more conscious and critical evaluations of jobs on the part of the employees. Ultimately the index aims to produce a change in the way we think about the labor market. It aims to produce what could be described as a cultural change, a shift in emphasis away from unemployment to a broader more inclusive concept. This does not mean that having a job is not supremely important to those who want to work, it means that other issues should also be considered. As we will see in the following section, the ILO has recently attempted to produce such a shift in the labor market debate, but its efforts do not go far enough. 5. Conclusion The index and method proposed in this chapter are subjective and their elaboration is but preliminary. This book by no means hopes to present a simple formula for applying the capability approach to the complex realities of modern labor markets. But it does intend to respect the overall objectives of an approach that consistently emphasizes that the functionings and capabilities of an individual depend on more than just income or simply having a job. It should be considered that indices, whether poverty lines, unemployment rates, or GNP per capita are all ultimately arbitrary. Their main value must be seen in the comparative perspective that they open up for us, which allows us to monitor individuals or groups of individuals and developments over time and across different regions or countries. Bearing this purpose in mind, the methodology presented here is specifically designed in order to be applicable also to countries other than Chile, especially countries where similar sources of data are available and have similar labor market structures. All the Southern Cone countries of Latin American, for example, would fall into this category. This book has also suggested that labor market policy should form an integral part of any development strategy. It does not, however, answer the question, what this labor market policy should consist of more specifically in order to nurture capabilities. This issue will be addressed in more detail in the following chapter.

CHAPTER 9

Conclusions: Quality and Quantity

T

he introductory chapter to this book suggested that if the Chilean labor market after years of high and stable economic growth combined with targeted social policies could not generate good jobs, then it was unlikely that other Latin American countries with much less favorable economic circumstances and or fewer resources could do so. The empirical evidence presented in the preceding chapters demonstrated that in effect Chile has not generated quality employment. So this of course leads us to the question, what could Chile have done differently or what could it now do to improve the employment situation of its workforce? And what can other developing countries do to improve the quality of their labor market? There is obviously no simple, straightforward panacea for this problem. Moreover, any potential solution has to be specific to the context of the country in which it is applied. But it is also true that potentially simple policy measures that could be taken are unnecessarily complicated by antagonistic labor relations, and by politicians and experts who are attached to whatever status quo they represent and who have forgotten how to think out of the box. Chile is not the only country in the world with unresolved labor market problems. The U.S. labor market is characterized by huge inequalities and persistent poverty, the German, French, Italian, and Spanish labor markets suffer from persistently high unemployment rates (although for very different reasons), the British labor market has significant problems in overcoming the issues of social exclusion that large segments of the labor force face, and many countries in East Asia (e.g., Korea) cannot bridge the segmentation that characterizes their labor markets and effectively splits the workforce into protected and unprotected segments. But the problem with Latin American labor markets is that they face all of these problems together and to a much larger extent: high unemployment, high inequality, segmentation, social exclusion, and property. And although Chile faces these problems to a lesser degree than many of its neighbors, to the majority of Chilean workers these problems are nevertheless serious. Successful

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examples of labor policies from across the globe abound, and this chapter will refer to some of these in its discussion of the policy options that Chile faces. Much research still needs to be done on the issues that this book raises, so it cannot be the purpose of this chapter to formulate a list of policy recommendations. But the chapter does ask some fundamental questions and point out some issues that need to be addressed from an objective perspective using the knowledge of other cases, and using the theoretical framework of the capability approach, which is not related to typical ideological or political preferences. Throughout this book the capability approach has attempted to refocus policy debates on the capabilities that are generated by employment. This concluding chapter should be considered as a further input into this discussion. In terms of its empirical analysis, this book has only scratched the surface of all the research that can and should be done. However, before going further into any kind of policy discussion, it would be useful to recapitulate some of the analysis and arguments presented so far. 1. The Range of the Quality of Employment in Chile In the introduction to this book we met Sonia and Germán, whose respective jobs not only situate them at the lower end of the Chilean labor market in terms of the quality and productivity of their jobs and the capabilities they generate, but whose cases also exemplify many of the problems that we routinely encounter in this labor market, such as unstable and low wage employment without contracts or social security benefits and with other problems that demonstrate a complete disregard of labor market legislation. Chapter 2 explains what the capability approach can do for workers such as Sonia and Germán in terms of situating labor policy in the heart of the development agenda and focusing on the characteristics of their employment as opposed to considering these characteristics of secondary importance because Sonia and Germán are not unemployed. The following chapters then demonstrate how the capability approach changes the focus and priorities of employment policies and debates. Chapter 3, for example, argues that changes in Chilean labor legislation over the last fifteen years have been largely symbolic and will not affect workers such as Sonia and Germán much. Policy debates are largely based on a continuation of unresolved historical issues and do not really address the realities of the country’s modern labor market with its multitude of different employment relationships. As a result, they do not consider the capabilities and functionings that the characteristics of these employment relationships generate (or often do not generate) either. Even the legislated increases in the minimum wage may not have a positive effect on the situation of workers such as Sonia and Germán, partly because their jobs are so informal that their employers simply ignore official legislation, but partly also because they may price them out of the labor market. The empirical evidence presented in chapter 4 showed that Sonia and Germán are not the only ones in the Chilean labor market working under such

Quality and Quantity

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precarious conditions. The data shows that jobs without formal written contracts have the worst characteristics: the lowest rates of health insurance and social security contributions, the highest job turnover, the lowest income, and the lowest rates of training. Any labor market policy that does not specifically focus on this category of workers, which represents 23 percent of the Chilean labor force and 38 percent of new jobs, is ignoring one of the most important problems of the Chilean labor market. Furthermore, the chapter shows that only 42 percent of the Chilean labor force still have traditional open-ended contracts. This means that, while attention is paid to workers without formal written contracts, a great deal more attention should be paid to the employment situations of those employed with atypical contracts and to the self-employed. Chapter 5 in turn demonstrated that the proportion of workers with unstable jobs, such as Sonia and Germán’s, has probably increased over the last decade, but also that there is a degree of mobility within the labor market that allows them to find better jobs, just as Germán does when he finds short-term employment that offers him at least a contract. The chapter highlights the importance of looking at a range of labor market variables beyond the unemployment rate because in Chile the proportion of precarious employment appears to have increased during the same period that unemployment declined. The chapter further suggested that Chile’s most recent economic downturn not only sharply increased the unemployment rate, but also brought about a significant increase in short-term and informal employment. The conclusions of this chapter highlight the irrelevance of labor policy to the problems that the empirical evidence throws up, especially if we consider that most of the political energy has been focused on details of union and collective bargaining legislation, which would affect at most 11–12 percent of the workforce. The new unemployment insurance system, which has constituted the most important piece of Chilean labor legislation during the last decade and a half, is shown in chapter 6 to do next to nothing for people such as Sonia and Germán, who generally will not be covered by the insurance. Thus, it will not protect the capabilities of the most vulnerable. The data showed that only 9.4 percent of the unemployed will be protected by the insurance in the sense that they would be entitled to payments beyond their own contributions. And if workers such as Germán, who had a short-term contract, become unemployed, the benefits they receive from the insurance are so minimal that they cannot be considered as constituting any real protection of his capabilities and functionings. As for the vocational training policies discussed in chapter 7, these would not help Sonia and Germán much either, as the tax credit that is set up to finance such training serves mainly medium-sized and larger companies. Although an impressive 15–16 percent of the Chilean labor force is now being trained every year according to official data, the workers who receive this training are rarely unskilled and low-income workers. This means that if people such as Sonia and Germán wanted to expand their capabilities and functionings through vocational training, they would almost certainly have to depend on the publicly financed training programs that the state-run training agency offers. In general, the vocational training programs available to workers such as Sonia and Germán

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are much too underfunded and too short to make much of a difference to their employment prospects. Thus Chile is missing an important opportunity for enhancing the capabilities of its most vulnerable workers. In an attempt to quantify how many people in Chile work in conditions similar to Sonia and Germán’s, chapter 8 showed that approximately 19 percent of the Chilean labor force had jobs of very low quality and another 36 percent had jobs that have to be considered low quality. The chapter argues throughout that focusing on the unemployment rate when evaluating the performance and development of a labor market is as simplistic as focusing only on the GDP/capita ratio when evaluating the economic performance and development of a country. The calculations presented in this chapter provide a powerful argument as to why labor policy should focus also on workers with precarious jobs. Sonia and Germán undoubtedly represent the lower end of employment quality in Chile (although not by any means the lowest). However, at the other end of the quality of employment scale in Chile are large companies with international operations, which offer employment opportunities that are the very opposite of Sonia and Germán’s jobs. These companies are driven by concerns of competitiveness in international markets, by the compliance requirements with international quality standards (ISO 9001 certifications), and by the requirements of large multinationals, which means sending extensive questionnaires to their business partners about all aspects of their affairs, including their employment and professional training practices. One such company with over 5000 employees worldwide, almost a thousand of which are based in Chile, only recently hired a personnel director to be put in charge of developing a human resource strategy for the firm, which until then had not been a company priority. Many of the firm’s employees had been hired with annual short-term contracts, made redundant every year, and then rehired. However, the negative effects of this policy on worker morale and productivity were noted, and the company decided to reverse this policy and established a practice of converting these contracts into open-ended ones. Apart from its internal information technology services, which are outsourced to another firm, this company now has a very stable workforce with a low rate of rotation. In addition to complying with all the statutory requirements, the company has also affiliated all its workers to the new unemployment insurance (not only those who have joined the firm since the scheme was introduced), it pays severance pay to all employees with more than five years tenure who leave the firm, regardless of the cause of their departure, and they have contracted a supplementary health insurance policy that covers 80 percent of the expenditure not covered by the ordinary health insurance plans. Furthermore, the firm, which has always invested a lot in vocational training, regularly trains its entire workforce. Their director of human resources told me that they spend three times as much on training as the Franquicia Tributaria amounts to. He explained that for his firm training was simply vital to maintaining their competitiveness in an international market, and that they even sent many employees abroad to acquire further qualifications, as training institutions in Chile offered few courses that were specialized enough for their field. This


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director was not in the least concerned about poaching. He explained that his main concern was to train workers up to the maximum of their ability so that they can take on more responsibility within the firm and move between jobs if necessary. He also characterized the firm’s relationship with its union as excellent, adding that the last collective bargaining contract was signed for four years, an indication of the trust between the partners. When asked about what labor legislation most required changing, he answered that there were too many grey areas in the law that required clarification, such as part-time employment legislation, and that greater flexibility would be desirable in drawing up an employee’s work schedule. When asked about whether less regulation would lead them to hire more staff, he laughed and said: “That old myth! I hire as many people as I need. Legislation has nothing to do with it.”1 I relate this example not only because it serves as a contrast to the situation of Sonia and Germán and thus helps to delineate both the top and the bottom end of employment quality in the Chilean labor market, but also because it is useful in illustrating several points that we should bear in mind in the course of this concluding chapter. First of all, companies who want to circumvent labor legislation, for example, by hiring the same workers on a short-term basis every year, do so. Even large firms do this. Second, such a practice may not always be the best business strategy, as the firm described above noted. Third, pressures to improve labor relations are generally driven by the need to maintain competitiveness and productivity in international markets and to comply with international certifications, which are much more demanding than Chilean labor market standards. Needless to say, however, this only applies to large companies. Fourth, a firm’s success in competing internationally depends to a large extent on its investment in human resources, an investment that the country as a whole has fallen behind on. Even large companies such as the one described above have only recently discovered the need for managing their human resources and the importance of this factor to their productivity and competitiveness. Fifth, the labor reforms described in chapter 3 have failed to address the issue of flexible work schedules, which employers associations and labor market experts have been demanding for at least a decade, while they have spent a lot of time on concerns that will have little real impact. The recapitulation of Sonia and Germán’s case and the example of the large company described above remind us of some of the problems that are highlighted in the course of this book and illustrates the wide range of different employment situations that exist in Chile, each of which requires a different set of policy measures to respond to its particular problems. The discussion of labor legislation, specific employment policies, and empirical evidence together with a suggestion for measuring the quality of employment in this book does hopefully shed light on the Chilean labor market from various perspectives, all of which need to be considered going forward. This concluding chapter will therefore provide an overview of the interaction of legislative reform, employment policy, the policy of information, institutional factors, labor relations, and generally the importance of labor policy as part of the development agenda.

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2. Employment Legislation 2.1. Historical Definitions in a Modern Labor Market The current Chilean Labor Code dates back to the 1920s. Its fundamental distinctions and structure have not changed since then, although innumerable labor reforms have changed the detail of its content. As is the case in many countries, this means that it retains distinctions and is based on premises that make increasingly less sense given the reality of the country’s current labor market, in which many new forms of employment relationships that are not well defined by the Labor Code have emerged. And much employment related legislation is not part of the Labor Code, such as, for example, the social security provisions or the employment situations that are covered by civil law (honorarios and any kind of service provided to the public). This means that we need to consider all employment related legislation, and not just the Labor Code itself, when discussing the need for more comprehensive reform. One of the basic distinctions that Chilean legislation makes is between wageearners and the self-employed. The former are obliged to contribute to pension, health, and unemployment insurance systems, are covered by work related accident, illness, and disability insurance, and have the right to a number of other benefits such as child and family allowances (paid by the state) or child care facilities (provided in many cases by employers). The self-employed are excluded from these regulations and benefits, and they may contribute to the pension and health insurance systems voluntarily. There are historical reasons for this distinction, as Chile, along with other Latin American countries, did not have the capacity to monitor the activities of the self-employed. However, today, a large proportion of the self-employed pay taxes and have formal licenses for their activities, which shows that Chile does now have the institutional capacity to track the self-employed. This point raises two questions: the first is, in view of the evidence we have seen on the employment characteristics of the dependent and independent sectors, does it still make sense to treat the self-employed as a different category of worker? In particular, should it not be obligatory for the self-employed to contribute to the social security system? And the second question is, can we still distinguish that clearly between the self-employed and wage-earners given the contractual conditions that some workers are employed under? One of the fundamental policy priorities that has already been identified by the Chilean government and other analysts is to increase the coverage of Chile’s social security system.2 Since the self-employed are not obliged to contribute under the current system, and are actually excluded from the unemployment insurance ex ante, this fosters an attitude of complacency and reluctance (or laziness, as many of them put it during my interviews with them) among the selfemployed with regard to potentially making contributions. It also generates the widely held opinion among the self-employed that they cannot possibly afford social security contributions, even though their wage-earning colleagues with similar incomes do pay contributions and can therefore afford it. Furthermore, making social security contributions optional for the self-employed cultivates


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a general mentality of informality among the workforce as many wage-earners do not see why they should have to contribute if the self-employed do not, and thus often quite happily work without contracts to avoid paying contributions. A lesson should be learnt from the fact that people who are given a choice about whether to contribute to social security or not (i.e., the self-employed), in their vast majority chose not to do so. These attitudes do not exactly represent a vote of confidence in the social security system. As was mentioned in chapter 4, the private health insurers and the private pension fund administrators generate particularly negative responses. It would therefore be difficult to increase social security coverage without taking measures to improve the system and thus public opinion, as the existing lack of confidence would lead workers to avoid or ignore this legislation. Just changing the legislation and compelling workers to contribute on paper would clearly not make much of a difference. During the presidential election campaign of 2005, Michelle Bachelet presented a comprehensive reform of Chile’s pension system as one of the main priorities of her future government. The matter is likely to constitute her government’s most important item of business, and is also likely to generate the fiercest battle that her government will have to fight with the opposition, a proportion of whose votes are needed to pass any major reform of the system. Any reform proposal that does not specifically aim to increase the confidence of the Chilean labor force in the pension system is likely to fail. As I have discussed elsewhere, it will be impossible to generate such an increased confidence in the system without forcing the pension fund management companies to truly compete by breaking up their oligopolistic hold on the pension system that current regulation generates.3 Any reform proposal also has to consider the current structures and characteristics of employment in Chile (as far as they are known), and the patterns of contributions that these in turn create. Discussing what such a proposal should consist of would be beyond the scope of this book. However, we can point out that some combination of obligations and incentives has to be integrated into the system to increase the willingness of workers to contribute. Health and pension insurance could, for example, be linked, so that workers are only entitled to health services if all of their social security contributions, including their pension contributions, are up-to-date. At the same time, the self-employed may consider making these contributions more willingly if the incentives to contribute to the system were revised. At present, twenty years of contributions are required to guarantee a minimum pension, while no contributions are necessary to become eligible for a pension subsidy worth half the amount of the minimum pension. To many workers, contributing for twenty years therefore seems like a tough condition for which they receive relatively little reward. In addition, there can be no doubt that some form of redistribution within the pension system from the highest to the lowest earners, such as in a Solidarity Fund, would also make the system more attractive to contributors. Another incentive could be to extend the rights to child and family allowances to the self-employed, and link these benefits to their contributions to the social security system. Policymakers should also consider that the self-employed are among the most vulnerable workers in situations of accidents, injury, or permanent disability,

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since they have no employer who is obliged to provide insurance. Forming an overall package that would provide health, pension, unemployment, accident, and disability insurance together with family allowances should therefore constitute an attractive proposition for all but the most informal and low income self-employed, who will always be reliant on the state’s emergency services and benefits. However, it cannot be emphasized enough that any such policy must be accompanied by a public information campaign on a massive scale about the advantages, or indeed necessity, of contributing to such an insurance. In the case of honorario workers, however, it should be relatively more straightforward to integrate them into the social security system (and into any general insurance package such as the one proposed above), since the receipts (boletas) they provide their employers with are passed on to the tax authorities. This means that their work can be tracked and social security payments could become part of the same process as the required tax deductions. Similar issues arise with regard to workers without contracts. Unlike the U.S. Labor Code, where no written contract is required, Chilean employment relationships are based on formal contracts. However, it is assumed that a working relationship exists if both parties agree to an exchange of labor and remuneration, whether verbally or in writing. But in case of a dispute the burden of proof of a working relationship is on the party making the claim, generally the worker. As has been discussed in other chapters, this constitutes such an onerous procedure that few workers actually contemplate such a move. The main problem that arises from the lack of written contracts is that workers do not contribute to a health insurance or pension fund, nor are they protected in any way if they loose their employment. Especially as regards health and pension benefits, this often leaves the state picking up the bill. These informal employment relationships constitute a problem, which is two-sided. On the one hand, employers often do not offer (or refuse to issue) contracts and employees are too afraid to insist. But on the other hand, many employees also quite happily work without contracts as this means that they avoid paying social security contributions and taxes. As we saw in chapter 4, the working conditions of employees without formal written contracts are the most precarious of all. These workers earn the lowest wages, are the most likely to become unemployed, generally do not contribute to any social security arrangements, and often work for small firms, which are run more or less informally, and face a much higher business risk. Yet little public policy focuses on this issue. This problem can only be resolved by distinguishing between those workers who are permanently employed without a contract and earn a wage comparable to what they would earn in the formal sector, and other workers who are temporarily employed without a contract, and who rotate between precarious low income and informal jobs because they cannot find a better alternative. The former category should be treated in the same way as you would the self-employed with regard to social security provisions, that is, the workers should be motivated to contribute through appropriate reforms of the social security system, while employers should be sanctioned for not issuing contracts. The latter


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category, however, can only be helped through a social security network of benefits that would kick in if they face a loss of income or health problem, which means that the state simply has to assume the cost of their lack of insurance. However, the best possible policy measure that would help the most vulnerable workers is to generate more jobs of better quality, a point that we shall return to in section 6 of this chapter. The different treatment of wage-earners and the self-employed by Chilean legislation is problematic not only with regard to the very different social security situations that this leads to, but also because many of the contractual forms that are being increasingly used by employers blur the distinction between dependent and independent employment. As we saw in chapter 4, people who work as honorarios constitute the largest category of employees who muddle this distinction. Are honorarios to be treated as dependent, salaried workers who should have an open-ended contract, or are they to be treated as though they were self-employed, since they are not covered by the Labor Code? Consider Juana, a professional, self-employed accountant who has a client base consisting of several small firms, and who works partly from home and partly from the offices of her clients. She is effectively running her own business and provides her clients with a receipt for the fees she charges (boletas). She manages her own time and the hours that she works (including holidays), does not depend on business from any particular client, and receives no orders from a boss. Now consider Joaquin, also a professional accountant who is hired by a firm, but who is told that the position is honorario-based. Joaquin is offered an open-ended contract, he will be required to work from the firm’s premises (for which the firm charges him a fee to cover office costs), he will take his orders from a particular person, is required to be present during regular office hours, and will be entitled to fifteen days off every year just like everybody else.4 Juana is clearly self-employed, Joaquin is clearly a dependent employee. Yet because the firm has decided that Joaquin is to be paid on an honorario basis, he is legally in the same position that Juana is in, responsible for his own health and social security provisions and without any protection in case his job is terminated, even though he is dependent on one single employer. Joaquin’s situation clearly contravenes the spirit of the Labor Code, which considers all persons who are dependent on and subordinate to an employer as wage-earners.5 And if Joaquin were dismissed, he would have a clear case against his employer in court. But as we have discussed repeatedly, it rarely comes to such legal disputes. There is an obvious case to be made for additional specifications to be added to the Labor Code to clarify these situations. Some types of work are specifically regulated by the Labor Code. This applies to apprentices, agricultural workers, temporary agricultural workers, workers at sea, port workers, domestic employees, and workers in the performing arts.6 This regulation dates back to the 1950s and 1960s when workers in these sectors either required special licenses to exercise their professions or were considered exceptions to standard forms of employment. Today, many more nonstandard forms of employment have emerged, which have not yet been specifically regulated. The Labor Code contains no explicit definition of what exactly constitutes teletrabajo, trabajo a

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domicilio, honorario work or subcontracting. It further does not stipulate the content of fixed-term, project-based, temporary, or other forms of short-term contracts and the specific rights and obligations associated with these. It is merely assumed that except for their duration, these contracts give workers the same rights as open-ended contracts, unless the contrary is explicitly specified. Some of these types of contract are merely referred to indirectly in subclauses of the legislation that are really regulating other issues. For example, the regulation of the ordinary working day mentions in a subclause that teleworkers are excluded from this regulation.7 And subcontracting is referred to in a section that relates to the payment of wages and social security contributions.8 Similarly, the different forms of contracts—whether short-term or open-ended—are not defined explicitly either. The Labor Code’s chapter on the termination of employment merely states that workers with project-based or fixed-term contracts are not entitled to any form of severance pay.9 These definitions of the Labor Code are not specific enough and leave a number of grey areas that are not clearly regulated, and these are being used by employers to circumvent the spirit of the law. Chapter 4, for example, showed that half of the workers with fixed-term contracts had been working with the same employer for more than a year, and the author’s numerous qualitative interviews confirmed that many workers were being hired on an annual basis with fixed-term contracts, which are terminated after eleven months and subsequently renewed one month later. Technically, this is legal as the legislation does not specify that a certain amount of time has to pass between contracts before they are considered equivalent to an openended contract.10 The same goes for the large number of honorario workers who are even given open-ended contracts. The exploitation of these legal loopholes leaves a large number of workers without legal protection and rights. In most cases, these clarifications do not require making the existing regulations more complex or bureaucratic, but simply require making regulation that is implicit in the Labor Code more explicit. For example, just as there are sections in the Labor Code that define the working conditions of port workers or agricultural workers, there should be sections that explicitly define what constitutes each of the types of contract and the circumstances under which these can be applied. Such a series of definitions would also resolve another problem that underlies Chilean labor legislation, namely the implicit assumption that openended formal written contracts underlie most employment relationships. Again, there are historical reasons for this implicit assumption: Since the Chilean Labor Code was modeled on European labor legislation, it also adopted this assumption from Europe’s labor codes. And it is probably fair to also say that this was the dominant form of dependent employment relationships during most of the twentieth century in Chile. The assumption of an open-ended contract is most evident in the regulations pertaining to job security, which relates the worker’s tenure to the severance pay to which a worker is entitled. (As is explained in chapter 3, Chilean workers have the right to receive one month’s wage per year of tenure, if they are made redundant for


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reasons not attributable to their own conduct). This assumption, in fact, also constitutes the logic on which Chile’s new unemployment insurance is based, as it relates the benefits workers can expect to the tenure of their former job. And despite the introduction of this unemployment insurance system, this basic entitlement to severance pay still constitutes a worker’s main benefit upon loosing a job, as the severance pay the worker should theoretically receive is likely to exceed any potential unemployment insurance benefit, especially for workers with longer tenures.11 This means that workers with atypical contracts not only face more employment and income insecurity because of the nature of their contracts (which by definition are likely to lead to spells of unemployment), but it also means that they face a very much reduced entitlement to any benefits from the unemployment insurance system, thus leaving them doubly unprotected in situations of unemployment. This arrangement, on the other hand, means that employers can hire a short-term employee without having to take on the risks of potential severance costs, but are not required to pay a premium for this privilege by, for example, having to deposit an equivalent amount as contributions to the worker’s unemployment insurance account. Bearing in mind that most workers with atypical contracts are not paid higher wages to compensate for this insecurity, this means that they have to assume all the risks and costs in such an employment relationship. From a perspective of protecting a worker’s capabilities in circumstances of unemployment, the logic behind such an arrangement is perverse. But the assumption of an open-ended contract is also evident in some of the more detailed legislation of the Labor Code, which also assumes that whatever applies to the conditions of an open-ended contract also applies to all other forms of work, unless the contrary is specifically stated. Theoretically, for example, workers with short-term contracts are subject to the same working week legislation and have the same rights to holidays, aguinaldos (the thirteenth wage in Chile), bonuses, and other benefits that workers with open-ended contracts have. But in practice, while their working week may look similar to that of openended contract workers, they rarely receive the bonuses that they are entitled to, and they are also unlikely to be entitled to paid holidays.12 The assumption of the open-ended contract prompts two observations: the first is that, as we saw in chapter 4, only 42 percent of the Chilean workforce now have indefinite contracts. And second, we also see that 23 percent work without any type of formal written contract (including the numerous honorario workers). The first observation should lead to the conclusion that much more political attention should be paid to the other 58 percent of the workforce that does not have open-ended contracts, something which is not currently being done, as much of the political discourse and labor reform agenda is focused on details that only affect a minority of workers (not even the 42 percent with open-ended contracts, but the 11 percent who are members of unions). But it should also lead to the conclusion that the parts of the Labor Code or other legislation that are relevant for this 58 percent of the workforce should be reviewed in more detail.

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2.2. Deregulation: Partial Reform and Flexibility at the Margins The implicit assumptions of the Chilean Labor Code that most employment relationships are open-ended, and that workers who are made redundant are entitled to severance pay based on their tenure, leads us to one of the most important recurring themes with regard to Latin American labor legislation, namely the extent to which employment relationships should be made more flexible, or put differently, the extent to which they should be deregulated further. As discussed in the course of this book, the Washington-based international development institutions are currently pressing for more deregulation, arguing that Latin American labor market structures, in particular those relating to wages and job security, are too rigid and are thus preventing the generation of more employment. Chilean employers fervently second this view. The Chilean labor market has undergone three distinct processes that have resulted in its flexibilization and present structure: deregulation of legislation, noncompliance with legislation, and a reinterpretation of legislation. The first process, deregulation, refers to the regulatory reforms that were formally initiated in 1979 (extensively described in chapter 3). The second process, noncompliance, consists of circumventing or simply ignoring existing legislation as Chilean authorities have little hope of rigorously enforcing legislation. This effectively leads to a process of informalization of the formal economy, the most important manifestation of which is the large number of persons employed without written contracts, as chapter 4 demonstrated. This type of employment relationship has always existed, although the proportions of workers without formal contracts has probably increased over the last decades. The third process, reinterpretation, is subtler and less obvious: it results from changes in how labor legislation is interpreted and applied in practice. Of the three flexibilization processes that the Chilean labor market has undergone, this last one is probably the least evident and thus requires some further explanation. The possibility of contracting workers based on the duration of a particular project or on a short-term basis has always existed in Chile. Labor legislation has not changed significantly to encourage such forms of contract. Yet we know from the existing data that a far larger proportion of the workforce now works under the so-called atypical conditions today than ten or fifteen years ago. 13 So what has happened is simply that over time employers have made different use of existing legislation, by, for example, hiring more people on a short-term basis. We saw how dramatic such a process of change can be in the tables on employment generation and the transition matrices in chapter 5. Subcontracted jobs, work from home, and honorario jobs are also examples of flexible employment relationships that appear to have increased in recent years, although not as a result of any specific legislative changes. The combination of noncompliance with legislation and reinterpretation of the law constitute a process of flexibilization that must in large part be attributed to the desire of Chilean employers to avoid severance pay obligations and other regulatory requirements, especially those related to union legislation. As was


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discussed in chapter 3, there are historical reasons why the Chilean Labor Code incorporated severance pay: first because the code is modeled on European labor legislation, which generally mandates some form of compensation payment if workers are made redundant (although not to the same extent that severance pay is mandated in most Latin American countries), and second because until recently, Chile did not have a functioning unemployment insurance, so the mandated severance pay, as in most Latin American countries, doubled as a substitute unemployment insurance. The process of flexibilization just described prompts several questions: first, can employers be induced to comply with labor legislation, in particular to hire workers on a formal basis with written contracts? Second, will the use of atypical contracts continue to increase, and is it desirable that it should? Third, does severance pay legislation still constitute the best form of ensuring job security for workers and of providing them with income in case of unemployment? The answer to the first question depends largely on the answers to the second and third questions, so we will begin by discussing these first. As regards the use of atypical contracts, it is impossible to estimate to what extent they will be used more frequently, especially since we do not have data that precedes 1996. The economic crisis of 1998–1999 seems to have increased the proportion of atypical contracts, and this percentage has not decreased since then. But we still do not know whether this process will continue, or whether it will stabilize. Any future economic crisis is likely to impact the use of atypical contracts. In many European countries, labor markets seem to have settled into a relatively stable division between permanent and temporary employment relationships. In most countries 10–15 percent of the labor force have atypical contracts, with the exception of Spain, where the proportion reached over 30 percent as a result of legislation specifically encouraging such contracts. In Chile, the percentage of atypical contracts has not yet risen as far as 30 percent, but it certainly appears unlikely to drop below 10 percent again given current regulatory structures. The increased use of atypical contracts in European countries is generally referred to as “flexibility at the margins” in the literature. Traditionally, such contracts could only be used under very particular circumstances in Europe, for example, in order to replace workers who were temporarily on leave or for seasonal work.14 However, many governments made the legislation governing these contracts more flexible as a simple way of introducing a greater degree of flexibility into their labor markets in an attempt to bring down high unemployment rates.15 Politically, this was an expedient strategy as it meant that governments could leave legislation for permanent employment intact and would not have to face tough opposition from unions and their electorate in general over regulatory changes that would reduce the benefits that workers had become accustomed to. By now, several analysts have pointed out the dangers of such a strategy. Using the example of France, Blanchard and Landier argue that such partial deregulation has led to the perverse consequence of unemployment rates having actually increased due to higher job turnover among workers with shortterm contracts. In addition, they show that many workers become “trapped” in a

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cycle of rotating short-term jobs and find it very difficult to make a switch to permanent employment. The authors conclude that the same legislation that was supposed to reduce unemployment levels, especially for young adults and unskilled workers, may have actually harmed these very groups of workers that they were supposed to help.16 The data presented in chapter 4 showed that atypical contracts in Chile are also generally associated with more precarious employment characteristics than open-ended contracts: they are predominantly held by younger workers or workers with lower levels of education, skills, and incomes, although chapter 5 showed that the degree of mobility between different types of contract in Chile is relatively high. But we must say this bearing in mind that the data on employment transitions and mobility in Chile is nowhere near as extensive or complete as it is in Europe. In particular, we cannot make any judgments on whether the use of atypical contracts has decreased the unemployment rate in any way, or whether on the contrary it has increased unemployment due to higher job turnover rates. In addition, we must always consider that in Chile, unlike in Europe, atypical contracts by no means represent the most precarious category of employment, which is constituted by those jobs that are informal, that is, where no written contract has been signed. However, much further research needs to be done before we can understand the exact impact of the increased use of atypical contracts on the Chilean labor market, and more coherent and detailed data will have to be gathered. International data comparisons show that atypical contracts are much more common in countries with restrictive labor legislation for permanent employees than in those where general employment legislation is flexible. In the United States, for instance, only 2 percent of the total contracts were of a short-term duration. Their increased use in Chile shows that employers have effectively taken the flexibilization of labor markets into their own hands, through a process of making different use of the existing employment legislation described above. As in Europe, this has thus led to a situation of partial flexibilization or flexibility at the margins, a situation that is compounded by the increased proportion of jobs that are not based on formal written contracts. If the Chilean government wants to improve the quality of employment that the labor market is currently generating by reducing the proportion of informal or atypical jobs, the only way it could do so is by making such jobs less attractive to employers, to wit by reducing the difference between an atypical contract and an open-ended contract to the point where it is not worth the employers while to use atypical contracts. This brings us to the issue of severance pay and the second question raised above: does it still make sense to use severance pay legislation as a means of ensuring job security for workers and providing them with income in case of unemployment? Apart from union legislation, severance pay has probably been subject to the hottest debates during recent decades as most employers would like to abolish it, arguing that it introduces rigidities into the labor market, burdens them with high costs when they can least afford it, and makes workers unproductive as they feel overly secure in their jobs and thus work less efficiently. Many labor analysts have


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supported these arguments, especially with regard to the rigidities, arguing that the legislation increases or lengthens unemployment, and, more recently, that the legislation prejudices the young and the unskilled.17 These arguments surfaced indirectly after 1999 during the debate of how to financially structure the unemployment insurance, which effectively pays a proportion of the severance pay upfront. Chapter 6 explains that the structure of the Chilean unemployment insurance is based on the idea that workers with open-ended contracts save one quarter of their monthly wage in an individual savings account during each year that they work in a particular job. If they are made redundant for reasons not attributable to their own conduct, they are entitled to additional severance pay equivalent to one month’s wage per year of tenure minus the savings they have already accumulated in their individual accounts, with a ceiling of eleven months wages in total. This means that the new unemployment insurance has effectively replaced a quarter of the severance pay to which workers are entitled. This legislation leaves several unresolved problems that have been identified with regard to severance pay legislation in Latin America in general, and in Chile in particular. First, apart from dealing with those workers who receive benefits from the Solidarity Fund (approximately 9 percent as we saw in chapter 6), the unemployment insurance does not resolve the problem that its benefits are linked to a worker’s tenure, which from the point of view of workers constitutes one of the main weaknesses of severance pay systems. Second, it means that the severance pay they are entitled to receive upon becoming unemployed still represents the lump sum of their insurance against unemployment. This is especially problematic if we consider that the overall rates of compliance with severance pay legislation are low. Third, also from the point of view of workers, the fact that severance pay still dominates their unemployment insurance package means that they are left to assume most of the risk of bankruptcies. If an employer goes out of business and simply cannot afford to pay dismissal compensation, then the worker loses out. Fourth, the current stipulations of the unemployment insurance system mean that workers with atypical contracts hardly receive any benefits (only a one-off payment equivalent to a third of a monthly wage), and those workers who never signed a contract and whose employers therefore never contributed to the system are consequently not covered by it. As demonstrated in chapter 6, together these conditions mean that only a small proportion of the unemployed are actually covered by the system. It is further clear that current severance pay regulation prejudices unskilled and low-income workers who are easily replaceable. If employers want to avoid the risk of potential severance pay, they can simply replace unskilled workers before they accumulate significant severance pay rights or alternatively hire them on a short-term basis. Of course, the ultimate alternative is to simply refuse to pay compensation upon dismissing a worker, or at least to pay not the full amount. High skilled workers, on the other hand, are more likely to have firm specific skills and are not as easily replaceable. Thus, employers are more likely to invest in them, and part of this investment will be the accumulation of severance pay entitlements.

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From the point of view of employers, the problems with the structure of the unemployment insurance are different. First of all, it has not significantly reduced layoff costs, as they are still required to pay three quarters of severance pay in a lump sum. This means that employers potentially have to pay large amounts of redundancy compensation in moments of economic difficulty, which is when they can least afford it. As was discussed in chapter 6, many analysts have argued that this leads to inefficient decisions with regard to the hiring and firing of workers. Second, the insurance actually represents a slight increase in wage costs for employers, particular in the cases of workers who are covered by the system and for whom employers have to pay contributions, but who are never made redundant. An increase in labor costs always has to be assumed by employers before they can adjust wages accordingly. And as we have seen throughout the analysis presented in this book, when employers are dissatisfied with labor legislation, they will do their utmost to avoid complying with it, especially in a country where the employment inspectors are not feared half as much as the tax inspectors. As was mentioned above, employers have effectively taken the flexibilization of the labor market into their own hands by hiring an increasing number of workers under a number of different contractual arrangements that do not require them to incur severance pay liabilities, or alternatively by completely avoiding the law through hiring many workers without formal contracts. The Chilean state is fighting a losing battle in terms of trying to enforce labor legislation as it will be a long time before it has the resources to really do its job effectively, which is what brings us to the question of whether severance pay is the best form of protecting workers against unemployment. In a series of articles, Olivier Blanchard has put a lot of thought into how employment protection legislation and unemployment insurance should be designed and combined.18 Since I largely agree with his analysis, this section draws extensively on his arguments. One of the main conclusions that Blanchard comes to in his work is that in view of the empirical evidence and the inefficiencies associated with severance pay systems, both in terms of the unsatisfactory protection that they provide for workers and the hiring and firing decisions that they lead to among employers, developing countries should move from a system based on severance payments to one based on unemployment benefits and layoff taxes as they develop their institutional capacities, since these are much more efficient tools of labor market policy.19 This brings up an interesting point with regard to employment protection legislation in Chile. The unemployment insurance effectively constitutes a new payroll tax for employers, while traditional severance pay legislation constitutes a layoff tax. Blanchard, however, recommends unemployment insurance be financed through layoff rather than payroll taxes, because the latter represent a high additional wage cost for employers while they do not force employers to internalize the cost of dismissing workers. Severance pay legislation in Chile represents the layoff tax that employers face, except that the payments are made to individual workers and not pooled to finance unemployment insurance, which would involve making the payments to the state.


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In the design of Chile’s unemployment insurance, policymakers never considered the possibility of including a component that would relate the payments of employers into the insurance system to the amount of use they make of it when they dismiss workers. Such mechanisms are common in other countries, most notably in the United States, where companies that frequently cause redundancies also have to pay higher unemployment insurance premiums. Such a layoff tax could also be applied to workers with atypical contracts in order to increase the amount of insurance pay that these workers receive when they become unemployed, and in order to make sure that workers are only hired on a short-term basis in situations that justify the use of such contracts and not as a circumvention of labor legislation. This would reduce the attractiveness of atypical contracts relative to open-ended ones, and would ensure that they are not used excessively. There are good arguments for maintaining at least a residual severance pay component in employment protection legislation, especially in the case of older and more senior workers, for whom it is generally more difficult to find new employment and for whom the psychological cost of the loss of employment is therefore greater.20 A residual severance pay component should also be maintained simply to discourage unnecessary churning. However, to avoid imposing additional costs (however residual) on employers during times of economic crisis, employers could be given the option of obtaining a loan to pay for the severance pay from the state, which could then recoup the costs at a later stage through increased taxes, hopefully when the company’s business situation has improved. This would also have the advantage of shifting the risk of losing out on severance pay through bankruptcies away from workers by creating a pooled fund run by the state. First of all, this would eliminate or at least significantly reduce the risk for workers of employers refusing to pay full severance compensation, and second, it would allow the state to implement a pre-financing mechanism that would alleviate the burden that these payments represent for employers in times of economic crisis, which is one of the main complaints that Chilean employers put forward about severance pay. In view of the problems associated with both the use of atypical contracts and the severance pay system, it would therefore make more sense to try to accommodate the wishes of employers for more contractual flexibility in exchange for a proper unemployment insurance scheme that would really protect workers. This would hopefully also reduce the need for atypical contracts, and prevent their use as a mechanism to dodge standard labor legislation. The current structure of the Chilean unemployment insurance essentially leaves the question of what to do about severance pay fairly open, as only a quarter of the severance pay due has now been converted into an upfront payment, which means that the amounts that workers accumulate in their individual savings accounts is rather paltry. It is also clear that the unemployment insurance system as it stands represents but a first step toward insurance as opposed to severance pay. As most Chilean officials and ministers who have worked on the insurance will admit off-the-record, it is clear that the benefits of the system

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must be extended. This means that Chile could go down the route of increasing the contributions that employers make to the unemployment insurance and decreasing the amount that they would have to pay as severance pay to the point of substituting most severance pay with insurance contributions. There would be three main advantages to such a substitution: first it would mean that workers would actually accumulate greater amounts in their individual savings accounts that would be much more useful in situations of unemployment, second, this would mean that employers actually paid the equivalent of the severance pay due (which if we remember from previous discussions in this book, they often avoid doing at present), and third it would allow for a more extensive financing of the Solidarity Fund, which could be increased or extended for example to include payments to unemployed workers with atypical contracts. However, the drawback of any such scheme would be that it increases the labor cost of employers (at least temporarily until wages have adjusted for the increased cost) and may thus result in reduced employment generation. It is important to recognize that the role of the Solidarity Fund in the Chilean unemployment insurance must be expanded over time, especially in terms of making benefits available to workers who did not have open-ended contracts. Michelle Bachelet’s campaign program recognizes this need, and it is likely that her government will propose a reform to this end. However, Blanchard argues that self-insurance for unemployment is not an option that will work. The model of a private pension system cannot simply be transferred to a situation of unemployment, as retirement and unemployment are two very different events that occur under very different circumstances. The former generally occurs later on in a worker’s life, when savings have already been accumulated. The latter occurs earlier, generally when workers have not had a chance to accumulate enough savings. Furthermore, retirement is a predictable event, while unemployment generally is not.21 One of the main reasons why Chilean policymakers did not consider implementing a traditional unemployment insurance system was the widespread perception that such systems in Europe have led to higher levels and longer durations of unemployment. This idea, however, is a fallacy. As Blanchard points out, the countries that have successfully lowered their unemployment rates in the European Union, did not really change their institutional arrangements. In fact, two of the countries that most successfully lowered their unemployment rates (the Netherlands and Sweden have among the most generous benefits of them all. “They have eliminated excesses [in terms of their benefits], but continue to offer high levels of social protection, even relative to the European average.”22 A similar point can be made with regard to the U.K. and Ireland. Conversely, other countries that have reduced unemployment benefits, eliminating some of the excesses that Blanchard points out (e.g., Germany and France), have not been able to reduce their unemployment rates significantly. More than anything, the evidence from Europe suggests that the unemployment rate is linked much more to economic dynamics than to benefit levels, a point we shall return to in section 6 of this chapter.


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Since there is a big difference between the current contributions that employers pay into the unemployment insurance and paying the equivalent of the total amount of severance pay due to workers, this leaves a big margin for negotiation. But it is likely that any such negotiation would lead to an outcome that is preferable to the current one in which severance pay is mandated, widely resisted by employers and therefore frequently not paid in full, or avoided through contractual arrangements, such as atypical contracts on the one hand, that shift business risk primarily onto workers who regularly have to face unemployment without insurance to protect their capabilities, or onto the state on the other, which has to pick up the bill if workers require emergency services or do not accumulate a pension. From the point of view of the government’s negotiating position in any attempt to shift from severance pay legislation toward unemployment insurance, it is actually an advantage that current severance pay legislation does not work. It means that you can offer workers a better alternative. This is a very different position from that of many European governments, which have to make labor legislation more flexible by reducing job security provisions that serve employed workers well. There is a powerful argument to be made for replacing the existing severance pay legislation with something that actually gets paid. One of the reasons why it would be a good idea to increase the contributions to the unemployment insurance system in exchange for lowering entitlements to severance pay is that the unemployment insurance contributions are paid at the same time and through the same mechanism as social security contributions.23 And while a proportion of these contributions is not paid on time or not at all, the compliance with this legislation is still much higher than the compliance with severance pay. In short, there are many additional policy alternatives that the Chilean government could contemplate that should make current job security regulation both more efficient in terms of the functioning of the labor market, more effective in terms of protecting workers and their capabilities, while constituting a less onerous burden on employers. Since Chile has the institutional capacity to run an unemployment insurance system, a more significant move toward unemployment insurance instead of severance pay would indeed be feasible. However, if the available benefits from unemployment insurance are to be increased in the long term, this also means that Chile has to develop a greater capacity to monitor the job search behavior of the unemployed. This brings us to the next issue that this chapter will consider: institutional capacity and structures. 3. Institutional Capacity and Political Priorities The Chilean labor market depends on a complex network of institutions, which administrate a wide variety of services ranging from the provision of social security and welfare benefits to the enforcement of labor legislation with an associated network of labor courts to the private companies that insure Chilean firms against the work related accidents or illnesses of their employees and run a number of clinics across the country. Needless to say, the more closely these

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institutions work together, the more smoothly the labor market will operate, and the better it will be able to generate capabilities for its workers. In chapters 6 and 7, this book referred to the inadequacies of local labor market institutions, which in Chile consist principally of municipal employment agencies, the OMILs. While the aforementioned chapters discussed the problems of these institutions with regard to the specific concerns of unemployment insurance and vocational training, this section will look at broader concerns relating to how national and local institutions relate to each other. The local OMILs suffer from a double neglect: they are neglected by policymakers at a national level, as well as by those at a local level. Local municipalities in Chile are the executors of national government programs, and especially of national social policies, for which they receive funding from the national budget. They are the first port of call for poor people who recur to official sources for help. Thus, a family that has no medical insurance will recur to the municipal administration in order to obtain the necessary certificate that will give it access to free medical services. Similarly, local municipalities administer housing policies, food subsidies, pension allowances, and as we have seen also some components of the unemployment insurance, among many other services. Apart from the federal monies they receive to run these programs, municipalities also raise their own funds through taxes imposed mainly on local businesses. The more businesses are located in a municipality, the richer it is likely to be. The classic example of a rich municipal administration is Las Condes, one of the wealthiest areas of Santiago, which provides its poorer inhabitants with excellent services and allowed its former mayor, Joaquín Lavín, to gather much popular support with the policies and programs he implemented with the municipality’s spare cash (including additional security services to supplement the capacities of the local police force). The financial resources of Las Condes go far also because the municipality has comparatively few poor families to look after. Poorer municipalities, however, have fewer available funds and a much higher proportion of poor families that require services. Federal budget allocations only partially make up for these differences and there is also very little redistribution of funds from richer to poorer municipalities. The very same Joaquín Lavín, for example, as mayor of the less wealthy municipality of central Santiago, did much less well in terms of the success of his administration in this middle income municipality. Overall, this means that the funding of poorer municipalities for the social services they are supposed to provide is permanently overstretched. For example, people who are indigent and over the age of 65 theoretically have the right to receive a basic pension, a Pension Asistencial (PASIS), as they are known.24 The amount is minimal, only enough to push a person over the line of indigence, not enough to push them above the poverty line. Even so, most municipalities have a long waiting list for elderly people who have applied for such a pension.25 “No hay cupo,” meaning that the available quota of a particular benefit has already been allocated and that there is a waiting list of applicants for this benefit, is one of the most frequently heard phrases around the offices of middle and lower income municipal administrations.


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Since the mayors of these municipalities generally find their resources hopelessly overtaxed by the most basic needs of their constituents, funding is allocated according to the most urgent needs and the priorities determined by each mayor. This leaves very little time, energy and least of all money for services that are not regarded as absolutely essential, such as employment services. It is therefore not difficult to imagine that employment services are placed near the bottom of a mayor’s list of priorities, while there is insufficient funding for more basic services. This creates a vicious circle: the OMILs are neglected by local and national policymakers, therefore the offices are poorly equipped, understaffed and cannot function properly, therefore they acquire a bad reputation for being useless and are consequently not sought out by either employers or workers, which in turn leads to their political neglect again. Assigning them the task of paying out unemployment insurance and of administering employment programs such as Chile Joven, has been an important step in raising their profile both at a local and a national level. However, they are still a long way away from being considered as functioning labor market intermediation services. As one senior Labor Ministry official commented to me, the institutional links are all there on paper, but they do not work in practice. And the main reason for this is that they lack funding. Such funding could only come from the national budget, which would have to assign employment intermediation services a much higher priority. This point leads us to the institutions at the top of the hierarchy through which indirectly many of these services are run. First of all, the practical role of the Ministry of Labor is not that of a policymaking institution, but that of an executor of policies that often emerge from the Finance Ministry or the Secretariat of the Presidency. This means that the ministry which supposedly has the most technical expertise and information on the labor market, as well as links to employers’ organizations and unions, really only has a minor role in the process of policymaking. Since René Cortázar, who was Labor Minister from 1990–1994, Chile has not had a powerful Minister of Labor with the ability to formulate policies.26 The distinct hierarchy between government ministries in Chile, among which the Finance Ministry rules supreme, and the resulting rivalries and overlapping competencies between them can make the process of policymaking complex and sluggish, with every ministry defending its turf rather than working as part of a unified whole. In particular, this means that the Labor Ministry is not very effective at pushing through employment policies and reforms. It partially explains why Chile took so long to implement an unemployment insurance system, why a fundamental pension reform is only now being officially contemplated, why there will be no comprehensive employment survey before 2007, or why each labor reform has taken so painfully long to negotiate. The only area of employment policy in which policy responses have been much speedier is that of the emergency employment programs as the unemployment rate rose above levels that were politically damaging to the government. The responsiveness of the Chilean Ministry of Labor to employment problems contrasts sharply with those of

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other countries that have had to encounter the effects of economic crisis, in particular with the Korean case, which will be discussed in more detail below. Related to these issues is the Labor Ministry’s extremely limited budget for research and staff. In fact, it has no research department to speak of. Labor market studies are often financed by international organizations and outsourced. The most extensive research units attached to the Ministry of Labor are the research departments of the Labor Office and of the agency that supervises the pension fund administrators (SAPF). The former must be credited for having undertaken a number of studies on specific labor issues that are relevant to its field, while the latter has finally brought together the individual databases of the pension fund administrators (although the data has not been released as yet), as well as running two comprehensive surveys on the employment histories of the Chilean workforce.27 The Ministry’s own lack of resources for research partly explains why in 15 years of almost continuous debate about labor reform, not one comprehensive study was undertaken of the issues at stake, in order to assess the impact of previous reforms and the potential impact of further reforms. The neglect of labor policy as a political concern, the neglect of the institutions linked with employment policy and the limited budget available for research are reflected by the general lack of fiscal resources allocated to employment policies. In the Latin American region, fiscal expenditure on employment policies is generally very low, but Chile’s is the lowest of them all. OECD countries, for example, spend an average of 2.06 percent of their budget on labor market programs (with a range from 4.85 percent in Finland to 0.43 percent in the United States), while the Latin American expenditure ranges from 0.94 percent in Jamaica to 0.03 percent in Chile.28 These figures combine expenditures on unemployment compensation, employment generation and training for the unemployed. The fact that Chile comes in at the bottom of the range of labor market expenditure in Latin America is indicative of the attitudes of its governments toward employment issues, which are not considered a priority, unless high unemployment levels cause political problems. In addition, the labor market in Chile, as has been mentioned throughout this book, is considered as the preserve of free markets and thus generally treated as a fallout of economic policies. Together, these factors mean that the capabilities employment potentially generates are also largely considered to be the outcome of free market mechanisms, and that employment policy on the whole is very much neglected in Chile. The attitudes of Chilean policymakers with regard to employment policies differ strikingly from those in many other countries. One especially good contrasting example is South Korea, which was also hit by an economic crisis in 1997/8, and which has a labor market that is similarly structured to the Chilean one in terms of its contractual composition. Unlike Chile, the South Korean government responded very rapidly and comprehensively to the resulting increase of unemployment. A little background information is required, however, to illustrate this point. Like Chile, Korea experienced an economic crisis in 1998, which led to a sharp increase in its unemployment rate, from 2.6 percent in 1997 to 8.4 percent


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in early 1999. As in Chile, many Korean workers do not have permanent contracts. Also, as in Chile, the economic crisis in Korea not only provoked an abrupt increase in the unemployment rate, but also a significant drop in the overall proportion of permanent contracts which fell from 53 percent in 1998 to 47 percent in 2000. However, unlike Chile the Korean labor market recovered much more quickly, at least in terms of its unemployment rate, which dropped to an average of 4.1 percent in 2000. Korea’s unemployment insurance was introduced in 1995 and was instituted as part of an employment insurance scheme that consists of three components: an employment stabilization program, an unemployment insurance, and a vocational training scheme.29 The employment stabilization component is designed to help employers restructure their businesses when the need arises and is intended to help prevent unemployment. Its purpose is to ensure that all other possible measures are taken to increase a company’s productivity before firing workers. The vocational training component of this scheme, for example, helps retrain workers in situations of economic change, but also offers training to unemployed workers. All three of these components are integrated in one single institutional structure so that companies can work with all three branches of the institution in a relatively fluid process. However, when the economic crisis hit Korea in 1998, the coverage of this employment insurance system was still low as it had only recently been introduced. The government therefore responded very rapidly to the changing economic conditions, expanding both the system’s coverage and its level of benefits only two months after the crisis began, and regularly thereafter as the need arose.30 In particular, it extended the system’s coverage to temporary workers while emergency employment programs were created to help those workers not covered by the system. These policies were accompanied by a corresponding increase in budgetary resources devoted to employment measures, which reached 2 percent of the national budget in 1999. The rapid and comprehensive reaction to the employment crisis of the Korean government contrasts sharply with that of the Chilean government. In Korea, the prime minister chaired the committee on reducing unemployment, which illustrates how seriously they took the matter. Unlike Chile, which finally managed to institute its unemployment insurance two years after the employment crisis began, they responded to the crisis by increasing the coverage of their unemployment insurance within two months. The budgetary resources dedicated to employment policies were also much higher in Korea than in Chile. Furthermore, the very structure of the employment insurance in Korea illustrates its different purpose and the political attitudes that lie behind its design. The emphasis on employment security and human capital is particularly striking, as is the very sensible fact that unemployment insurance and vocational training are integrated within one single institution. To an analyst of the Chilean labor market, the discussion of the Korean employment insurance by local experts (including government officials) is also refreshingly frank, critical, and uncluttered by economic doctrine. Korean documents discussing the insurance dwell on the human cost of unemployment,

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in particular on the welfare of workers and their families. There is no discussion, however, of the moral hazard or perverse incentives that an unemployment insurance system can generate, which are two favorite topics of Chilean analysts. Korean analysts are still very critical of the insurance as its coverage has not yet reached 100 percent of the unemployed to date. Comments such as “at present, the social safety net consists of more holes than net” form a striking contrast to those of Chilean analysts who completely fail to acknowledge the fact that their unemployment insurance covers only a very small proportion of the unemployed.31 Unlike Chile, Korean analysts clearly state the exact proportion of the unemployed who are covered by the system and data on the unemployed is readily available. Not gathering and not providing accurate information, as we will see in the following section, is a policy in itself.

4. Information Policy One of the ways in which the neglect of employment policy shows itself is in the information policy that recent Chilean governments have pursued with regard to the labor market. Throughout this book I have emphasized the importance of accurate information and data. In every chapter that has presented empirical evidence, we have come across the limitations of Chile’s sources of information on the labor market. These limitations basically break down into two different categories: the first is the inadequacy of the existing employment surveys, and the second is the lack of data that is gathered by institutions who deal with specific groups within the labor market. With regard to the problems with survey information, we have to highlight the inadequacy of Chile’s main employment survey, the Encuesta Nacional de Empleo. As has been repeatedly pointed out in the preceding chapters, this survey only generates data on the most basic labor market variables and simply ignores some of the most important characteristics of employment, such as whether workers have contracts, their types of contract and social security contributions. An important opportunity has been missed for capturing the changes that the Chilean labor market has undergone during the last decade by failing to redesign this survey sooner. However, as was mentioned in chapter 4, a new employment survey is finally to be launched in 2006 by the National Institute of Statistics. Since the survey’s questionnaire is not yet available, there is no point in speculating as to its potential usefulness. From what the institution’s officials have told me, the new survey will capture the most important characteristics of employment as well as some information on the employment history of workers, thus allowing us to monitor not only the unemployment rate, but also the quality of employment and employment mobility. It must be emphasized, however, that obtaining such information makes it absolutely indispensable that workers are interviewed directly rather than through proxies, as other household members are unlikely to be aware of the detailed characteristics of each other’s employment situations.


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In view of the limitations of the main employment survey, Chilean policymakers have to rely on additional information from the main household survey, the CASEN, and from other surveys that are carried out on an ad hoc basis, and which frequently generate historical data based on the recollection of information rather than on the generation of time series or panel data. Not only are these surveys inconsistent in terms of the formulation of their questions over time, but even more importantly, they are not undertaken with the kind of regularity required to analyze the responses of the labor market to changes in the economy. Furthermore, they are frequently subject to budget cuts, and you never know when or whether the next one will be carried out. While it is too late to lament the questions that were not asked in the past, it is nevertheless not too late to emphasize that the consistency of the CASEN survey questionnaires should be improved, so that data can be compared from one year to another. Even when a new national employment survey is instituted, this will not eliminate the need for a good household survey, which allows analysts to relate employment information to other data on households, their income levels and the fulfillment of their basic needs. The second main improvement that should be undertaken with regard to the sources of information on the labor market concerns the data that could and should be gathered by the numerous institutions, which operate in the Chilean labor market. One such effort is already underway in that the supervisory body of the pension system has finally begun to consolidate the individual data bases from each pension fund manager, so that the movements of individuals in the labor market can be tracked with greater accuracy. The advantage of such sources of information is that they provide real data as opposed to survey data that can only ever provide estimates. However, in order to really make the most of such data sources, workers should be required to provide additional data, for example on the composition of their households and their educational level. Workers who switch from one pension fund to another should be required to fill out a certain set of standard forms requesting such information. This would also allow public institutions to track the movements of workers between the formal and informal sectors by asking them questions about their activities in periods during which they were not contributing to the pension system. Another such an opportunity is lost with regard to the information that claimants of unemployment insurance have to provide. The unemployed are not requested to provide any information on the circumstances of their job loss, nor on their employment histories, or any personal information (household composition and level of education, for example). In particular, the compliance with severance pay legislation could be assessed through such a questionnaire, provided it was administered anonymously. A similar point goes for participants in government-sponsored employment or vocational training programs, as well as for beneficiaries of welfare benefits from municipal sources. This represents another argument for why the institutional linkages between different actors in the labor market, such as employment agencies, vocational training institutions and other municipal offices that

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are in charge of the practical details of the administration of social services, which were discussed in the previous section, should be strengthened. The diversity of institutions and of the services that they administer represents a unique opportunity to gather data on the various labor market concerns discussed in the course of this book. This is an opportunity that should be taken advantage of. 5. Labor Relations So far we have examined what could be done to improve the functioning of the Chilean labor market in terms of legislative changes, institutional changes, increased vocational training, and information policies. As we have seen, in every case, legislative changes can only go so far. Government attempts, for example, to induce employers and unions to coordinate vocational training through the Comités Bipartitos have failed. No legislation can oblige employers and workers to cooperate if it cannot be rigorously enforced. If, for example, governments introduce job security legislation that employers disagree with, then the latter will find a way around it. The widespread use of honorario contracts, the employment of workers without contracts, and the significant increase in atypical contracts are examples of how employers are circumventing the legislation they wish to avoid. As for avoiding the legal stipulations with regard to the formation of unions, we can only speculate as to the extent of noncompliance with this legislation. To what degree, for example, do Chilean employers use atypical contracts in order to avoid the unionization of their workers? How many companies are split into small administrative units on paper, so that each unit is too small to form a union legally? These practices are common especially among small and medium sized firms, but we do not know the extent of these problems. As we saw in chapter 3, the animosity between employers and unions largely paralyses the process of policymaking, leads to ineffective reforms, and to such compromise legislation as the unemployment scheme described in chapter 6. Many studies have shown that those economies have progressed the most that have integrated labor relations based on common objectives.32 Whatever is to be undertaken in Chile in terms of its labor policy, better labor relations would be desirable. And this requires that both unions and employers change their attitudes toward each other, especially at the level of official discourse. It means that unions have to accept the logic of free markets, and that employers have to understand that their competitiveness and business prospects may actually improve if they allow unions to form and use them as a regular channel of communication and cooperation with workers. While individual companies and unions may have very good relationships, employers generally view unions with distrust and suspicion, fearing that they may disrupt their business activities and prospects. And workers, on the other hand, have repeatedly expressed their view that employers are exploitative and only interested in their own profits, as we saw in the surveys cited in chapter 3. That the relationship between employers and unions can be mutually beneficial, enhancing both productivity and the


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standard of living of workers, is not an idea that forms part of the official discourse of either party. The bad news is, as Blanchard and Philippon (2004) have pointed out, that labor relations are slow and difficult to change, as they are so deeply rooted in historical and cultural traditions. But the good news is that there are many examples of very effective changes in labor relations, which have brought about significant and quick measurable results. Perhaps one of the best examples of the transformation of labor relations comes from an unexpected source: Las Vegas. In the 1980s, the hotel and casino business in Las Vegas was severely disrupted by strikes and poorly managed labor relations. This not only temporarily disrupted the city’s economic development, but, as a more lasting consequence, it also decimated the city’s main union, Local 226, as many employers forced their workers to disassociate themselves from the union. By 1989, however, the union had reorganized and reinvented itself. It signed an agreement with one of the entertainment industry’s biggest tycoons, Steve Wynn, to scrap obsolete work rules in exchange for union recognition. As part of its massive reorganization, the union negotiated the establishment of the Culinary Training Academy, which is financed entirely by employers to train existing and prospective union members in the skills required to serve the entertainment industry in Las Vegas. Its curriculum is jointly developed by management and workers, and covers areas as diverse as bedmaking, customer service, wine serving and English classes (many of the union’s members are undocumented Central American immigrants who arrived without much knowledge of the language). Courses are free and all graduates from the academies are certified in their skills. Employers often hire entire classes of graduates. The academy not only allows the rapidly growing businesses to quickly bring new employees up to speed in required skills, it also allows existing employees to move up the ranks quickly, for instance from dish washers to sommeliers in a matter of a few years. 2,500 workers are enrolled in the academy in any given year. Through its national networks, the union also helps employers attract workers to Las Vegas, which since the early 1990s is growing so rapidly that the city is having to build one new school every month. Waddoups examines the case of Las Vegas in comparison with that of Reno, a city with a very similar business structure, but where no unions have operated in almost three decades.33 He concludes that workers in Las Vegas enjoy much higher employment mobility, benefit from better health insurance and pension plans, and earn approximately 40 percent more than their counterparts in nonunionized Reno. He also concludes that the opportunities offered by the union’s training programs have done much to narrow the disparity between the standards of living of Anglo-American and Hispanic union members, a positive externality which is not apparent among workers of other highly unionized economic sectors in Las Vegas, such as the equally booming construction industry. While Las Vegas is booming, Reno, although also growing, is stagnating by comparison. Good labor relations and a first class vocational training system have contributed much to the economic success of Las Vegas, and the changes in

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the workers’ standard of living is an especially positive conclusion from the point of view of the capability approach. The case of Las Vegas serves as an example to unions the world over, but especially to unions and employers in a country such as Chile, which on a practical level is beginning to implement similar changes (for example, through its new certification system mediated by the Fundación Chile), but which at the level of official discourse still acts as though strong unions and successful business growth were two incompatible objectives. Chilean governments cannot legislate changes such as those described in the case of Las Vegas, but they can act as facilitators. Most importantly, they can provide better information on the subject of labor relations and educate especially smaller and medium sized firms about the benefits of forming and cooperating with unions. This is also an area where international cooperation can be very useful. It most certainly would be beneficial for Chilean unions and employers to meet their counterparts in other countries where changes in labor relations have been achieved. The key to achieving any change in Chile is to make both employers and unions understand that greater cooperation brings greater economic benefits for all parties. The Acuerdos Marco discussed in chapter 3 were a first attempt after the dictatorship came to an end to bring about a rapprochement between unions and employers in Chile. Since then a succession of democratic governments have proven that they have not run the economy into the ground, and that they have not paralyzed economic growth by handing the country over to militant unions. The next generation of governments should build on the economic credibility established by their predecessors and focus on setting up a new range of agreements that aim at bringing employers and unions closer together. Establishing a new legislative agenda that moves away from traditional union and employer demands toward concerns of productivity and competitiveness would be one way forward. Vocational training, the certification of skills, the participation of workers in profits, the functional flexibility of workers and how this can be achieved should figure prominently on such an agenda, as should the cooperation with international counterparts and agencies which could help with training the various social actors concerned. Issues related to the mentality and culture of employers and workers are very difficult to quantify and pin down in any exact way, and establishing international comparisons is even more difficult. It is my impression that labor relations in Chile are much more hostile, both at an official level as well as at the level of individual companies, than in other countries of the region, and much more so than in developed countries. But this comment is based on purely anecdotal evidence. This is why most labor analysts avoid these topics. However, labor relations are probably the most important factor in all of the analysis that this book has so far presented. If atypical contracts or honorario workers have increased in Chile, or if employers refuse to give workers formal written contracts, how much of these practices are due to real economic necessity, and how much is really the result of a culture of suspicion and distrust between employers and workers?


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Speaking in general terms, the attitude that Chilean (and even more generally, Latin American) business elites take toward human resources is very similar to the attitude they take toward their country’s natural resources. It is an attitude of exploitation rather than investment.34 As far as natural resources go, this attitude is reflected by a tendency to extract a natural resource and export it without much value added, and in the case of human resources, this attitude consists of a tendency to employ workers based on their existing level of skills rather than on their potential. In both cases, this attitude reflects an unwillingness to invest in productive capacity while easy gains can be made without such investment. In the case of human resources, this generally means that the skills of workers may be updated periodically so that the company remains competitive, but are unlikely to be upgraded to the extent that they allow a worker to perform a significantly more complex function within the company (with the possible exception of professional workers, who are highly skilled to start with). Such attitudes are culturally ingrained and have developed over decades, if not centuries. And they can only be confronted by raising the awareness and increasing the recognition of these attitudes. Michelle Bachelet’s program for government speaks of generating a broad national agreement (“Acuerdo Nacional”) in order to generate more part-time and youth employment. It would be wise to include issues of vocational training, labor relations and the social responsibilities of employers in such an agreement, too. Furthermore, the culture of natural resource exploitation should also be confronted, as such a culture very much limits the rate of employment generation in any developing country, as the following section will discuss. 6. Toward a Pro-Employment Development Strategy For people whose livelihood depends on their own ability to generate income through work, having a job is clearly essential. But the example of Sonia and Germán clearly shows that a job is not always enough. Unstable, short-term jobs generally end in unemployment, which in the absence of adequate social security, forces people to work informally until they can find better work, if they can find better work. Low-income jobs may not pay enough for families to maintain themselves above the poverty line even if one or more household members are permanently employed. And long-term informal jobs with low income inevitably lead to a lack of savings that leaves workers unable to support themselves when they are older. All of these statements are obvious. But if they are so obvious, why do policymakers ignore the issue of low quality employment in the belief that as long as the unemployment rate is low enough, they do not need to be overly concerned with employment issues? The answer to this question lies in the faith that policymakers put into the ability of economic growth to generate enough jobs and individual wealth to solve these problems, and in particular to lift people out of poverty. In Chile, this faith is especially evident. Almost every government document or official speech begins with a review of how successfully the Concertación has reduced the high poverty rates it inherited in 1990 as a result of economic growth.35

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The Concertación takes justified pride in this fact, especially given the lack of progress that has been made on this issue in other Latin American countries. However, this success has not translated into a corresponding feel-good factor among Chileans who voice their concerns about poverty, equity and employment in every survey.36 These pessimistic responses can partly be attributed to the fact that people such as Sonia and Germán do not feel as though public policy is addressing their problems, while economic growth is benefiting mainly the rich. Much of their discontent is attributable to the insecurity that arises from their employment situations.37 As Stallings and Weller have commented on the economic reforms that were carried out during the 1980s in Latin America: “most of the empirical studies conclude that the reforms had a negative impact on the generation of employment and perhaps also on equity. The data indicate that in the 1990s the growth rate of employment was lower than in the second half of the 1980s; unemployment increased; there was a proliferation of informal sector employment, and the rise in real wages favored above all skilled workers.”38 The empirical evidence suggests that the Chilean labor market adjusts to an economic crisis more through its unemployment rate, and the types of contract that it generates than through wage levels or any shifts between the dependent and independent sectors of the workforce. In this regard it shows a behavior that is rather typical of countries with flexible labor market regulations. Take the United Kingdom for instance: its unemployment rate is highly volatile and shoots up very quickly in situations of economic downturn, while its wage levels tend to be sticky during these downturns, as no large-scale wage cuts can be negotiated with sector wide unions operating in the worst hit economic sectors, as for example in the Netherlands and continental European countries. At the same time, the Chilean economy is not as dynamic as for the example the U.S. or the Korean labor markets, which are also based on very flexible regulation, which means that the Chilean unemployment rate is stickier than the unemployment rates in the United States or Korea. In a sense, this means that Chile combines the worst of both worlds: an unemployment rate that shoots up quickly and an economy that is slow to generate jobs in an upswing. In addition, it suffers from the problems associated with large quantities of informal employment that are typical of labor markets in developing countries. The combination of these factors explains why so many Chilean workers are concerned about their employment situations, and why employment security is a particularly sensitive issue for them. A country can have the best trained labor force in the world, operating in the best possible institutional set up, with legislation that makes everyone happy; but if the generation of employment opportunities is insufficient, then the characteristics of employment will always be precarious and/or the unemployment rate will be high, and workers will feel insecure about their jobs. Latin American countries, including Chile, which have registered a reasonable amount of economic growth since the 1980s have not been very successful in generating jobs at the same rate. While developing countries in Asia have provided incentives for investment in manufacturing activities, which generate


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large numbers of jobs, Latin America continues to be focused on the extraction and export of primary resources with very little value added. Chile, for example, is often cited as a success story a far as the diversification of its range of export products is concerned.39 The country has reduced its dependency on copper by diversifying into so-called “nontraditional exports” that include the production of wine, salmon and other seafood, fruit and also forestry products. However, none of these sectors generate large amounts of employment, or if they do, then the jobs are seasonal and generally of low quality. As we saw in chapter 8, the mining sector, which has experienced high growth in Chile despite the reduction of its overall share of exports, actually generates some of the best jobs, but very few of them. And jobs in the agricultural sector, which generates more employment overall, are of very low quality. With reference to the forestry sector, Palma compares the development strategy of two newly industrialized countries in Asia (Taiwan and Malaysia) with two cases from Latin America (Brazil and Chile). He shows that all four countries had budding forestry sectors in 1963. By 1977, Taiwan and Malaysia were manufacturing predominantly furniture and other products made out of wood, while Chile had hardly developed the sector further and Brazil had begun to manufacture pulp. By 1990, Chile had then developed a wood chip and pulp industry, the second of which expanded further by 2000. Brazil in turn had invested more in the production of sophisticated products (paper, furniture, and other wood products), and even in producing machinery used to manufacture value added wood products. However, Brazil’s expansion into these value added sectors is dwarfed by the expansion of the proportion of manufactured wood products that were achieved by Taiwan and Malaysia, as a proportion of the sector’s exports into OECD markets. Both Taiwan and Malaysia avoided the expansion of their forestry sectors into the production of pulp and paper, and concentrated instead on manufacturing activities.40 Figure 9.1 sums up these developments at a glance. If we now consider what kind of employment is generated in the production process of wood chips, pulp and paper, all of which require significant investment in fixed capital but very little manpower to run the plants, as compared to the production process of furniture, wood processing machinery and other products made of wood, which in turn require significant inputs from skilled labor as well as capital investments, it is not difficult to understand why the Latin American countries that have achieved economic growth have done so without generating enough employment, while developing countries in Asia like Taiwan and Malaysia have achieved growth and at the same time generated a corresponding expansion of employment. Such examples abound in Latin America, while contrasting examples proliferate in Asia. And in many ways these developments make sense as Latin America is much more resource rich than Asia, which is comparatively more densely populated. As a result, Latin America’s growth since the mid 1990s is generally being driven by increased exports of raw materials, especially to China. However, despite Latin America’s relatively lower population density, this strategy does not generate enough quality employment. Only Mexico constitutes a

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Figure 9.1 Chile, Brazil, Taiwan, and Malaysia: changing vertical integration in the processed-timber industry, 1963–2000 w-chip

pulp

paper

w-mf.

furnit.

w-mach.

CHILE: market shares in OECD imports

BRAZIL: market shares in OECD imports

10%

12% 10%

12%

8% 8% 8%

8% 6% 6%

4% 4%

4% 4% 2% 2% 0%

0% 0%

0% 1963

1977

1990

2000

TAIWAN: market shares in OECD imports

13%

10%

1963

1977

1990

2000

MALAYSIA: market shares in OECD imports

10%

3%

3%

8% 6% 6%

2% 2%

4% 4% 2%

1% 1%

2% 0%

0% 0%

0% 1963

1977

1990

2000

1963

1977

1990

2000

Source: Palma (2004). His paper shows similar graphs for the vertical integration of the iron and steel manufacturing industries.

genuine exception to this rule as the country’s economy is by now firmly linked to the U.S. economy, which has allowed it to build up a labor intensive assembly driven manufacturing industry.41 Other Latin America cases that have attempted to diversify their exports into non raw-material-based products include Brazil, which has as broader manufacturing base than many other Latin American countries (with production in the automotive and aviation sectors, for example).42 But even Brazil is not succeeding in doing this on a big enough scale to generate sufficient employment. An example from within Chile’s own tourism sector also illustrates this point. One part of the tourism business that has boomed in recent years is the cruise industry. An increasing number of ships are undertaking a significantly increasing number of cruises to Central and South America. While Mexico very quickly established the necessary infrastructure to provide these high-income customers with the range of services and products that they require, Chile was much slower to adapt to this industry on a large scale. Erdozain and Sievers (2004) note the lack of infrastructure, services, products, and skilled personnel that cruise ships encountered in Chile when they ventured along its coastline. They discuss how the revenue per tourist that these cruise ships generate drops as the ships venture further south, where the quality of the infrastructure decreases. And overall, the revenue that cruise ships in Chile generate is much lower than in Mexico, where one cruise ship generates approximately one million dollars of revenue per day in each port that it visits.


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Such industries require coordinated investment in infrastructure, production and skills. Port and transportation facilities need to be provided so that tourists from the ships can travel inland from ports quickly on roads that will not rattle their bones. These tourists also want to be received by guides who are fluent in English and other languages. They want to purchase goods along the way, enjoy quality local food and be entertained by local customs and folklore. Individual businesses can provide many of the services and goods required for this process, but the overall investment, both in infrastructure and skills, has to be planned and coordinated through local authorities, especially if these investments are to generate year round employment beyond the main season. These examples illustrate how different development strategies will generate different types of employment, which in turn will generate different levels of capabilities and well-being for workers. They show that there is a role for governments to take on in terms of planning and encouraging investments in infrastructure and human capital, as well as in fostering the expansion of some industries, especially those that generate productive jobs in sectors that add value and require as much input as possible from workers. While Chile has made significant progress in terms of its investments in human capital and infrastructure, these investments pale beside those made by developing countries in Asia. And as for developing an industrial policy, this is something that Chilean policymakers in their vast majority refuse to even contemplate, but which to Asian policymakers is routine. Developing an industrial policy does not mean returning to a 1950s and 1960s style import substitution industrialization policy with all the involvement (and mismanagement) of governments in the economic affairs of a country that this implies. But it does mean taking a closer look at how Latin America’s Asian competitors are managing their human and economic development, and perhaps taking a leaf or two out of their books, most especially with regard to fostering productive sectors that generate employment. Only such a strategy can generate quality employment and ultimately tackle the problems discussed throughout this book with regard to informal employment.

7. Conclusions Applying the capability approach to the Chilean labor market has brought about three main shifts in terms of our analytical perspective. First of all, it obliges us to measure the performance of a labor market through a broader range of variables. Second, it changes the focus of employment policy itself, and third, it allocates labor policy a different priority status within the development agenda of a country. Politicians the world over are concerned with the unemployment rate in their countries. Generally speaking their popularity ratings decrease if unemployment increases, especially if it reaches levels beyond what is considered socially acceptable. This relationship between unemployment and popularity leads to a policy focus on unemployment rates that often ignores other labor market developments which may be equally, if not more important. In developed countries

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such a focus on the unemployment rate is nevertheless more reasonable than in developing countries, where labor markets are much more segmented and informal, and where poor people can simply not afford to be unemployed. Developing countries have a tendency to copy policy strategies of developed countries. So if the latter evaluate their labor market performance principally based on their unemployment rates, developing countries do the same. Moreover, the relationship between political popularity and the unemployment rate is the same in developing countries, as the public mind associates the unemployment rate with all the problems that it encounters in the domain of work. However, the structure of labor markets in developing countries is very different indeed, principally because of the sizable proportion of informal jobs that exist even within the formal labor market. This means that—assuming stable participation rates—while the labor market in a developed country begins to tighten when the unemployment rate drops below a certain level, in a developing country the labor market only tightens when both the unemployment rate drop and the number of informal jobs decreases significantly. In order to monitor their labor markets, governments of developing countries therefore need to monitor both the unemployment rate (i.e., the quantity of the available jobs) and the proportion of informal or precarious jobs (i.e., the quality of these jobs). As stated repeatedly in the course of this book, this means that looking at only the unemployment rate in a developing country when considering its labor market is as simplistic as looking only at its GDP per capita ratio when considering its human development. The resulting requirement to look beyond the unemployment rate has led this book to emphasize the quality of employment, which consists of a combination of different employment characteristics. This in turn brings about more sophisticated informational requirements as far as data on employment matters is concerned, a point which has also been emphasized continuously throughout this book. As we saw from the empirical evidence presented on the Chilean labor market, the unemployment rate can move in very different directions from other labor market indicators. Chapter 5 showed that while the unemployment rate decreased during the early 1990s, the proportion of permanent contracts declined and informal work increased. These developments run counter to what one would expect given the impact economic growth is assumed to have on the labor market, but they make perfect sense if we consider that employers have used different contractual arrangements in order to make their employment relationships more flexible. And as we saw throughout this book, these contractual arrangements and the stability of employment largely determine the capabilities of individual workers and their dependents, not lastly because they determine how often workers will pass through spells of unemployment. We cannot therefore emphasize enough that in considering the labor market of any country, but especially of developing countries, it is too simplistic to focus solely on the unemployment rate. We have to consider the characteristics of employment, too. Good information systems and the appropriate measurement of labor market variables are at the heart of good labor market policy. Without comprehensive and reliable statistics that allow analysts to make accurate projections as to the


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future development of their labor force and their employment patterns, policymakers cannot make informed decisions. This is why this book returned again and again to the discussion of the quality and availability of data. The second change in perspective that applying the capability approach to labor markets brings about is that it redefines the employment policy agenda according to the needs of the most vulnerable workers, who may or may not be unemployed. It thus prioritizes those workers whose employment situations generate the fewest functionings and capabilities, as opposed to those workers who typically define the agenda of politicians because they are more organized or politically influential, such as unionized workers. Over the last 15 years, employment policy in Chile has consisted of six main components: legislative reform (including an attempt to strengthen the position of unions), the increase of minimum wages, the institution of unemployment insurance, the implementation of emergency employment programs as they became necessary to contain unemployment levels, the increase of vocational training, and the expansion of the enforcement capabilities of the Dirección del Trabajo. All of these components have been discussed at various points in this book. The point I would like to make here is that with the exception of the emergency employment programs, none of these policies have really focused on developing the capabilities of the most vulnerable workers. This even goes for minimum wage legislation, which may increase a government’s political popularity, but does not apply to workers who work informally and who constitute the most vulnerable category of workers. As we saw in chapter 3, issues related to the regulation governing unions and collective bargaining have hijacked the political agenda with regard to employment. Making the Chilean labor market more or less flexible has been the key subject of debate, based on the idea that a more flexible labor market will generate more employment. However, this debate also fails to address the concerns of the most vulnerable members of the workforce. These can only become less vulnerable if they become more employable in jobs of better quality. This in turn implies an investment in human capital on a scale that Chilean politicians have simply not contemplated, and that has not figured on the agenda of mainstream debates. The application of the capability approach to these issues, however, highlights the necessity of much more significant investment in these matters, as was discussed in chapter 7. Similarly, the capability approach has focused our attention on the level of protection that workers receive when they become unemployed. Unemployment can wipe out the functionings of workers and their families, and if the stability of employment decreases, this means that more workers are likely to pass through spells of unemployment more frequently. It is therefore essential to consider whether they are protected under these circumstances. Chapter 6 therefore focused on the benefits that the unemployed will receive from Chile’s new unemployment insurance scheme. Unlike other studies, which focus on the its coverage in terms of the number of workers who contribute to the scheme, this book actually focuses on the extent to which the unemployed are actually protected by the scheme, which is a completely different matter.

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So overall, this means that this book has focused on different policy concerns than many other studies, and these policy concerns reflect the priorities of the capability approach on individual human functionings. Since the characteristics of employment are so crucial in determining the functionings and capabilities of individual workers as well as of their dependents, the third change that the capability approach forces us to consider is the emphasis that we should place on employment when considering the development process of any country. The capability approach places employment issues at the forefront of the development agenda, and into the heart of any program that attempts to alleviate poverty. It suggests that in the context of a country’s development, jobs are the lines between the dots that connect economic growth with social policy, equity, poverty, education, and ultimately the freedom that human beings have to live lives that they value. In Chile, as in most countries, however, labor policy takes a back seat to other policies, especially those related to economic development. Politicians generally rely on economic growth to generate employment as a more or less automatic result. But the last decades of development in Latin America have shown that the link between economic growth and employment is not as automatic as it may seem. As we saw in the case of Chile, growth can be generated in sectors such a mining, which require very little labor relative to the revenues they generate, or it may be generated in sectors such as agriculture where the jobs are of a very low quality. It is therefore fundamental that politicians set their priorities and their development agenda with employment issues in mind. While Chile has without any doubt performed the best in the Latin American region, and while its successful development has to be applauded, we also have to recognize that the country has perhaps not done as well as it could have done in terms of generating employment. Other Latin American countries should be careful to bear this in mind when they look to Chile as a model for their own development process.

Appendix A Details of the Unemployment Insurance Scheme Coverage ●

●

●

●

All employees who are contracted after this unemployment insurance became a law will automatically be obliged to contribute to the insurance scheme. Those under contract at the time of ratification will be given the choice of affiliation. This will be a unilateral decision made by the employee. Once the employee has decided to subscribe to the scheme, her employer will be obliged to contribute on her behalf. This means that the unemployment insurance scheme will be rolled out gradually over the coming decades to cover the entire labor force of the formal sector. The scheme will cover all wage-earners who are normally subject to the regulations of the Labor Statute (Código del Trabajo), including workers with short-term or project-based contracts. This means that it excludes all self-employed workers and employers. The scheme also excludes domestic employees, apprentices, minors ( 18years), pensioners, and temporary workers. The scheme proposes insurance against loss of employment regardless of its cause (dismissal, voluntary resignation, retirement, permanent injury, and death). Workers dismissed for reasons not attributable to them have the right to additional severance payments from their employers. A minimum of twelve monthly contributions have to have been paid into the insurance scheme (continuous or not), either since affiliation to the scheme or since the last date of the withdrawal of funds. In the case of fixed term contracts the minimum period of contribution is six months.

Funding ●

The current proposal will be financed 80 percent by the employers and 20 percent by the employees, and contributions are based on the

276

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Appendix A

employee’s current gross monthly salary. The employer pays 2.4 percent, of which 1.6 percent goes into an individual account, the Cuenta Individual de Cesantía (CIC), and the remaining 0.8 percent is paid into a centrally administered Solidarity Fund (the payment structure of which will be described below). The employee’s contribution of 0.6 percent goes entirely into the individual account. Over the course of one year, the contributions accumulate to 26.4 percent of a monthly gross salary. The contributions are only adjusted to changes in the employee’s gross salary during the eleven-year period of contribution, and do not take into account any salary increases that may occur thereafter if the employee stays at the same firm. For workers with fixed term contracts, employers have to contribute 3 percent of the employee’s gross salary into the CIC only, and no contribution is made to the Solidarity Fund. Employees do not have to make any contribution to the scheme from their salaries. The worker has the right to receive all interest accumulated on the funds in the CIC account minus the attendant cost of administration. In cases of dismissal for business reasons, the employer has to make up the difference between the contributions already made into the account of the employee and his legal right to severance payments (one month’s salary per year of service with a ceiling of eleven months). This means that the employee’s own contribution of 0.6 percent constitutes an additional forced saving, and functions as a top-up to the employer’s contributions. The money paid into the solidarity fund, however, is not deducted from the IAS payments due, thus representing an additional or new tax to the employers. If the employer has to pay severance payments, fluctuations in the value of the portfolio and the administrative cost of the portfolio management are subtracted from the employer’s contributions. If the value of the portfolio increases, the employer pays less, if it decreases the employer has to make up for the lost funds. The employee only benefits or suffers from market movements on his contributions of 0.6 percent. The employer is obliged to pay this insurance up to a limit of eleven years (if the employee stays that long with the same company), after which no further contributions have to be made to the insurance.

Withdrawals ●

●

Before withdrawals can be made, the employee must have contributed to the fund for a minimum period of twelve months (continuous or otherwise) immediately prior to the loss of employment, and the first withdrawal can be made only thirty days after the loss of employment, provided the worker is still unemployed at that time. In cases of loss of employment the worker can withdraw the funds from the CIC account in decreasing amounts. The total sum of the savings are

Appendix A

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277

divided by four and then paid out according to the following percentages: Table A.1 Month 1 2 3 4 5

●

●

Monthly payments of unemployment subsidy Payment Total savings divided by 4 90% of that amount 80% of that amount 70% of that amount Remainder of savings

Any unemployed individual who finds a new job before the end of the period that the CIC account provides funds for is free to decide whether the funds remaining in the account are to be withdrawn or are to remain in the account as an additional security in cases of future unemployment, in which case they will be added to the funds accumulated thereafter, and the total amount will be taken as the basis for calculation in a situation of future unemployment. In either case, the clock for the new employer is reset to zero as any funds remaining in the account would not affect the new contributions to be made. The same conditions apply if the worker finds a new job within thirty days (i.e., before having made his first withdrawal). In the case of workers with short-term or project-based contracts, they can only make one single withdrawal of their entire accumulated funds.

Public Subsidies from the Solidarity Fund ●

●

●

●

If workers’ own funds are insufficient, only those who held unlimited contracts and were dismissed for reasons not attributable to them are entitled to payments from this fund. In order to qualify for payments from the Solidarity Fund, workers must have contributed to the fund continuously for twelve months prior to becoming unemployed. Effectively, workers can choose if they would like to use their savings or benefit from the Solidarity Fund if they qualify for the latter. If the balance of the CIC account is less than two monthly wages, it would be to the worker’s advantage to draw funds from the Solidarity Fund. The fund supports the unemployed for a maximum period of five months. The amounts received are related to the level of income last received by the beneficiary on a decreasing scale, with the following stipulated maximum and minimum limits, which are to be adjusted every year to the annual inflation rate.

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Table A.2

Appendix A Unemployment benefits paid by the Solidarity Fund

Duration of unemployment (months)

Minimum amount (in Chilean Pesos and U.S. Dollars)

1 2 3 4 5

$ 67,292 $ 55,904 $ 47,622 $ 39,858 $ 31,058

Payments in percent of the last 12 months wages (%) US$ 114 US$ 94 US$ 80 US$ 67 US$ 52

50 45 40 35 30

Maximum amount (in Chilean Pesos and U.S. Dollars) $ 129,408 $ 116,467 $ 103,526 $ 90,586 $ 77,645

US$ 219 US$ 197 US$ 175 US$ 153 US$ 131

Note: The exchange rate used is 592 Chilean Pesos to the U.S. Dollar. These amounts are valid for the period of February 1, 2005 to January 31, 2006. They are adjusted on an annual basis. Source: www.safp.cl. ●

●

●

The fund is limited to paying out a maximum of 20 percent of its previous month’s balance during any one month. Should the total amount of claims made exceed this amount, individual benefits will be reduced proportionately in order to not exceed the stipulated maximum. According to the government officials, the fund is designed to withstand an unemployment rate of up to 18 percent for one year. The unemployed loses the right to benefits from the solidarity fund if s/he refuses a job offer made by the local council’s employment office, provided that the job offers more than 50 percent of the individual’s former wage or if s/he does not attend an interview for an offered job. The individual also loses his right to benefits if he refuses a scholarship for professional training offered by the official training agency, SENCE. Workers can benefit from the Solidarity Fund only twice in any period of five years.

Other Benefits ●

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●

Any unemployed worker benefiting from the scheme and dismissed for business reasons will have a preferential right of access to training programs offered by SENCE as part of their scholarship programs. The same employees will also be entitled to public health care services for at least five months, one month after they cease employment and once they have cancelled their membership of their respective health insurance (ISAPRE, Instituciones de Salud Previsional: Private health insurance providers). The fund administrator will be obliged to inform local employment agencies of any beneficiaries of the system, so that they can be incorporated into the national information system for job seekers to help the unemployed find new jobs.

Administration of the Funds ●

The funds (both individual accounts and the solidarity fund) are administrated by one single entity, the Administradora de Fondos de Cesantía (AFC),

Appendix A

●

●

●

●

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279

which was determined by a public bidding process. All banks, fund administrators, insurance companies, and other financial institutions could bid for the license, which has a maximum duration of ten years. The idea of picking a sole administrator was driven by the desire to reduce the costs of administration, transaction, and marketing to an absolute minimum, while maintaining a degree of competition through the licensing procedure. The responsibilities of the chosen fund administrator will consist of collecting contributions, administration, maintenance and investment of the funds, the paying out of benefits, and the capacity to check compliance with the requisite criteria of the potential beneficiaries. The funds will be invested according to the regulations established by law 3.500 for type 2 style pension funds. A specific regulation of the funds will be established at a later date. The investment body will be regulated by the pension fund regulator the Superintendencia de las AFPs. The commission for the administration of the funds is expected to be negotiated during the bidding process for the license. The government is currently expecting this commission to be no higher than 1.5 percent of the total value of the funds and to be linked in some way to investment performance.

280

Table A.3

Different levels of coverage under the Unemployment Insurance Scheme

Description of employment history Open-ended, 1 yr. tenure, reasons of the firm, 3 months unemployed Open-ended, 7 yrs. tenure, reasons of the firm, 4 months unemployed Open-ended, 2 yrs., reasons of the firm, 6 months unemployed Open-ended, 7 yrs., voluntary, 4 months unemployed Open-ended, 2 yrs., voluntary, 6 months unemployed Short-term, 2 yrs., contract expired, 3 months unemployed Open-ended, 10 months, reasons of the firm, 4 months unemployed

Months in previous Job

Balance in CIC

N of payments from CIC

12

40,571

84

Payments 1

2

3

4

5

Severance payment

1

40571 CIC 34,429 SF

67,500 SF

60,000 SF

0

0

109,429

334,374

5

83,594

75,234

66,875

58,516

50,156*

715,626

24

83,332

3

30863 CIC 44,137 SF

27777 CIC 39723 SF

24690 CIC 35310 SF

52,500 SF

45,000 SF

216,668

84

334,374

5

83,594

75,234

66,875

58,516

50,156*

0

24

83,332

3

30,863

27,777

24,690

0

0

0

10

45,900

1

45,900

0

0

0

0

0

10

33,660

0

0

0

0

0

0

91,340

Note: SF stands for Solidarity Fund, CIC stands for the individual savings account. The cases marked with an asterisk would have the choice between withdrawing the fifth payment or leaving it in his CIC account as he finds a new job after four months. The calculations of the total balance in the CIC account are based on an assumption of an annual growth rate of the invested funds of 6 percent and a 0.6 percent commission on the money paid into the account. These are the government’s official assumptions for the functioning of the scheme.

Appendix B Unemployment in Chile Note: All the tables in this appendix are based on 1012 cases of employed and 185 unemployed workers. Source: Quality of Employment Survey. Own calculations.

Table B.1 Distribution (%) of the employed and unemployed by sex Sex Men Women Total

Employed

Unemployed

58.9 41.1

56.3 43.7

100.0

100.0

Table B.2 Distribution (%) of the employed and unemployed by age group Age group

Employed

Unemployed

14–19 20–25 26–35 36–45 46–55 56–65 65

4.2 14.1 21.8 26.3 21.4 9.9 2.3

10.9 30.6 24.2 16.5 11.6 4.8 1.5

Total

100.0

100.0

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Appendix B Table B.3 Distribution (%) of the employed and unemployed by level of education Level of Education

Employed

Unemployed

1.4

1.7

8.3 13.8

8.7 16.0

13.0 4.5

13.4 8.1

20.1 11.4 10.9 16.6

14.5 20.4 11.7 5.4

100.0

100.0

None Basic complete incomplete Secondary (Technical) complete incomplete Secondary (Academic) complete incomplete Technical higher education Higher education Total

Table B.4 Distribution (%) of the employed and unemployed by household position

Head of household Other Total

Employed

Unemployed

38.6 61.4

25.7 74.3

100.0

100.0

Note: The primary labour force consists of heads of households between the ages of 25–54, while the secondary labour force consists of all others.

Table B.5 Distribution (%) of the employed and unemployed by economic sector Sector Industry Construction Commerce Transport/Communication Finance Services Other Total

Employed

Unemployed

17.1 8.2 22.1 10.2 7.2 33.6 1.7

20.3 15.3 21.1 7.8 8.3 25.1 2.1

100.0

100.0

Note: The category “others” refers to the agricultural, mining and electricity sectors as these are relatively insignificant sectors in Greater Santiago.

Appendix B Table B.6 Distribution (%) of the employed and unemployed by contributions to pension and health Insurance Pension

Employed

Contributing Not contributing Total Health Contributing Not contributing Total

Unemployed

66.0 34.0

54.9 45.1

100.0

100.0

66.6 33.4

54.6 45.4

100.0

100.0

Table B.7 Distribution (%) of the employed and unemployed by number of hours worked Hours

% Employed

Cumulative

% Unemployed

10 10–20 21–30 31–40 41–48 49–60 61

1.9 4.6 7.6 12.7 44.1 18.4 10.7

1.9 6.5 14.1 26.8 70.9 89.3 100.0

0.6 2.4 7.0 13.9 41.9 24.2 10.0

Total

100.0

Cumulative 0.6 3.0 10.0 23.9 65.8 90.0 100.0

100.0

Table B.8 Distribution of the employed and unemployed by level of income Income 1 MW or less Between 1–2 MWs Between 2–3 MWs Between 3–4 MWs More than 4 MWs Total

% Employed

% Unemployed

10.2 31.4 21.4 8.8 28.2

32.9 47.1 12.9 3.1 4.1

100.0

100.0

Note: The income categories were calculated based on multiples of the minimum wage effective in September 1999, which was 90,500 pesos, roughly US$200 at the time.

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Appendix B

Unemployment Subsidies and Severance Payments Table B.9 Did you receive an unemployment subsidy?

Table B.10 Did you receive severance pay?

Yes No

Yes No

22.1 77.9

Total

100.0

Note: The question refers to only those workers who were dismissed for reasons of the firm, as the other unemployed are not entitled to this benefit. 77 cases.

Total

44.2 55.8 100.0

Note: The question refers to only those workers who were dismissed for reasons of the firm, as the other unemployed are not entitled to severance pay. 77 cases.

Table B.11 Why did you not receive severance pay? Made an agreement with the employer Company went bankrupt Employer refused to pay Other or does not know Total

22.2 18.5 44.4 14.8 100.0

Note: The question refers to all workers who should have received severance pay but did not. 43 cases.

Appendix C

Determining Factors of the Quality of Employment The aim of this model is to identify the determining factors of the quality of employment. According to the formulation of the indicator explained in chapter 8, the latter can only take whole values from zero to seven. Therefore, the first point to be noted is that the dependent (explanatory) variable is not continuous, so that an ordinary least squares estimation would be inappropriate. So given the characteristics of the variable “quality of employment,” an ordered probit is estimated. The model assumes the existence of a latent variable that is specified as follows: y*i xi ui However, this latent variable is not observable. What is observable is a discrete variable that can take on eight different values: yi 0 if y*i a0 1 if a0y*i a1 2 if a1y*i a2 3 if a2y*i a3 4 if a3y*i a4 5 if a4y*i a5 6 if a5y*i a6 7 if a6y*i where xi is a vector of the characteristics that affect the quality of employment indicator, and ui is an independent and identically distributed error term. The parameters that will be estimated are and a (a0, a1, a2, a3, a4, a5, a6). This model was run using data from the CASEN survey of 2003. Table C.1 presents the results. It is important to point out that the coefficients do not represent the slope of the function and therefore do not represent the marginal change in the

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Appendix C Table C.1

Determining factors of the quality of employment

Variable Age Age squared Work experience Work experience Level of education Male Firm with 2–5 workers Firm with 6–9 workers Firm with 10–49 workers Firm with 50–199 workers Firm with 200 or more workers First Region Second Region Third Region Fourth Region Fifth Region Sixth Region Seventh Region Eighth Region Ninth Region Tenth Region Eleventh Region Twelfth Region Agriculture Mining Manufacturing Utilities Construction Commerce Transport and communications Financial services Other economic sectors a0 a1 a2 a3 a4 a5 a6 Number of observations R2 Pvalue Chi 2

Coefficient

Standard error

Pvalue

0,506 0,001 0,399 0,000 0,255 0,209 0,040 0,088 0,086 0,186 0,413 0,216 0,085 0,096 0,149 0,129 0,255 0,079 0,071 0,130 0,126 0,240 0,068 0,124 0,476 0,005 0,276 0,373 0,003 0,064 0,173 0,040 5,122 5,695 6,227 6,851 7,537 8,243 9,073 86.225 0.0967 0

0,059 0,000 0,059 0,000 0,059 0,008 0,011 0,016 0,011 0,013 0,011 0,022 0,023 0,027 0,019 0,013 0,017 0,016 0,012 0,017 0,015 0,044 0,036 0,013 0,031 0,012 0,047 0,015 0,011 0,015 0,015 0,078 0,355 0,355 0,355 0,355 0,355 0,355 0,356

0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,059 0,000 0,000 0,658 0,000 0,000 0,768 0,000 0,000 0,607

Source: Own calculations using CASEN, 2003.

dependent variable. In this sense, we have to consider the sign of the coefficients. For example, the sign associated with the variable male is positive, which indicates that men on average have better quality jobs, if all other variables remain constant. Finally, it is possible to observe that the immense majority of the coefficients associated with the variables are statistically significant at 1 percent.

Notes Chapter 1

Introduction: Model Performance or Precarious Employment?

1. “Igual me habrían echado. Total no me puedo llevar la guagua al trabajo. Además eran jornadas muy largas. A veces teníamos que hacer tres o cuatro pegas en un día . . . más todo el tiempo para movilizarse. Eso no se puede con una guagua.” 2. “A veces renovaban los contratos, pero a veces no, y seguíamos trabajado igual. Eran muchos altibajos, según si ellos tenían pega dónde mandarnos. Algunos días llegaba y me mandaban pa’ la casa, y allí me quedaba por una semana más o menos, hasta que me llamaban pa’ otra pega.” 3. This amounts to approximately US$ 109. The exchange rate used in this chapter is 548 Chilean Pesos to 1 US$, which is the exchange rate of September 1999, the time when these interviews took place. 4. “¿Sindicato? No po, no hay sindicato. Lo prohibieron. Nos echarían a todas!” 5. This amounts to approximately US$ 45. The exchange rate used in this chapter is 548 Chilean Pesos to 1 US$, which is the exchange rate of September 1999, the time when these interviews took place. 6. “¡Seguir, no más po!” 7. “Normalmente no toma tanto tiempo. Normalmente, me toma como un mes, máximo dos para encontrar algo nuevo. Sería distinto si supiera que va a salir algo luego. Si supiera que puedo empezar una pega nueva de aquí a un mes, sería otra cosa. Me dedicaría a vender los helados y chao . . . sabiendo que el mes que viene habrá plata. Pero con esta crisis, está seca la cosa . . . no hay pega, ni por día, y menos con contrato.” 8. The definition and construction of unemployment statistics as well as the almost exclusive focus of labor policy on the unemployment rate will be discussed in detail in subsequent chapters. 9. Chilean companies that employ more than 15 women are obliged by law to provide childcare facilities for their workers. 10. “Hay una suerte de extendida insensibilidad social: muchos empresarios consideran a los trabajadores como un insumo mas, y no como a personas” (Fantuzzi, 1989: 56). Roberto Fantuzzi was formely the President of ASEXMA, an association of Chilean exporters. 11. Survey results discussed in chapter 3 confirm the often negative attitude that workers have toward their employers, and the sense of exploitation that they feel. 12. “Podrías ofrecerme una pega con una empresa chilena que pague más. Pero no te la aceptaría. Acá me gusta porque tratan a todos igual y te respetan. Como lugar de trabajo, es la papa.”

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13. Chileans pay 7% of their wages toward health insurance. The insurance plan they receive corresponds to what this 7 percent can buy. For workers, this normally means that they contribute to the public system, while managers usually have a private plan. It is therefore highly unusual in Chile that all workers in a company have the same health insurance plan with the same level of benefits. This is why this worker was so appreciative of his company policy to provide a private plan for all workers. 14. See N. Garcia, 1993: 103. Note that the informal sector, as defined by the ILO, includes domestic service workers. 15. While a few employment surveys were carried out between 1987 and 1989 in the period preceding Chile’s transition to democracy, the Chilean labor market had already changed by then as the structural adjustment took place in the late 1970s and early 1980s. And we have very little information on labor market developments before 1987 except for the most basic variables such as the employment and unemployment rates, and income levels. Una de las negativas consecuencias de la falta de preocupación por el tema de la cobertura previsional durante las décadas de los ‘80 y ‘90 es la inexistencia de bases de datos que puedan proporcionar información sobre el tipo de trabajadores que deben entrar en el sistema provisional . . . El principal obstáculo actual para el diseño de políticas específicas o integradas que busquen aumentar la cobertura previsional es la falta de antecedentes e información específica respecto a quiénes son los trabajadores que dejan de cotizar o presentan lagunas previsionales. (Arenas, 2000: 44 and 60) 16. In fairness, it should be pointed out that this debate reflects international biases as well: there is little innovative inflow of ideas into the discussion of whether developing countries should follow a U.S.-styled flexibilize labor market model, or a European style more protective social model. 17. These reform proposals will be discussed in more detail in chapter 3. 18. Utility companies in Chile are very quick to cut services if bills are not paid on time, and charge high fees for reconnecting services. 19. The Universidad de Chile very kindly allowed me to observe the interview process of their quarterly employment survey in March 1999. 20. Data from the 2003 CASEN shows that 21% of the labor force in Chile was classified as below the official poverty line. The working poor are discussed in chapter 5 of this book. 21. Some lucky exceptions to this rule are countries like Switzerland, Austria, and Luxemburg. 22. This has been the case especially in France, Germany, Italy, and Spain. 23. For an excellent historical account of the development of Chile’s income distribution, see Ruiz-Tagle Venero (1999) and Palma (2003). 24. For recent estimates regarding the coverage of the Chilean pension system, see Bernstein (2005). And for an analysis of the rationale of Bolivian policymakers for copying the Chilean pension system model, see Weyland (2004). 25. On the World Bank’s Rigidity of Employment Index Chile scores 19 points. This is by far the lowest score in Latin America (a lower score indicates a more flexible labor market), but is still higher than most Anglo-Saxon countries (the United States (3), Canada (4), and New Zealand (7)). Most European countries, however, have higher scores, as do most Asian countries (the exception there is Malaysia). For comparative

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purposes, Brazil and Mexico score 72, and Argentina and Colombia 51. See the author’s Website for a complete ranking. 26. See, for example, Agacino and Echeverría (1995), Aguilar et al. (2000), Echenique (1997), Echeverría et al. (2000), and Gálvez and Salamé (1999). 27. During her election campaign, Bachelet consistently referred to the need for “more and better jobs” (“más y mejores empleos”). See for example Bachelet, 2005: 19.

Chapter 2 Employment in the Development Context: The Contribution of the Capability Approach 1. See, for example, van Ootegem and Schokkaert (1990) who apply the capability approach to the case of the Belgian unemployed. 2. See, for example, Sen, 1984, 1985, 1989, 1992, 1995, 1999b. For excellent brief summaries of the capability approach and its contributions to development thought see Pressman and Summerfield (2000), or Gasper (2000). 3. A number of other papers exist that critique details of Sen’s approach. Gore, for example, proposes that Sen’s approach is fundamentally limited by a focus on private goods (Gore, 1997), Quizilbash argues that the capability approach is subject to the same difficulties as utilitarianism if more than one criteria of equity is used (Quizilbash, 1997), Giri contends that Sen’s notions of functioning and capability lack emphasis on self-development and how individuals can themselves advance their capabilities (Giri, 2000), and Gasper suggests that his approach would benefit from a more in-depth analysis of human agency (Gasper, 1997 and 2000). I have excluded papers like these from my discussion for the sake of maintaining simplicity, and because I am inclined to share Carmen’s impatience with the endless theoretical discussion of the capability approach (see Carmen, 2000), and would add that it seems punctilious and self-important from the perspective of a fieldworker faced with the real-life evidence of poverty. 4. Sen, 1998, www.nobel.se/economics/laureates/1998/Sen-autobio.html 5. Robeyns, 2000. 6. Sen has defined our ability to exchange money, goods or our own labor as our “exchange entitlement” (Sen, 1981). 7. The most well-known text where Sen presents this argument in detail is his book Poverty and Famines: An Essay on Entitlement and Deprivation (1981). This publication was followed by 3 volumes of case studies which illustrate his point, and that have had a profound impact on development thought (Drèze and Sen, 1995a). 8. Sen, 1981. 9. Sen, 1985. 10. “Entitlements” is a word that Sen rarely uses in his more recent work, where he examines poverty in general rather than famines and starvation in particular. The concept of functionings has largely replaced and incorporated the concept of entitlements. 11. Nussbaum and Sen, 1993: 3. 12. For the sake of completeness, it should be noted that the various functionings that a person achieves are known as their functioning set or vector (Sen, 1985). 13. In Hunger and Public Action, Sen distinguishes between growth-mediated and support-led development strategies in his analysis of these differences (Drèze and Sen, 1989). His arguments about economic growth not necessarily being related to progress in human development have by now been echoed by many analysts and the

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17. 18. 19. 20. 21. 22. 23. 24. 25.

26.

27. 28. 29. 30. 31. 32.

33. 34. 35. 36. 37.

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international development organizations, so that this argument has by now become “common knowledge” (see, for example, the UNDP Human Development Reports, 1999 and 2000). Drèze and Sen, 1995b: 10. Sen, 1985. By the publication of Development as Freedom in 1999, Sen frequently uses the word “freedom” instead of “capabilities.” This book will continue to use the term “capabilities,” however, partly so as not to confuse matters, but also because the term is more intuitive to readers who are not very familiar with the theoretical foundations of the capability approach. Pressman 2000: words in italics are my addition to this quotation. Nussbaum, 1995 and 2000. Sen 1992. Sen 1993: 47. Sen, 1992. Streeten, 1981: 3. The authors refer to Rawls (1971) in chapter 7 of their book and present a list of basic needs in chapter 8. For a summary of their theory, see figure 8.2, p. 170. See Streeten 1981 and 1984. See Feres and Mancero (2001) for a very detailed application of the basic needs approach to the situation of poverty in Latin America. The paper constructs a poverty map for the region, which is based on the variables quality of housing, persons sharing accommodation per room, running water facility, sewage system, education, and income. Although the capability approach has been applied to some countries with higher levels of development (in particular Belgium and Italy), the approach is still mainly applied to less developed countries. Detail on the latter point can be found in the Panorama Social published by CEPAL each year. The statistics all show that Chile has one of the lowest levels of poverty and malnutrition, and one of the highest rates of access to, for example, clean water, electricity, sewage, and health care among the countries of Latin America (CEPAL, 2000). Gore, Figueiredo, and Rodgers, 1995: 2. For an analysis of the applicability of the social exclusion approach to developing countries, see, for example, Saith, 2001b. Ruiz-Tagle and Wormald (1999), Clert (2000), and Carpio et al. (1999) have, for example, applied the social exclusion approach to Chile and its labor market. Section 6 of this chapter discusses the importance of the concept’s universality in relation to the labor market with reference to Sen’s own view on the matter. Saith, 2001a. In June 2001, the von Hügel Institute at St. Edmund’s College, Cambridge held a conference on the subject of “Justice and Poverty” at which 39 papers were presented. After a number of these presentations, participants asked whether the same analysis could not have been undertaken using other approaches, and whether these would not have led to the same conclusions. Balestrino, 1996. Drèze and Sen 1989b, 1995a, and 1995b. For example, Sugden, 1993. See, for example, Sugden (1993), Cohen (1993), Desai (1990). For example, Drèze and Sen 1995.

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38. See Drèze and Sen, 1995a and 1996. 39. Although he has elaborated an econometric method for quantifying his approach, which he summarized in Commodities and Capabilities (Sen, 1985), he has never, for example, generated specific survey data for measuring capability issues. 40. Beginning with a Conference held in Cambridge in 2001, a series of conferences were held on the capability approach in the following years. 41. See, for example, the papers held at the Conference on Sen’s work: Alkire, Altman, Ardeni, and Andracchio; Ballet and Mahieu; Carey, Chiappero Martinetti, Chopra, and Duraiappah; Comim, Deneulin, and Stewart; Deprez and Butler; Dubois and Rousseau; Flores-Crespo, Gasper, Hamilton, Harcourt, Harrison, de Herdt, Ikemoto, Ingrando, Jensen, Lelli, Mackintosh, and Tibandebage; DeMartino, Pant, Papadopoulos, and Tsakloglou; Ruis and Vigorito; Robeyns, Santibanez, Sehnbruch, Teschl, and DeRobert, Unterhalter, Vero, Wanderley, Warner, and Yaqub (all 2001 publications). 42 See Sandoval, undated. 43. An example that aroused much attention in Chile is the result of a study undertaken by Bravo and Contreras, which shows that although the literacy rates that the country records are very high, the ability of those who are officially considered to be literate to understand the most basic written instructions is extremely limited. The study concludes that the focus of education policy should now turn to the quality of education provided rather than just aiming at ensuring an appropriate quantity (extent) of education (Bravo and Contreras, 2001b). 44. See, for example, Todaro, 1994; Cypher and Diez, 1997; Ray, 1998; and Meier and Rauch, 2000. 45. Bosworth et al. have written an entire book about labor economics, which discusses the supply and demand features of the labor market in great detail, as well as other issues such as human capital functions and the relationship between economic growth and labor. But it completely neglects to mention that there is a connection between the characteristics of the labor market and the well-being of the individual (Bosworth, Dawkins, and Stromback, 1996). 46. Eßner, 2000. 47. A paper by Paredes (1996) typifies this approach: he states that the objective of his paper is to highlight the most salient characteristics of the Chilean labor market between 1970 and 1996, and then goes on to discuss data that relates purely to employment and unemployment rates and wage levels, without mentioning any other variables that may be equally important. 48. Chapter 2 discusses these issues in more detail and provides references. 49. Meier and Rauch, 2000. 50. Argentina before its most recent crisis is an especially good example of this phenomenon, particularly over the last decade (since the stability pact), as its very high unemployment rates were hardly reduced by high growth rates. 51. Supiot, 1996. 52. Examples of this will be discussed in the course of this book. As a preliminary example of this idea, we can mention the specific targeting of social resources to the most marginalized, or the fact that social assistance in a country like Chile is so minimal, and involves so much bureaucracy, that its impact on a family’s well-being is literally marginal. Child benefit allowances, for example, amount to approximately US$ 6 per child per month. 53. It is in the nature of these stereotypes that they ignore the heterogeneity of European labor markets, some of which have never had problems with high unemployment,

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54. 55.

56.

57. 58.

59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

69.

70.

71. 72. 73. 74. 75.

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and some of which have successfully resolved their problems of unemployment, while others have not. Esping-Andersen and Regini, 2000: 1. This problem is by no means limited to the Chilean case. A World Bank paper by Maloney, for example, analyses the structure of the Mexican labor market using only indicators of the quantity of employment without any mention of underemployment or poor-quality employment (Maloney, 1998). Streeten, 1981: 12–13. The view that unemployment is a luxury few can afford is echoed by numerous case studies, see, for example Agacino et al. (1995), Echeverría et al. (1998), and Garcia Huidobro (1999). Supiot, 1996. Unemployment benefits in Chile, for example, amount to approximately US$ 24–12 per month (depending on the length of time unemployed), and child benefits subsidies amount to just over US$ 4 per child per month for those with the lowest income levels. Companies with more than 20 female employees in Chile are obliged by law to provide their employees with childcare facilities. By “spaces,” Sen refers to areas such as well-being, freedom, health (longevity, morbidity, and mortality), and quality of life (Sen, 1992). Stewart, 2000. J. Banyulst and E. Cano, 2000. Sen, 1981: 2 and 46. Sen, 1997c. His article Work and Rights elaborates on the issues discussed in his speech. See Sen 2000. ILO: Somavía, 1999: 3. See for instance Burchell et al., 2000. Sen mentions these issues himself in Sen, 1997c. This book uses the term quality of employment as opposed to the ILO’s term “decent work” in order to emphasize that the concept goes beyond the characteristics of the job itself and includes the aspects mentioned above. See, for example, the ILO’s World Employment reports, the World Bank’s Development Reports, or the UNDP’s Development Reports. At most, these publications refer to employment and wage levels when including the labor markets into their analysis. But the available statistics never go beyond the most basic data, even in the case of the regional employment reports of the ILO (e.g., Labour Overviews for Latin America) where, until the 2001 edition, the only additional variable considered is the distinction between the informal and formal sector (ILO, 2002). The government, which ultimately has to foot social security bills, may argue that good jobs are those that do not burden the fiscal budget with any expenditure. An employer, on the other hand, may argue that the best job is the most productive one, whereas the individual may wish for any number or combination of characteristics that suit her personal circumstances and welfare criteria (Infante, 1999: 12–13). Rodgers, 1997. It took the ILO several years to finally publish methodologies for measuring decent work, the specifics of which will be discussed in chapter 8. Beatson, 2000: 448, my italics. ul Haq, 1995: xi. Sen presents his arguments for a more comprehensive approach to development in several papers, they include Sen 1997a, 1997b and 1997c among his more recent work.

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Chapter 3 The Never-Ending Story of Labor Market Reform 1. In 1988, 38.6% of the population named employment as their principal concern, and in 2004 the figure had diminished but little to 34.3%. Over 50% of Chileans think that people are not remunerated according to their efforts (2000) and 66.6% feel underpaid (2000). See CEP surveys: www.cepchile.cl. 2. CEP survey, 1990. The overwhelming concern for inflation can be explained by the widespread fear of some sectors of the population, in particular the business community, that a return to democracy would lead to irresponsible macroeconomic management, which in turn would trigger the high inflation rates that Chile had suffered from in the past. 3. The development of poverty rates in Chile is discussed in chapter 5. Questioned about the effects of Chile’s most recent labor reform, few Chileans believed that they would make a difference. See CEP surveys, 2001 and 2002. 4. For example, three quarters of Latin Americans (simple average of 18 countries) worry about loosing their job within the next 12 months. The range is from 63% in Uruguay to 91% in Guatemala. Chileans worry a little less than average (69%). See Latinobarómetro, 2004. 5. This was particularly true between 1990 and the 1998–1999 crisis, a period during which unemployment rates came down, salaries and productivity increased, and the informal sector decreased slightly. See the ILO’s summary tables in various editions of the Panorama Laboral. 6. See Cotázar, 1997: p. 237. More detail on the performance of the Chilean labor market is presented in chapter 4. 7. Between 60% and 75% agree with the statement that “Employers are only interested in profit, they only look after their own interests and try to impose their will without caring about others.” Between 85–90% believe that employers in Chile have a lot of power while only 25–30% believe that unions have much power. See Huneeus, 2003 for a more detailed interpretation of these results. 8. CEP, 2000 survey. 9. CERC surveys, various years. 10. Huneeus, 2003. 11. The so-called social deficit (deuda social) produced by consistent underinvestment in social policies during the military administration, and the Concertación’s attempts to address this problem given relatively tight fiscal constraints has been widely discussed in the literature of its own policymakers and advisors. See, for example, Cortázar (1993), Foxley (1993), and Hardy (1997). 12. For excellent reviews of how these theories emerged from the CEPAL and how they influenced policymaking in Chile, and Latin America in general, see Fitzgerald (1998), Lehmann (1990), Love (1996), and Roxborough (1979). 13. Arellano, 1982. 14. Raczynski, 1995: 208. 15. See Coloma 1998 for a description of the different rights that applied to “blue” and “white” collar workers. The private and the public sector were also treated very differently. 16. Arrellano, 1982. 17. For a complete list of the professions or trades that required such a licence, see Alamos, 1987. 18. Paredes, 1996.

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19. Dismissals of more than 10 employees per month even had to be approved of by two ministries. 20. The process of ISI and its associated problems have been extensively discussed in the literature, so that it is not worth going into details here. For further information, see Bulmer-Thomas (1994), French-Davis (1998), Cardoso (1992), Furtado (1970), Love (1996), and Cypher and Dietz (1997). 21. General Pinochet’s image has been severely tarnished since his arrest in London in 1998 and the subsequent investigations into human rights abuses following his return to Chile. More recently the revelations of corruption that followed the seizure of his accounts at the U.S. bank Riggs have damaged his image even more, even in the eyes of his former supporters on the political right who may have been willing to forgive the human rights abuses associated with the dictatorship as a “necessary” side-effect of fighting Marxism in Chile, but who are much less willing to forgive corruption. So the former dictator’s power and influence have steadily dwindled since 1998, and especially since he had to resign from his Senator for life position in 2002 on the grounds of “senility.” Nevertheless, most Chilean employers still firmly believe that he saved the Chilean economy from collapse and want to preserve his legacy. See Huneeus (2001) for a discussion of the politicized nature of Chilean employers and Angell (2003) for an analysis of the impact of Pinochet’s arrest in London. 22. Huneeus (2003) shows just how divided Chile still is regarding the evaluation of the military administration. The proportion of the population that holds a positive view of this period changed little during the 1990s and early 2000s. 23. The development of the economic reforms and the team of “technocrats” that carried them out have been documented by many analysts. For one of the best descriptions of the network of “Chicago Boys” who designed and implemented the reforms, see Huneeus (2000). 24. Two main emergency employment programs were implemented: the Programa de Empleo Mínimo (PEM) in 1975, and the Programa de Ocupación para Jefes de Hogar (POJH) in 1982. Both programs were intended to provide unskilled workers with employment that would pay a fraction of the minimum wage at the time. While they did mobilize a significant amount of resources, the wages they paid were insufficient to keep families above the poverty line. In addition the programs have been criticised for lacking any investment in human capital, not being used to invest in productive resources, stigmatising workers (and sometimes their families, too), and for the authoritarian approach with which they were implemented. Furthermore, they clearly constituted a political measure of damage limitation in the face of two devastating economic crises. Graham writes, for example, that “the programs helped reduce social unrest, especially since the government included emergency employment program persons in its statistics, which made a significant difference in reported unemployment levels” (Graham, 1997: 38). For further details on the emergency employment programs and the unemployment rates at the time, see, for example, Gonzalez (1996), Graham (1997), or Mizala (1997). 25. Barrera and Valenzuela, 1986: 231. 26. See Barrera and Valenzuela (1986) for an account of the development and the effects of the international pressure, led by the U.S. union confederation AFL-CIO. An interesting account of these events, which illustrates the thinking of the Pinochet administration, can also be found in the book “La Revolución Laboral en Chile” of the Labor minister in charge of the plan, José Piñera (Piñera, 1992).

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27. Most analysts have argued that the neoliberal policies implemented by the military administration were basically the correct path to follow, but that there were serious flaws in the way they carried them out, related to the timing and sequence of liberalization, to the failure to establish regulatory frameworks, and the failure to prevent the excessive accumulation of capital in too few hands, so that these large new conglomerates ended up taking the country into its financial collapse in 1982. They call the government’s approach to the economy between 1974 and 1983 “an extreme laissez faire approach” (Bosworth et al., 1994: 5), saying that only the 1982 crisis really woke them up. See, for example, Silva (1991), Garcia (1993), Bosworth et al. (1994), Díaz and Martínez (1996), or Bulmer-Thomas (1996). 28. See Angell (1991), Barrera and Valenzuela (1986), and Winn (2004) for an overview of union activity during this period. 29. Participants in the emergency employment programs are usually included in the unemployment rate figures as analysts agree that the programs were too insufficient in terms of income to constitute “employment.” 30. See Hojman (1992), Meller (1992), Garcia (1993), Mizala and Romaguera (1996b), and Paredes (1996). Riveros (1997) gives a good description of how the labor market reforms and the economic reforms complemented each other. 31. The only insurance that employers still had to pay for was accident insurance, which cost approximately 3% of the total wage bill. 32. Until 1990, the only sources of data on the labor market were the official employment survey undertaken by the National Institution of Statistics (INE) and a similar survey by the Universidad de Chile. Both surveys only provided (and still only provide) very limited information on the labor market, e.g., unemployment rates, income, economic sector, occupational position etc. They give no information on how the profile of job durations changed, or how workers were contracted under nonstandard forms of contract. The only other data available from before 1990 are from two surveys run by an NGO, The Programa de Economía y Trabajo (PET) in 1988 and 1989. Although they collected a far broader range of data, there are no historical references to compare them with. The last of these surveys was carried out in 1991. 33. Garcia (1993: 103) shows that the informal sector fluctuated between 24% and 29% between 1970 and 1990, with only slight increases following the 1982 crisis. This evidence contradicts standard development thought that suggests that economic crises in developing countries are absorbed at least as much through increases in the informal sector as through increases in the unemployment rate (see, for example, Franko, 2003). In Chile, the economic crisis was mainly reflected by a higher unemployment rate. 34. See González (1996) for a comprehensive account of the regulation governing public sector employment in Chile. 35. Favouring the use of short-term contracts has been a popular measure used by other governments who have found themselves in the midst of an employment crisis (e.g., by Argentina and Spain). However, the Pinochet administration merely increased the maximum length of short-term contracts from 6 months to two years. Within this period, short-term contracts could be renewed any number of times. The latter stipulation was amended in 1981, when the principle was established that a short-term contract automatically became an open-ended one if it was renewed twice. See Urmeneta (1999) for details on short-term contractual relationships in Chile.

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36. See Scholnik and Teitelboim (1989). The NGO referred to was the Programa de Economía del Trabajo (PET), which carried out independent labor market surveys in 1988, 1989, and 1991. 37. See Cortázar, 1993: 39. 38. “Parecía fundamental abordar una reforma integral al Código del Trabajo, puesto que las reglas del juego definidas en él no contaban con esa legimitidad democrática que resulta indispensable para que, en una sociedad abierta, tengan estabilidad en el tiempo” (Cortázar, 1993: 13). Like Piñera, the minister of labor responsible for the 1979 reform, Cortázar also wrote a book about his labor reform. 39. See Barrera and Valenzuela (1986) for an account of how the unions became involved in leading the protests against the military regime in 1982, but then had to gradually join with the political parties in order to broaden the coalition against the dictatorship. 40. The attitude of the Chilean business sector contrasts sharply with its counterparts in Argentina and Brazil, where support for an end to military regime was much more widespread. This can be explained by the fact that the Chilean business sector widely perceives the dictatorship as having saved the economy and implemented much needed reforms, whereas in other countries of the Southern Cone, the military regimes did not resolve any economic problems, and generally handed the countries back to democracy in a worse state than they had taken them over in. As a result, labor and business are not as profoundly alienated from each other in other Latin American countries as they are in Chile. 41. Campero, 2000: 397, my italics. See also Sehnbruch, 2006c. 42. Cavallo notes that the minister of labor, René Cortázar, and the minister of finance, Alejandro Foxley, who were the principal negotiators of labor market reform on behalf of the government, had good relations with the main union federation, the Central Unitaria de Trabajadores (CUT), as they had both served as advisors to the union prior to 1990. Furthermore, the leader of the principal employers’ association, the Confederación de Producción y Comercio (CPC), Manuel Feliú and the leaders of the CUT, Manuel Bustos and Arturo Martínez, also enjoyed good relations as the former had intervened on behalf of the latter during the time of the dictatorship (Cavallo, 1998). 43. See, for example, the speeches he addressed to employers published in his book, Economía Política de la Transición. Foxley, 1993. 44. See Cavallo, 1998. 45. This debate emerged from analysis that was undertaken both at Chile’s principal universities, but also in its main think-tanks (the Christian Democrat influenced Corporacion de Investigaciones Económicas para Latinoamerica, CIEPLAN and the more right wing Centro de Estudios Públicos, CEP). To fully understand the impact of this research, it is necessary to know that the Concertación governments drew many of their ministers and principal ministerial advisors from the ranks of CIEPLAN. See Silva (1991) for detail on this. 46. Riveros (1997) and Mizala and González (1996) are proponents of this argument. An alternative view, however, would be to argue that this phenomenon must also be attributed to the structural nature of the 1975 crisis that occurred after a series of privatizations, which in turn led to a high unemployment rate, while the 1982 crisis was more cyclical in nature (see, for example, García, 1993). Most likely, however, both factors were at play in the more rapidly declining unemployment rate after 1982. 47. As a result of the 1989 elections, the Concertación held 60% of the seats in Congress and 22 of 47 Senate seats. Nine of the 47 senators are not elected and had been appointed

Notes

48. 49. 50.

51. 52. 53.

54.

55.

56. 57. 58. 59. 60. 61.

62.

63. 64.

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by the Pinochet administration. Only eight designated senators served during most of the Aylwin period, as one died in office and was not replaced. Throughout the period they constituted an effective veto power for the parties of the right whenever it came to major legislation and constitutional reform (Mainwaring and Shugart, 1997). Frank, 2004. The exact text of these agreements is reproduced in Cortázar 1993. See Cortázar (1993), Campero 2000, Henríquez (1999), and Santibañez (1999). Campero writes, for example, “the accord was a first for Chile. Its value lay in the willingness of all groups involved—the unions, the government and business—to come to the same negotiating table and work toward consensus, this search for consensus contributed to the smooth transition to democracy which the government had pledged to bring about” (Campero, 2000: 397). Frank, 2004: 76. Haagh (2002) largely echoes this view. Frank, 2004: 76. According to the current labor law (Article 161) the cause “reasons of the firm” includes: rationalization or modernization, attempts to remedy falling productivity, changing conditions in the market or the economy, and unsatisfactory job or technical performance of the worker, as well as an unsuitable skill match between the worker and the firm’s needs. In practice, therefore, this article allows for employers’ flexibility as much as an “unjustified dismissal” clause would do. For details on the strike regulation see Mizala, 1996 or Gonzalez, 1996. Employers can temporarily replace strikers, from day one if their last offer for wage increases matched the forecast CPI index, or after 15 days of strike if it did not. This chapter really does not do the complexities of the Chilean union movement justice and touches only briefly on the issues of union regulations as they are not central to the task of this book. Since union coverage is so low in Chile, the impact of unions at the national level is more political rather than practical. For a better and more detailed analysis on both the legislative reforms regarding unions and collective bargaining and the complexities of the situation of unions since 1990, see Frank (2002 and 2004) and Haagh (2002). For useful insights into how the strategy of the union movement changed during the Frei government, see Campero, 2000. Interviews with Coloma, Mizala and Paredes. See Espinosa, 1998. Mizala’s comment was made in an interview in 1998. The Frei government held 58% of seats in Congress in 1993 and 21 seats in the Senate, which amounts to 44.6%. See Angell (2000) for a discussion of the impact of this manoeuvre on the election campaign. See the surveys of Barómetro CERC, 1999, and the UNDP, 1999 and 2000. The unemployment crisis is widely recognized as having been an important factor in eroding support for the government, thus turning an election, which should have had a foregone conclusion into a very close race indeed. At the time of these negotiations, the seats in the Senate were equally distributed: both the Concertación and the Opposition held 24 seats each. For a step-by-step account of how these nonnegotiable issues were dropped from the proposed reform, see Frías, 2002. See La Tercera and El Mercurio, various issues September–October 2000. One rather amusing example of these alterations is that workers can now no longer be dismissed for swearing at each other (only if they insult their employer!), nor for their behavior outside of the workplace.

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65. See Frías (2002) for a detailed discussion of all the turns and about turns of this labor reform. 66. For more details on the reforms, see www.mintrab.gob.cl/reformaslaborales/ 67. In all his speeches, President Lagos puts the unemployment insurance on the top of his list when it comes to enumerating the achievements of his administration, especially when he is talking about issues of social policy. See, for example, the presidential addresses held on the 21st of May each year (Presidencia de la República, 2000, 2001, 2002, 2003, 2004, and 2005). 68. For a complete list of all the individual pieces of regulatory reform implemented in recent years, see the Website of the Chilean Ministry of Labor: www.mintrab.gob.cl. 69. At the time of writing the judicial reform that the Lagos administration proposed was in the final stages of being approved in the Senate, and was about to be published as an official piece of new legislation. 70. For a discussion of these election maneuvers see Sehnbruch, 2006b. 71. Once we begin to look at empirical evidence on the Chilean labor market in the following chapters, it will become very clear that the regulation on these matters can have only a very limited impact because it affects such a small proportion of the labor force. 72. Campero, 2000: 400. Campero further argues that the position of the unions is compounded by their internal divisions that prevent them from developing an alternative strategy. 73. The statement “the employers love Lagos” (“Los empresarios aman a Lagos”) was coined by Hernan Somerville, the current president of the Confederación de la Producción y del Comercio (CPC), Chile’s most important employers’ association, and has led the Chilean press to describe Lagos as the employers’ best friend. 74. The Concertación’s policies on professional training have also been generally inadequate and not been discussed as part of the comprehensive labor reforms. This matter will be discussed in more detail in the following chapter. 75. More on this in chapter 6. 76. Sen 1995: vii. 77. This slogan “growth with equity” was used during the 1990, 1994, and 2000 election campaigns. During the Lagos campaign, the expression “crecer con igualdad” was used. 78. A stable, traditional open-ended contract is defined in this context as workers with open-ended contracts that pay social security and health insurance contributions, and have tenure of at least one year. Of a total workforce of 5,869,228 only 1,984,957 workers have such a job (CASEN, 2003). More detail on this issue will follow in chapters 4 and 5.

Chapter 4

The Characteristics of Employment in Chile

1. The definition of unemployment and the reasoning behind this definition is discussed in the following sections. 2. The survey is undertaken on a monthly basis and then quarterly averages are calculated. Since the survey was conceived in 1966, this provides us with a relatively long time series of data, but as the methodology has not been completely consistent over the years, the data has to be adjusted for these changes. See Ahumada and Gálvez (1992) for further explanations. 3. The precise question asked is “Qué hizo la mayor parte de la semana pasada?” (“What did you do during most of last week?”). If the answer to the question is not

Notes

4.

5. 6.

7.

8.

9.

10.

11. 12. 13. 14. 15.

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“work,” then the questionnaire investigates further as to the respondent’s activity during the last week. See http://www.ine.cl/03-empleo/ metodologia.htm for an analysis of the INE’s survey methodology. The report on the ENE by Mata Greenwood (1999) looks at the definitions used in this survey in great detail, and makes a series of recommendations regarding their improvement. The variable type of contract was included in some ENE surveys, but has not become a consistent part of the survey. The survey can also include additional modules to investigate specific topics such as child labor, inactive women, reading habits, workers of the microenterprise sector and work in the own home. However, none of these modules are ever repeated on a regular basis. See Mata Greenwood, 1999. The Universidad de Chile and the Dirección de Trabajo have had very similar problems in 1999 and 2005 when they attempted to construct panels between the households in the survey over the course of the 18 months that they are included in the survey. Although commissioned by the Ministry of Planning, the CASEN is in fact carried out by the Survey Unit of the Department of Economics of the Universidad de Chile, that is, by the same team that runs the Encuesta Ocupacional for the Central Bank. Like the ENE and the Encuesta Ocupacional, the CASEN is also applied to any responsible adult in a household, which in the case of this survey makes more sense since it is supposed to be a household survey. However, this means that the same methodological limitations apply to its employment data as to the ENE and the Encuesta Ocupacional. For a complete description of the CASEN’s survey methodology, see MIDEPLAN 1996. The CASEN surveys have been carried out in 1985, 1987, and every other year from 1990 until 2000, and then again in 2003. At the time of writing it appears that the CASEN will henceforth be undertaken triennially. Methodologically, the data is only considered comparable from 1990 onward. Data from the early years is therefore not generally made available to the public. It takes almost a year to fully process the data gathered by the CASEN as it is such a long and complex survey. In subsequent chapters we will see the problems that arise from these inconsistencies in more detail. For a detailed report on its sampling method, see Universidad de Chile, 1994. For an analysis of the differences in the unemployment rate between the two surveys, see Ruiz-Tagle Venero (1999). Income data is only gathered during the March and June surveys. In June of each year, the university also runs a survey on the unemployed in order to measure the duration of unemployment and job search techniques. This survey unfortunately does not, however, ask the unemployed about the characteristics of their previous jobs. This survey also interviews any available adult member of a household, and not specifically the employed, but the chances of the head of the household answering the questions is much higher, as the survey is carried out over a weekend, and not during office hours in the week. Questionnaires are sent out to employers, personnel managers, and representatives of the employees working in an establishment, either a union representative if there is a union, or a randomly selected employee who has worked at the establishment for at least a year.

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17.

18.

19.

20.

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22.

23.

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For an official description of the Encla’s methodology, see Dirección del Trabajo (1998 and 1999). The available information is, however, very scarce. Twenty-five percent of the Encla’s sample are in fact small companies with 5–9 employees. For them to be included in the sample, they must, however, be part of some formal register of employment establishments. So far, the Dirección del Trabajo has not published precise information on exactly how the sample of companies is selected and which register of companies it is selected from! Examples of such surveys include three labor market surveys undertaken by an NGO, the Programa de Economía y del Trabajo (PET) in 1988, 1989, and 1991. This was probably the first series of such surveys that provided important data on the characteristics of employment in Greater Santiago. This author carried out a survey of the quality of employment in Greater Santiago in 1999, which was the first survey to use a methodology of interviewing the employed and unemployed members of a household themselves so as to obtain accurate information about their employment history. The idea of asking questions about employment histories in order to compensate for the lack of panel surveys and time series data was later copied by a survey carried out by the Centro de Estudios de la Mujer (CEM) and also by what is by now Chile’s most complete employment survey, the HLSS. In the numerous interviews that I carried out in which I asked workers about their employment histories, those with stable jobs could easily remember the employment history of the last ten years. But workers who rotated frequently between jobs could generally only remember the last three jobs accurately. It is very difficult for interviewers to motivate survey respondents sufficiently so that they make the effort of remembering their employment histories, and the more unstable these are, the more difficult it becomes to ensure that they continue to reply without breaking off the interview. This methodology is therefore not very accurate with regard to the segment of the workforce that we should be most concerned about. “La elaboración de estadísticas e indicadores socioeconómicos no ha evolucionado a la misma velocidad que lo ha hecho la realidad. . . . Es necesario crear un sistema de estadísticas del mercado del trabajo que mida no solamente la ocupación y la desocupación, sino que considere también la calidad del trabajo y los distintos tipos de empleo que se están generando.” Schkolnik, 1998: 305. The ILO’s employment report is a good example of this problem as it is based on INE data. The report has to use INE data, as its purpose is to discuss employment flows, which requires quarterly data that only the INE survey provides on a national basis. And although the reports make every effort to discuss workers who have problems with employment (e.g., young people or workers who are underemployed), these discussions are unable to include important issues such a job rotation, social security coverage rates or the proportion of workers without contracts. See ILO, 2004. This comment is based on the author’s own experience working as a consultant to the Chilean Ministry of Labor, and on discussions with experts from Washingtonbased development institutions, as well as from the ILO’s head office in Geneva and its local office in Santiago. Opinions are unanimous on this matter. Between 2000 and 2003, the issue of pension reform was such a politically sensitive subject that the word could not even be used in government documents, which had to circumscribe the issue with expressions such as the “possible perfectioning (perfecionamiento) of the pension system.” As the Lagos administration was during this time deeply embroiled in a controversial health reform, which also had to confront the politically entrenched interests of the private health insurance companies, the

Notes

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25. 26.

27.

28. 29.

30. 31.

32.

33.

34.

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government shied away from entering into another sensitive debate about fundamental issues concerning pension coverage, and concentrated instead on making less controversial changes, such as establishing new types of pension funds with different risk profiles. The development of participation and unemployment rates are discussed only very briefly here, as they have been extensively analyzed by other analysts. See, for example, Marfan (2001) or Infante and Sunkel (2004). See author’s Website for more information on the generation of employment. In addition, the variable occupational category usually distinguishes between blueand white-collar workers. This distinction is also outdated due especially to the growth of service sector jobs, as it classifies relatively menial tasks in the services sector (e.g., supermarket cashiers or bus drivers) as “white collar” jobs, whereas a skilled worker in a factory who may be earning multiples of the former’s salary will be classified as “blue collar” simply because these definitions are based on the distinction between “physical” and “intellectual” effort. The INE’s data also allows analysts to group workers into more detailed categories such as directors and managers, professionals, technicians, agricultural workers, blue and white-collar workers, and unqualified workers. For examples of this type of analysis, see Bravo (2003) and Contreras and Medrano (2004). As was discussed in chapter 3, “tele-work” is a category of employment that the Chilean Labor Code has recently defined as work from home that is carried out by Internet or telephone. The term “occupational status” is used in order to differentiate this variable from the variable “occupational position” that is traditionally used. As a general rule, fixed term contracts cannot exceed the duration of one year (Art. 159–64, Código del Trabajo). Under exceptional circumstances, they can be renewed for another year in the case of management level or professional employees (i.e., those with higher education). For a succinct description of the different types of contracts available in Chile, see Urmeneta (1999) pp. 72–76. The Chilean term used for such work is “boletear.” The assumption is that these workers work completely independently and are not subject to any regulations imposed by an employer, such as, for example, particular working hours. “Yo trabajo a honorario” is the way Chilean freelance workers describe their job situation if they are effectively working as wage-earners. My own employment survey undertaken in 1999 tested whether the professional self-employed and honorarios actually classified themselves correctly. Ninety-seven percent of the latter answered in this survey that they had to be present during particular working hours. This is the main criterion that Chilean compliance officers apply in order to determine whether honorarios are effectively disguised wage-earners without contracts. Incidentally, in a blatant abuse of their own legislation, the government and the public sector mainly employ people as honorarios, as this is the only way they can circumvent the antiquated regulations of the Public Sector Labor Code, which has yet to be reformed. The CASEN classifies workers according to their own judgment, either as honorarios or independent professionals, depending on whether they consider themselves to be self-employed or not. To make matters more confusing, honorarios may answer in surveys that they have signed a contract. However, these contracts only specify the kind of work that the worker is undertaking to do during a particular time period, in exchange for a particular payment. These contracts do not accord the worker any

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35. 36.

37. 38.

39.

40. 41.

42.

43. 44.

45.

46. 47.

48.

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Notes

rights to severance pay or paid social security benefits, although some other working conditions to which the worker is entitled may be specified, such as holidays or bonuses. Further data on the characteristics of honorario workers beyond what is contained in this chapter can be found on the author’s Website. Temporary contracts are very common in the agricultural sector during periods of harvesting. These contracts would not, however, be captured by the CASEN, which is carried out in spring (October/November). Workers in the 14–19 age group cannot be classified as professional self-employed as the definition of “professional” requires a higher education level. Based on CASEN data, Amuedo-Dorantes (2001) shows by means of regression analysis that the professional self-employed further increase the share of the highest income quintile. The minimum wage here is calculated on a net hourly basis to adjust for part time work. In 2003, the gross monthly minimum wage amounted to 115 pesos, 648 or US$ 167 at the average exchange rate of 2002 (691.4 Pesos/ Dollar). Also, the standard deviation of their earnings is higher than that of the self-employed at 2,529 versus 1,502. As regards the unemployment insurance, the obligation to contribute only applies to contracts that have been initiated since the insurance scheme was introduced in 2002. However, the self-employed are excluded from the scheme, and do not even have the option of contributing. People who use the tarjeta de indigente, a municipal accreditation of the fact that they are indigent, are treated by FONASA under the label “Grupo A.” People whose gross household income is 120,000 pesos or less and who are inscribed in FONASA, are also treated free of charge, under the label “Grupo B.” The same is true for the pension funds of the armed forces and the police. The negative views of the private health insurance and of the pension system were very noticeable and strongly voiced during the author’s own survey and numerous interviews. The words ISAPRE and AFP frequently provoked negative responses, especially among workers who had chosen not to contribute. However, it was also clear from the interviews that the relatively superior satisfaction with the public health insurance system, FONASA, was not based as much on the services received, as on a cost / benefit calculation. This comment is based on the author’s own interview experience. When probed in more detail, respondents who said they had pension insurance (but were unlikely to be contributing due to the informality of their work situations), explained that this coverage was through their spouse’s insurance. See the author’s Website for details on additional data. The term “laziness” was not originally suggested by the questionnaire itself, but the frequency of the answers that fell into this category under the heading “other” turned the answer into a category of its own merit. In any case the pension receivable depends on the amount saved, which is predominantly a function of how long a person contributed to the pension scheme. There is a maximum limit on the amount that can be contributed per month, but not a maximum number of years for contribution. In addition, people who have contributed for 20 years to a pension scheme, but due to low wages have not managed to save enough money for a minimum pension, are guaranteed this amount by the state. But in order to qualify for a minimum pension, workers must have contributed for at least 20 years to a pension scheme, and this is almost impossible to achieve if they have not had regular and relatively stable work.

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49. Art. 159–4, Código del Trabajo. 50. For instance, companies with more than 8 workers must allow them to form unions, companies with over 25 workers must form committees for health and security invigilation, and those with over a 100 have to form an entire department within the company for this purpose. 51. These examples have been picked from a range of cases in the author’s own survey sample where the interviewers detected other forms of employment through additional and persistent questioning. 52. The author’s own survey, which asked about additional employment in rather more detail, showed that less than 15% of workers engaging in extra employment activities earned more than 50% of their total monthly income through these additional activities while approximately another 40% earned less than 50%. 53. In the U.K., part-time work accounts for approximately a quarter of the labor force, most of which is concentrated among women. See Deakin and Reed (2000) or Harkness (1999). 54. There is no specific definition of part-time work in Chile. The CASEN survey merely asks workers whether they work full-time or part-time. The results are therefore self-defined. 55. As the following chapter will discuss labor market developments, data inconsistencies, and the need for regular panel surveys will also be discussed in the next chapter. 56. The self-employed in Chile are required to register their business, which provides them with an identification number, called a RUT, for their customers. Even small street stalls have such a number, if they are operating legally. Asking about whether the self-employed have registered their businesses would allow analysts to distinguish between small businesses and street vendors (vendedores ambulantes) who are simply selling a product temporarily (and illegally), and whose employment situation is therefore much more precarious. 57. So far, to the best of the author’s knowledge, such a study has not been undertaken. 58. See, for example, Echeverría (1997), Echeverría et al. (1998), Echeverría and Uribe (1998), Espinosa (1996 and 1997), Gálvez and Salamé (1999), Laire (1999), and Ruiz-Tagle (2000).

Chapter 5

The Development of the Chilean Labor Market

1. See, for example, Agacino and Echeverría (1995), Bastías (1987), Escobar and López (1996), González, C. (1998), Rojas (1998), and de Laire (1999). 2. Although this data would also be available from the INE survey, for consistency’s sake CASEN data is used here, as the CASEN surveys are the main source of information throughout this book. 3. A more detailed breakdown of Chile’s unemployment rates by sex and age group can be found on the author’s Website. 4. Garcia Huidobro, 1999. 5. Only the University of Chile’s employment survey asks workers whether they would like to work more hours than they actually do, and thus allows for the construction of a more precise underemployment rate. However, the survey is limited to the Greater Santiago area. 6. The results presented here are exactly the same if the underemployment rate is calculated with a cut off point of 35 hours per week. More detail on these calculations can be found on the Website accompanying this book. 7. In 1994, workers were also asked whether their employment relationship was permanent, short-term or temporary. However, if a worker answers that she is in a

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8. 9. 10.

11.

12.

13. 14. 15.

16. 17. 18.

19.

20.

21.

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Notes

permanent employment relationship, this does not necessarily imply that she has signed an open-ended contract. As we saw in the previous chapter, many workers are employed with short-term contracts that are renewed every year, so that workers therefore consider their employment relationship as permanent. This is an example of how the phrasing of the CASEN’s questions prevents us from making data comparisons from year to year. Data for 2003 could not be added to this graph, as the required expansion factors had not yet been made available when this data was calculated. See author’s Website for detailed data analysis. “New Jobs” refers to all employment created between September of one year and September of the next year, that is, all jobs with a starting date that falls within this period. If an individual has held more than one job within the period, then all jobs held are counted. Thus each job with a different employer is counted. Differences with the CASEN data on this point are explained by the fact that this survey is limited to Greater Santiago. However, when this survey was replicated with CASEN data from the same geographical area, the proportions were very similar. Cowan et al. (2004) argue that the Chilean labor market adjusted to the economic crisis predominantly through the unemployment rate, as opposed to through wage levels. However, their study does not consider other characteristics of employment, such as their occupational status or type of contract. See Blanchard and Landier (2001) and Toharia and Malo (2000). See, for example, De Gregorio and Landerretche (1998). Definitions of poverty and indigence differ in urban and rural areas, based on the logic that city life is more expensive. In 2003, the poverty line in urban areas was defined as 43,712 pesos and indigence as 21,856. Rural poverty was defined as 29,473 pesos and rural indigence as 16,842. The exact definitions of the poverty line in Chile during the period in question can be found on the author’s Website. The working poor (indigent) in this case have been defined as workers who belong to poor (indigent) households. More detailed data on this point can be found on the author’s Website. This section presents only the most cursory glance at unionization rates. For more detail and analysis on the development of unions in Chile, readers are referred to Dirección del Trabajo (undated), Espinosa (1996 and 1997), Haagh (2002), Salinero (2004), and the various reports by the Dirección del Trabajo (1999, 2000, and 2003) that present the results of the Encla survey. The historical data referred to is taken from N. García (1993), and refers to the ratio of union members to the total labor force. It is somewhat difficult to obtain coherent data, as authors who have presented historical data often use different definitions of union levels. Cortázar (1997), for example, presents much higher unionization rates (65% in 1973 and 22% in 1990), but does not specify how these were calculated, specifically how he defined wage-earners. The data presented in this section on the years 1990–2004 can be found on the author’s Website and is based on the Dirección del Trabajo’s Compendio de Series Estadísticas (2005). Source: OECD Labor Market Statistics database, 2002: www.oecd.org. Trade union density in the United States is 12.6% and most OECD countries have a union density of between 20–30%. This result is contradicted by a survey from 1996, also run by the Dirección del Trabajo, which showed that over 80% of employers had a favorable or very favorable attitude toward their most recent collective bargaining experience. See Espinosa, 1997.

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22. The universe of this question was restricted to wage-earners, even though in theory, the self-employed could form unions or similar organizations, as in practice this does not occur. Data on unions from the Quality of Employment survey can be found on the author’s Website. 23. One detailed study was carried out by Haagh in 1992. However, this was a relatively small survey and not representative at a national level. (See Haagh, 2002 for a report on its results.) 24. These comments are based on the author’s numerous interviews with workers as well as on interviews with officials and lawyers from the Dirección del Trabajo. 25. See Dirección del Trabajo, 2005. 26. For example, in 1997, the Dirección del Trabajo monitored the football and urban collective transport industries. The latter had a particularly high rate of noncompliance of 81%. It also monitored the existence of required nurseries for employees in shopping centers. In 1998, the football sector was again reviewed, as were the media industry, transport (including ports), collective transport, and aviation. 27. The source of this information is the Dirección del Trabajo’s Compendio de Series Estadísticas (2005). Data on the activities of the Dirección del Trabajo can be found on the author’s Website, as well as on www.dt.gob.cl. 28. IBD (2003) shows comparative data for Argentina, Brazil, Mexico, and Peru on the number of inspectors per 100,000 workers and on the number of fines levied per 100,000 workers. 29. For a detailed analysis of the reform, see Gazmuri, 2004. 30. Gazmuri, 2004: 62.

Chapter 6 Legislation versus Practical Reality: Chile’s Unemployment Insurance 1. Law N 19.728, Código del Trabajo. This law is not retroactive, however. Existing contracts are not affected by it. 2. The unemployment insurance schemes that do exist will be discussed in the following section of this paper. 3. The exact specifications of periods and conditions of advance notice vary from country to country. In Brazil, for example, the required notice period is 1 month, and workers are legally entitled to devote two hours of each workday during this period to searching for new employment. 4. Advisors from the Chilean Ministry of Labor have traveled to Argentina, Paraguay, Peru, Ecuador, and the Dominican Republic in order to advise local governments on the design of unemployment insurance schemes (Source: Interview with an official of the Ministry of Labor). 5. These four points were gleaned from a body of published and unpublished literature by members of the Chilean government who were involved in designing the new insurance scheme, and from a series of discussion papers published by prominent labor market experts in Chile. These papers include: Acevedo and Eskenazi (2004), Beyer (2000), Bravo (1998), CILAS (2000), Coloma (1993, 1996, and 1997), Cortázar (1995), Ministerio del Trabajo (2000a, 2000b, and 2000c), Mizala and Romaguera (1996a), Paredes (2000), Pérez (1998), Velásquez (1996 and 1998), and Vergara del Río (2000). 6. Except the domestic service sector, to which a different unemployment insurance scheme applies (See the Labor Code, Article 163, a). 7. Workers with short term contracts or contracts limited to a particular project or service only have to have had contributed to the scheme for 6 months.

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8. The payments made by the subsidy are as follows: ● ● ●

$17,338 for the first 3 months (~24 US$). $11,560 for the next 3 months (~16 US$). $8,669 for another 6 months (~12 US$).

9. The Subsidy has a historically low coverage: 25% in 1985 and 14.4% in 1990, according to Indicadores PET, 1996. 10. Theoretically workers can sue their employer for the full severance pay to which they are entitled, but as court proceedings are costly, time consuming, their outcomes uncertain, and do not provide workers with the immediate funds that they need, most of these cases are settled out of court. Latin American countries do not generally have effective labor courts that can deal with cases expediently. 11. Source: Interviews with the former head of the institution, Maria Ester Feres, and several officials from its compliance department. 12. As an example one could look at the debate about employment rigidities in Germany, which for a long time now has been attempting to flexibilize its labor market regulations against fierce opposition from both unions and the broader electorate. Such a debate cannot, however, be compared with the case of Chile with its large informal sector and difficulty in enforcing legislation even in the formal sector. 13. See, for example, Bravo (1998), Beyer (2000), Coloma (1993, 1996, 1997), and Cortázar (1995 and 2001). The Chilean government’s documents also follow this argument (see Ministerio del Trabajo (2000c), SAFP (2002)), as do the official speeches that presented the insurance scheme to the public (e.g., Solari, 2002). 14. Law 19010, approved 1990, Código del Trabajo. 15. Ministerio del Trabajo, 1997. This law was briefly mentioned in chapter 2 to show that it foreshadowed the new unemployment insurance. 16. The theoretical paper on unemployment insurance most widely cited by Chilean analysts is Atkinson and Micklewright, 1991. Although the authors begin the paper by a restatement of the view commonly voiced by economists that unemployment insurance can increase the unemployment rate, the authors go on to say that this is a gross oversimplification and also explain why. 17. This quotation is taken from an article by one of Chile’s preeminent labor market economists, Fernando Coloma, who is associated with both neoliberalism and the political right (Coloma, 2000). 18. See, for example, Bravo (1998), González (1996), or Paredes (2000). 19. One such paper by Altman and Feldstein, for example, is quoted in almost all the Chilean literature on unemployment insurance. They argue that unemployment insurance increases both the number of unemployment spells as well as the duration of unemployment, and therefore also the unemployment rate. The paper runs through a model of an unemployment insurance based on private accounts into which 4% of the wage is paid as a personal saving. Should the accumulated amount not be enough to finance a maximum period of 6 months unemployment, workers can obtain a loan from the government in order to cover the deficit. Balances in personal savings accounts can therefore be both negative and positive. The idea is that individuals fully internalize the cost of unemployment compensation in order to avoid all issues of moral hazard related to traditional unemployment insurance schemes. 20. See, for example, Bravo (1998), González (1996), or Paredes (2000). 21. Heckman and Pagés (2003), for example, argue that the legislation regulating job security in the shape of various types of mandated severance pay packages impact both the equity and efficiency of Latin American labor markets. And Montenegro

Notes

22.

23.

24.

25.

26. 27. 28.

29.

30.

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and Pagés (2003) argue that job security regulations reduce the employment opportunities of the young and unskilled and may force some workers into selfemployment. Pages and Saavedra (2002) state that “among Latin American labor laws, concerns for balance between social protection and labor market efficiency have been overridden by desires of pure social protection.” The natural proponents of more extensive risk sharing would be the trade unions who did commission some studies on unemployment insurance (see Larraín and Velazquez (1992) and Cilas (2000)). However, these studies lack academic rigor, are not produced by economists (which seems to be essential if you want to be taken seriously by Chilean policymakers), and were generally too few and far between to make an impact in an ideological environment that is heavily biased against them. The surveys of the National Institute of Statistics and the Ministry of Planning include some information on the unemployed, as does an annual survey undertaken by the Universidad de Chile. And the Dirección del Trabajo’s Encla has included questions on the reasons for dismissals that companies have made and their turnover rates. But none of these sources allow for a comprehensive analysis of the effects that this unemployment insurance scheme will have on the unemployed. The data referred to in this paper was produced by a survey that the author undertook specifically in order to be able to simulate any proposal for unemployment insurance legislation. The first official survey that provides similar information was undertaken in 2002, after the implementation of this insurance (see www.proteccionsocial.cl). Almost no studies or papers published in Chile on the unemployment insurance proposal actually discuss any data. See Coloma (1997 and 2000), Beyer (2000), Ministerio del Trabajo (2000 a and b), and Cilas (2000). Only Beyer (2000) undertakes the exercise of relating periods of employment to periods of unemployment based on 1996 Casen data. But his conclusions are erroneous as he uses data on the employed as a substitute for data on the unemployed, thus neglecting to take into consideration that the latter generally have worse job characteristics than the workforce on the whole. Unlike a study on the U.S. labor market by Altman and Feldstein (1998), who use the U.S. Panel Study on Income Dynamics to test the model over a period of 25 years (1967–1991) and conclude, first, that almost all workers will have positive balances in their savings accounts at the end of their working lives, and, second, that the cost of forgiving negative balances in personal savings accounts at the end of a working life would be less than half the cost of current unemployment insurance. For details on these early proposals, see Coloma (1993), Cortázar (1993 and 1995), and Cortázar et al. (1995). For details on Protrac, see Coloma (1997), Ministerio del Trabajo (1997), and Velázquez (1996 and 1998). During this period all politicians were talking about employment, including the conservative opposition’s candidate Joaquín Lavin, whose policy proposals were remarkably similar to those of the socialist candidate Ricardo Lagos. Excerpt from a book entitled “My Vision of the Country” published by President Ricardo Lagos of Chile before his election that outlined his policy program. The quote is from the section on employment. “Ninguna sociedad moderna es tal sino tiene un seguro de desempleo. Cómo es posible que Chile hoy no lo tenga, cómo es posible que frente a la crisis . . . el aumento del desempleo signifique simplemente hambre y privación para muchos, porque no hemos sido capaces de concordar la fórmula para un seguro de desempleo, esto es inadmisible. . . . En mi gobierno se legislará sobre un seguro de desempleo, aprendiendo de los errores cometidos en otros países. Así, haremos de éste un elemento indis-

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31. 32.

33.

34.

35. 36.

37.

38.

39.

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Notes

pensable para introducir mayor justicia en la clase trabajadora chilena. Que ellos no perciban que cuando llega la crisis son quienes llevan la peor parte” (p. 63). Interview with José Antonio Guzmán in El Diario Financiero, April 19, 1993. Quoted in Haagh, 2004. The contribution of employers is much less than in other individual savings account schemes in the region. In Brazil, the contributions to the individual savings accounts is 8%, in Argentina is 8–12%, and in Colombia 9%. An 8% contribution amounts to approximately one month’s wage over the course of one year. This point was confirmed by numerous interviews that the author undertook with officials from the Ministry of Labor, the Ministry of Planning and the Presidency. The publication of such information would have had important consequences regarding the functioning of Chile’s pension system. At the time when the unemployment insurance was being negotiated, the Chilean government, weakened by high unemployment rates and an economic crisis, considered that it was in no position to confront questions on the pension system that would have incited a revolt from the right wing opposition, which is closely linked to the system’s fund management companies. Only once the unemployment insurance was safely passed into legislation did the Chilean government undertake an official survey that would provide the data on employment histories to estimate its impact properly (and also estimate the real coverage of the pension system). The data that this section refers to can be found in Appendix F. Throughout, this chapter uses data from the author’s own survey carried out in 1999 as this remains the only survey to date that specifically asked the unemployed about the characteristics of the jobs they held prior to becoming unemployed, thus enabling a direct comparison of their employment characteristics with those of the employed labor force. While more recent surveys, such as the Casen 2003 and the HLSS 2003 provide more up-to-date information on the labor market, the former does not interview the unemployed about their previous jobs, and the latter was applied to a universe of people affiliated to the pension system and not to the entire labor force. The difference between technical and academic secondary schools was explained in chapter 4, Section1.4. This would be a typical result in any large developing city, but the same cannot be said for rural locations as the possibilities for informal street trading are much more limited there. However, the results of this survey apply to Santiago only. Unfortunately, this survey did not analyze this issue in sufficient detail. Any future study of this subject should find out exactly why people are working in their jobs, and ask them questions such as these: Did you accept the first option that presented itself, did you have a choice, do you consider your position as transitory or permanent, do you want to work in your job? Although the insurance only pays benefits in five installments, workers are covered for six months of unemployment as they have an additional salary to live on, which corresponds to the payment for their last month at work. However, they would not have any income for their first month in their new job! I am disregarding the long term unemployed in this analysis, first because they significantly distort the average periods of duration which double if they are included, and also because the unemployment insurance scheme is specifically designed for the short term unemployed, or what could be considered as “frictional unemployment.” As discussed above, honorarios are normally not considered part of the wage-earning labor force, as their contracts are based on civil not labor law. That is why they are

Notes

40. 41.

42. 43.

44.

45.

46. 47.

48.

49.

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excluded from this unemployment insurance scheme ex ante. The honorarios included in this simulation, however, are effectively working as wage-earners, and should therefore be considered as wage-earners without formal written contracts. See Sehnbruch (2004) for a discussion of how this scheme compares to others in the region. From Mi visión de país (Lagos, 1999: 65). “Este proyecto de seguro de cesantía garatizará a todos los trabajadores de nuestro país, la necesaria protección en casos de pérdida de empleo, con prestaciones básicas y garantizadas para todos sus beneficiarios. . . . Al término de mi período presidencial ningún trabajador de Chile dejará de tener un seguro de desempleo que le pueda permitir mirar con tranquilidad el futuro.” See Bachelet (2005), which can be found on http://www.michellebachelet.cl/m_ bachelet/grafica/ambientes/0/programa%20MB.pdf. The speeches given by President Lagos, Labor Minister Ricardo Solari, and his chief advisor on the unemployment insurance scheme, Germán Acevedo, at the ceremony that celebrated the implementation of the “insurance” give a very good idea of how the government presented this “insurance” to the public. They are published in Relaciones del Trabajo, No. 38. This strategy has been pursued in the areas of pension and health legislation, where the government has also run into fierce opposition when it came to making the systems work more effectively for beneficiaries, or expanding the benefits they provide. It is interesting to note that government officials who instituted this scheme recognize that the contribution from employers to the scheme is probably too low: see Acevedo and Eskenazi, 2004. See Bravo, 2004. One common instance in which this occurs is with taxi drivers who crash their cars. Since the latter are generally not even insured against accidents, they lose both their cars and their means of generating income for at least a period of time. It is a well-known fact that the Chilean tax authorities are extremely efficient and monitor even the self-employed very closely, but that they do not share their data with other government departments. This makes the enforcement of legislation in areas where the government has less institutional capability difficult. The forms that beneficiaries have to fill out when they make a claim can be downloaded from the Website of the unemployment insurance: www. afcchile.cl.

Chapter 7

Vocational Training: Missing the Opportunities

1. Haagh (1999 and 2002) and Jara (2002) are a notable exception to this rule. 2. Professional training undertaken before entering the labor market is normally referred to as vocational education and is generally considered part of educational not labor policy. This chapter cannot consider vocational education, as the subject would require a chapter for itself. For discussions and descriptions of vocational education in Chile and recent developments on the subject see Miranda 2003a and 2003b, and OECD, 2004. 3. Becker, 1993. 4. A more detailed analysis of these connections will follow in chapter 8. 5. Márquez, 2000: 4 6. Ibid. 7. See OECD, 2004 for a general study of the Chilean education system.

310

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8. The OECD’s Pisa Study, carried out in 2000, showed that Chile significantly lagged other developing countries, for example, Thailand, Bulgaria, Lithuania, the Czech Republic, Poland, or Hungary in terms of its educational performance. The top performers of this study were Hong Kong, Japan, and Korea. See Ministerio de Educación, 2004. 9. Approximately 75% of young people between the ages of 15–18 are still in education. This rate is slightly lower than in the United States but higher than in Britain. See Márquez, 2000. 10. Mazza, 2004a. 11. For a discussion of labor costs in Latin America, see chapter 9, IDB, 2001. 12. Moura Castro, 2000: 11. 13. See IBD, 2003: 282. 14. Moura Castro, 2000: 11. 15. This has been widely recognized by the literature on vocational training. See, for example, IBD, 2003. 16. Becker, 1993. 17. For example, in Lota, a small mining town to the southwest of Santiago, employment reinsertion programs were launched for workers who had lost their jobs as a result of the closure of the area’s coal mines. The programs were poorly planned, however, so that the small town ended up with over 200 hairdressers! 18. See Norton Grubb and Ryan (1999) for a comprehensive discussion of these issues. 19. Paredes, 1994. 20. For an excellent historical account of vocational training in Chile, see SENCE, 2004. 21. Several training centers were set up that specialized in different areas of training. The European governments involved were Denmark, France, Germany, Italy, Switzerland, and the United Kingdom. See Echeverria, 1989. 22. Law 1446. 23. The 1997 SENCE reform renamed all institutions related to the SENCE statute. To avoid confusion, this chapter uses only their current names. The OTECs were formerly known as Organismos Técnicos de Ejecución (OTEs), OTICs were known as Organismos Técnicos Intermedios (OTIRs), and the OMILs were known as Oficinas Municipales de Colocación (OMCs). 24. “Promover el desarrollo de las competencies laborales de los trabajadores, a fin de contribuir a un adecuado nivel de empleo, mejorar la productividad de los trabajadores y las empresas, así como la calidad de los procesos y productos.” Article 1 of Sence’s Statute from 1976. 25. See D. García, 1989 for details on the program. 26. The surveys referred to were carried out by TIME and PREALC, and are quoted in Mizala, 1996c. 27. Montero, 1997: 323. 28. Fantuzzi mentions several of these arguments. The fear of scrutiny by the tax authority is to be explained because the Franquicia Tributaria is based on a tax credit structure. See Fantuzzi, 1989. 29. Law 19.518. 30. In 2002, the postcontract training facility was extended to a maximum of five months. 31. Firms with a payroll of 35 UTMs or less now have to apply to FONCAP for funding as opposed to being a part of an automatic procedure (Law 19.967). Firms with a payroll of between 35 and 45 UTMs are entitled to write off up to 7 UTMs in training costs. And companies with a payroll of which 1% is worth less than 9UTMs

Notes

32. 33. 34. 35. 36.

37. 38. 39. 40.

41.

42. 43.

44. 45.

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and with a total payroll cost of more than 45 UTMs are entitled to write off up to a total of 9UTMs of training costs. All other firms are still subject to the traditional 1% tax credit rule. As for the OTECs, they are now subject to much stricter accounting procedures, they have to have been fully operational for at least six months in order to be accredited by SENCE, and their sole business objective has to be that of providing vocational training. See SENCE 2005 for details. More detailed breakdowns of subject areas can be found on the SENCE Website, www.sence.cl. Detailed calculations based on SENCE’s own data on the training committees can be found on the author’s Website. For more detail and also a critical perspective of the functioning of the Comités Bipartitos, see Geo-Consultores, 2005. Detailed calculations based on SENCE’s own data on the OTICs can be found on the author’s Website. Table 3 merely presents a summary of the CASEN data on training. Wherever the text refers to information that is not included in this table, this information can be found on the author’s Website, together with further details on these calculations. Green, 1999. ¿Ha asistido a algún curso de capacitación laboral en el último año? Green, 1999. Geo Consultores (1999) come to the conclusion that overall, there is a positive effect, especially for male workers between the ages of 26 and 35, who work in export oriented companies, in the Metropolitan Region and serve in an administrative or middle management position. This point is based on quantitative evidence from the author’s employment survey that showed that fewer than 30% of workers initiated their own vocational training, and also on qualitative evidence from numerous interviews in which workers, who were in stable jobs and had experienced training, expressed their surprise at the question of whether they had experienced either an increase in earnings or a change of employment as a result of the training they received. The full name of this program is Programa de Capacitación para Jóvenes, but it is generally referred to as Chile Joven. Throughout the 1990s, the Chilean government ran such a large number of specific programs, all of which were very small that their management became unwieldy. In 2002, these individual programs were discontinued and consolidated into three main new policies: the National Scholarship Program (Programa Nacional de Becas), the Individual Scholarship Program (Programa de Becas Individuales) and a new youth training program, the Programa en Oficios para Jóvenes. This introduced greater flexibility into the vocational training system as it became much easier to award individual grants for specific training purposes than trying to gather groups of at least 20 beneficiaries (for example, port workers or handicapped young adults) together for the same purpose, which was especially difficult in rural areas. Details on other programs that target vulnerable groups can be found in ILO (1998a), García-Huidobro (2002), and Arenas and Benavides (2003). See IBD (2003) and Ramírez (undated). In this context, young adults are defined as aged 15–24. The unemployment rate among young people was 13.1% as opposed to a total unemployment rate of 5.7%. See ILO (1998a), Weller (2003), and Fawcett (2004) for an analysis of the situation of youth unemployment.

312

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Notes

46. The latter program was run through Chile’s social investment fund, the Fondo de Solidaridad e Inversión Social (FOSIS). The difference between the program that was run through FOSIS and the SENCE programs was that the former emphasized general education while the latter emphasized vocational training. The FOSIS courses were also longer in order to give the participants a better chance of acquiring the necessary social skills to insert themselves into the labor market, and their training was carried out in learning centers rather than directly in companies. 47. For agricultural students, loans were provided by the agricultural development agency, the Instituto de Desarrollo Agropecuario, INDAP. 48. Most of these people participated in the program between 1991 and 1998. In 1999, the number of participants dropped significantly. For more detailed data on Chile Joven, see the author’s Website. 49. Nevertheless, Haagh makes the very valid criticism that Chile Joven’s insertion rates were significantly below those of a similar program in Korea, while its drop-out rates were much higher. 50. “El programa fue sumamente efectivo para aquellos jóvenes que necesitaban de un pequeño ‘empujoncito’ para salir de la marginalidad, mientras que tuvo dificultades para llegar a los jóvenes con mayores problemas” (ILO, 1998a: 339). 51. ILO, 1998a. 52. The ILO made this point very succinctly: “what we want to highlight here is the lack of a medium and long-term strategy that aims to provide a better perspective in terms of insertion and employment mobility for young people from low income backgrounds” (ILO, 1998a: 339). 53. The Fifth, Eighth and Metropolitan Regions. 54. See D. García, 1989. 55. See D. García, 1989. 56. Unfortunately, the question the CASEN asks with regard to different types of employment contracts does not allow us to distinguish whether respondents have formal apprenticeship contracts, as they are defined by the Chilean Labor Code, or whether they simply consider themselves to be apprentices. For instance, a participant in Chile Joven, who is interviewed during their period of work experience, may well consider herself an apprentice, but technically would not be subject to the same contractual conditions as apprentices. 57. A table detailing the number of participants appears in Bravo, 2004. 58. The US$ amount of this subsidy has fluctuated significantly since the program’s implementation. Depending on the exchange rate used since it was introduced 50,000 Pesos is equivalent to anything between 70–100 US$. 59. Green, for example, mentions exactly the same problem with regard to vocational training in Britain and Europe. See Green, 1999. 60. See Márquez (2000) and IBD (2001) for a comparison of vocational training institutions and their financing mechanisms in Latin America. For information on Asian countries, see the Website of the Korean Labor Institute. 61. Fantuzzi, 1989. 62. This point is made by Geo Consultores, 1999. 63. See González Candia, 2002. This report examines the human resources and technical infrastructure of 31 municipalities in the Metropolitan Region. The equipment and resources of municipal employment agencies in rural areas is likely to be even worse. 64. See Mazza (2004b) and IBD (2001).

Notes

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65. This comment is based on the author’s numerous interviews with local officials and municipal staff as part of research into Chile’s social policy programs. Other reports that are also extremely critical of the employment agencies in Chile are GeoConsultores, 1999 and 2002. 66. For Details on the Certification system, see Fundación Chile, 2005. The system was set up based on existing models and with technical expertise from Australia, Brazil, Canada, Mexico, the Uinted Kingdom, and the United States. For an example of a discussion of how useful certification is with regard to a specific economic sector in Chile, see Erdozain and Sievers (2004) on the tourism industry. 67. For details of the British system, see OECD, 2003. 68. See Ryan (2002) for a discussion and a critical perspective of these policies in the U.K. and in Europe. 69. Almost all the evaluation studies of the Franquicia Tributaria and SENCE’s social programs emphasize the need for further quality control and the enforcement of training standards (see, for example, Geo-Consultores, 2001 and Universidad de Chile, 2003). The establishment of a national qualification system would help in this process. 70. See Green, 1999. 71. See, for example, Esping-Anderson and Regini (2000) and Blanchard (2004a).

Chapter 8


1. Human Development Report, UNDP, 1999: 23. 2. See the article written by Sen in the Human Development Report, 1999: p. 23. 3. Arnand and Sen, 1994. For an excellent summary of the debate on the methodology and usefulness of the HDIs, see Anand and Sen (1994) and Mancero (2001). For critical discussions of the indicators, see León (1999), Lüchters and Menkhoff (2000), Ogwang (2000), Ravaillon (1997), Rodas (1998), and Srinivasan (1994). 4. Saith, 2001. 5. In June 2001, the von Hügel Institute at St. Edmund’s College, Cambridge held a conference on the subject of “Justice and Poverty” at which 39 papers were presented. After a number of these presentations, participants asked whether the same analysis could not have been undertaken using other approaches, and whether these would not have led to the same conclusions. 6. See Clark (2000) for a discussion of all the considerations that need to be taken into account. (Sections 5 and 6 of the paper.) 7. See, for example, the World Development Reports of the World Bank or the Human Development Reports of the UNDP (World Bank, 2000 and UNDP, 2000). Even the ILO’s World Employment Indicators contain very little data on employment characteristics beyond unemployment rates, participation rates and the proportion of the informal sector (ILO, 2004b). 8. ILO, 2002. 9. See Ministerio del Trabajo (2001b) Observatorio Laboral No. 2: www.mintrab.gob.cl 10. See the International Labour Review, Vol. 142, 2003, No.2. 11. The subvariables, for example, include workers’ participation in the functioning of their enterprise, outcomes of collective bargaining, coverage in 9 different classes of social security benefits or measures of “social dialogue” (Ghai, 2003). 12. These variables are the nonenrolment rate of children of school age in educational establishments, low pay, excessive hours of work, unemployment rate, youth

314

13.

14.

15.

16.

17. 18.

19.

20. 21. 22. 23.

24. 25.

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Notes

unemployment rate, male/female gap in labor force participation and old age without pension (Bescond et al., 2003). The variables used are a labor market security index (defined as a high level of access to reasonable income-earning activities), an employment security index (defined as protection against unfair and arbitrary dismissal, and the possibility of redress should this occur), a job security index (possession of a “niche” at work, allowing some control over job content, that is, what a worker actually does and the opportunity he or she has of building a career), a work security index (safe and healthy working conditions, including stress and overwork), a skills reproduction security index (whether there are possibilities for professional development, including apprenticeships), an income security index (adequate income), and a voice representation index (individual and collective representation), Anker et al. (2003). Theoretically, in case of a dispute with an employer, a verbal contract should also be considered as a valid basis for an employment relationship. However, as it is extremely difficult to prove the existence of a verbal contract, this effectively leaves the worker in a very weak position. Schemes for income support, child benefit payments, housing benefits, and pension assistance exist in Chile for the poorest of the poor, provided the state has adequate funds available for these expenses. Although it would be preferable to consider a more long-term indicator of income such as average wage over the last 3 months, in the Chilean case this statistic would be rather difficult to obtain. With a more generous budget, however, such a variable could be used. The minimum wage in Chile in 2003 was 115,648 Chilean Pesos, equivalent to US$ 167 at the average exchange of 2003 (691 Pesos). See Contreras et al. (2004) for a study of income and poverty dynamics based on an analysis of the CASEN 2001 panel survey. The authors conclude that downward income mobility in Chile is so high that only the highest income decile is unlikely to fall into poverty. Unfortunately, the CASEN surveys do not ask workers about whether they were trained on the job, just whether they participated in a formal training course, as we saw in the previous chapter. Saith 2001a. If this index were to be calculated for a series of countries, then income should be calculated on a purchasing power parity basis. See, for example, ILO, 1998a; ILO, 1999; Oxman and Galilea, 1999. As we saw in chapter 6, the new unemployment insurance scheme will not significantly change this, as it protects those most vulnerable to becoming unemployed least. See Mideplan, 2002b. In the case of Chile, most regions in the country depend predominantly on one particular type of industry or sector, for example, mining in the north, fruit and agriculture in the middle, and forestry in the south.

Chapter 9 1. 2. 3. 4.

Conclusions: Quality and Quantity

“Ese mito! Contrato a las personas que necesito. La legislación no influye en eso.” See World Bank, 2004. See Sehnbruch, 2006b. As was discussed in chapter 4, workers can be contracted on an honorario basis, and be given an open-ended contract. This merely means that they have been hired as an

Notes

5. 6. 7. 8.

9.

10.

11. 12.

13.

14.

15. 16.

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honorario on an indefinite basis. Such contracts are not the same as ordinary work contracts that are governed by the Labor Code. See Title I, chapter 1 of the Labor Code. See Title II of the Labor Code. Chapter IV, article 22 of the Labor Code. Chapter V, article 64 of the Labor Code. The Lagos administration tried to pass detailed legislation with regard to subcontracting arrangements, but its efforts ran into opposition from employers. After letting it languish in Congress for several years, his government attempted to pass the legislation during the second round of the presidential elections in 2006, but at the time of writing, no agreement has been reached on the matter. In generic terms, Chapter I, article 10 of the Labor Code stipulates the content of a contract, such as the details of the two counter parties, the type of work to be carried out, remuneration and benefits, and the distributions of the working hours. Subclause 6 of this article states that a contract may also specify the duration of the work to be carried out. Similarly, Chapter V, article 160 defines under which conditions a contract may be terminated. Again, the potential existence of short-term and project-based contracts can be deduced from subclauses 4 and 6 of this article, which state that a contract may terminate when its agreed duration has expired or the work or service that the workers was contracted for has been concluded. It is these subclauses that effectively define what short-term or project-based contracts are. Again, these workers could take their employers to court if they are dismissed, and claim that they should have been given an open-ended contract, and that their dismissal should be treated accordingly. However, as has been repeatedly stated, it very rarely comes to this in practice. The only workers for whom this will not be the case are low income workers with between 12 and 24 months tenure in their previous job. The standard regulation in Chile is that a new worker can only make use of his statutory paid leave once he has worked for at least twelve months with an employer. Since short-term contracts cannot be made up for longer than a year, workers more often than not lose their entitlement to holidays. As for the bonus payments and 13th salaries, these are paid at specific times during the year, September and December in the case of the aguinaldos, and after the financial year has closed in the cases of bonuses. Employers usually make sure that short-term contracts are timed so as to avoid having to pay aguinaldos, and as for bonuses, a worker would have had to have worked during the full financial year in order to be entitled to them, but would no longer be with the employer when they are paid out, and would therefore not receive them. In fact, it is widely assumed in the literature, that such contracts are much more common today than they were 20 and 30 years ago, although unfortunately there is no reliable time series data to prove such assumptions. In developing countries, by contrast, atypical contracts are not generally restricted to any particular circumstances, as the government would not have the administrative capacity to enforce such restrictions. For detail on the logic behind such policies, see, for example, Samek Lodovici (2000), and Blanchard and Landier (2001). In their own words, Blanchard and Landier argue that atypical contracts “have further insulated workers under permanent contracts from fluctuations in employment, increasing their bargaining power and decreasing the response of wages to unemployment. Second, they have made it very costly for firms to keep workers at the end of their temporary contracts: keeping a worker implies giving that worker a

316

17. 18. 19.

20. 21. 22. 23.

24.

25.

26.

27.

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Notes

permanent contract, and the employment protection that comes with it. Unless the worker is exceptional, the firm has an incentive to let him go, and hire another temporary worker. And if the probability that the worker will not be retained is high, the incentives for the firm to give him training are limited. The result has been an increasingly dual labor market. In France, the evidence is that entrants typically go through a long succession of dead-end temporary jobs and unemployment spells before landing a regular job, and that the length of time to obtain a permanent job has actually increased since the introduction of temporary contracts.” See Blanchard and Landier, 2001: 11. Other articles leading to similar conclusions are Deakin and Reed (2000) on Great Britain, Malo et al. (2000) on France, and Toharia and Malo (2000) on Spain. See Blanchard and Landier (2001), Esping-Andersen and Regini (2000), and Heckman and Pages (2003). See Blanchard (2004a and 2004b), and Blanchard and Tirole (2003). The other main conclusion that Blanchard and Tirole (2003) come to is that the role of judicial systems should be limited and that judges should not be allowed to second-guess the economic decisions of employers. The authors conclude that legal costs associated with redundancies, not the actual cost of severance pay legislation in Europe constitute the worst burden on European employers and the worst rigidity of employment regulation. This point, however, is less relevant in the context of the Chilean case, where labor tribunals do not have to authorize redundancies unless there is a complaint, which only occurs in very few cases. Blanchard 2004a. Ibid. Blanchard, 2004a: 18 and also Blanchard, 2004c. Employers in Chile automatically deduct health insurance and pension payments from the wages of their workers and pass them on to the respective insurance companies. The same mechanism applies to unemployment insurance. These basic pensions are different from the minimum pensions guaranteed by the state to people who have contributed to the pension system for a minimum of 20 years. The minimum pension is generally worth twice the amount of the basic pension, which does not require having made any contributions to the pension system. Michelle Bachelet’s program for her government promises to eliminate this system of cupos, and to make the payment of these basic pensions automatic for all people who qualify so that they no longer depend on whether the municipality has sufficient resources. It also promises to increase the amounts of these pensions (see Bachelet, 2005). Since the Concertación took over in 1990, Cortázar has been the only Labor Minister who was an expert with technical knowledge of the labor market, a Ph.D. in labor economics from MIT to be precise. He subsequently worked as an academic both at the Universidad Católica and the Universidad de Chile. Before being made Labor Minister, he was head of CIEPLAN, the most prominent independent research institution in Chile during the 1980s. An example of the limited information and research available to the Ministry of Labor is that its department (the Undersecretariat of Social Security), which is responsible for paying the remaining pensions in the public system as well as the pension assistance for the extremely poor, until 2003 did not have access to a centralized source of information on the pension system, and on the different types of pensions and benefits it paid out. It got various reports from the supervisory body of the pension fund administrators and from the institutions that manage the former pension system, but it was unable to bring this information together in a single

Notes

28.

29.

30.

31.

32. 33.

34.

35. 36.

38. 39. 40. 41. 42.

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database so that it could analyse the data. So if high-ranking government officials like Alberto Arenas complain of a lack of information on the pension system, this is very much related to the government’s own lack of emphasis on implementing suitable information systems. Instead of having access to real data, the SAPF has had to run two surveys (in 2002 and 2004) on the employment histories of the Chilean workforce in order to be able to estimate the history of their contributions to the pension system. The results of the first survey are available on www.proteccionsocial.cl. Source IBD (2003: 282). These figures should be treated with some caution, however, as different countries classify their labor market expenditures under different headings. The figures for Chile are likely to change as the unemployment insurance becomes fully functioning, although the state’s contributions to the scheme are based roughly on its contributions to the previous unemployment subsidy. The figures do, therefore, illustrate a general trend. The Employment stabilization component is financed by employer contributions of 0.2% of their payroll, the unemployment insurance is financed equally by workers and employers with contributions of 0.6% of wages, and the vocational training programmes is financed by a 1% payroll tax on employers. See Haagh (2001) for an excellent description of the political process and the decisionmaking procedures that formed the background to Korea’s rapid and efficient response to its employment crisis. Yoo (1999: 115). For more details on the Korean employment insurance system, see Haagh (2001), Hur (2000), Park et al. (2001), and Yoo (1999 and 2005). An excellent range of data and analysis is available on the Website of the Korea Labor Institute: www.kli.re.kr. See Auer (2000), Blanchard and Philippon (2004), R. Buchele and J. Christiansen (2000), Esping-Andersen (1999), Gallie (2000), and Standing (1999a). For a brief description of the history of the union in question, Local 226, see Meyerson (2004) and www.culinaryunion226.org. For more detail on the cases of Las Vegas and Reno, see Waddoups (2001 and 2002). I am indebted to Harley Shaiken for pointing out the case of the Las Vegas unions to me. I am using the word “exploitation” in its literal sense here, without the negative connotations that are normally associated with this word, although plenty of employment situations in Latin America would warrant the negative connotations, too. See, for example, the Mensajes Presidenciales by Ricardo Lagos (Secretaría de la Presidencia) and Mideplan 2001. Most recently, the June/July 2005 CEP survey again showed that employment and the generation of jobs routinely comes top among the concerns of the electorate followed by issues such as health services, crime, improved education, economic growth, equality of opportunities, and income equality, in that order. See www.cepchile.cl. Stallings and Weller, 2001. See, for example, Agosín and Ffrench-Davis (1998) and Rosales (2000). See Palma (2004). Figure 17 sums up these developments at a glance. See Palma (2003b) for a discussion of the particularities of the Mexican case. See, for example, Goldstein and Schneider (2004).


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Relevant Chilean Web sites Administradora de Fondos de Cesantía (AFC): www.afcchile.cl Centro de Estudios Públicos (CEP): www.cepchile.cl Centro de Estudios de la Realidad Contemporánea: www.cerc.cl Chilean Government Web sites: www.gob.cl Chile Califica: www.chilecalifica.cl Comisión Económica para América Latina y el Caribe (CEPAL): www.eclac.cl Corporación de Fomento de la Producción (CORFO): www.corfo.cl Confederación de Producción y Comercio (CPC): www.cpc.cl Central Unitaria de Trabajadores (CUT): www.cutchile.cl Departamento de Economía (Universidad de Chile): www.decon.uchile.cl Departamento de Ingenería Industrial (Universidad de Chile): www.dii.uchile.cl Dirección del Trabajo: www.dt.gob.cl Employment Survey Historias Laborales y Seguridad Social (HLSS): proteccionsocial.cl El Mercurio (Chile’s most important newspaper): www.emol.cl

www.

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El Mostrador (online newspaper): www.elmostrador.cl Expansiva (independent—but close to the Concertacón—thinktank): www. expansiva.cl Fondo de Solidaridad e Inversión Social (Fosis): www.fosis.cl Instituto Nacional de Estadísticas (INE): www.ine.cl International Labour Office in Santiago (ILO): www.oitchile.cl La Tercera (Chile’s second most important newspaper): www.latercera.cl Ministerio de Educación: www.mineduc.cl Ministerio de Planificación MIDEPLAN: www.midelplan.cl Ministerio del Trabajo y de Previsión Social: www.mintrab.gob.cl Presidencia de la Republica: www.presidencia.cl Programa de Economía y del Trabajo PET: www.petchile.cl Servicio Nacional de Capacitación (SENCE): www.sence.cl Sociedad de Fomento Fabril (SOFOFA): www.sofofa.cl Superintendencia de Las Administradoras de Fondos de Pensiones (SAFP): www.safp.cl Superintendencia de Seguridad Social (SUCESO): www.suceso.gov.cl

Index

Acquired rights, 49, 50, 54, 56 Acuerdos Marco, 62, 266 Acuerdos Sociales, 59 AFPs, see pension funds Allende, S. President, administration or government, 54, 55, 60, 61, 132 Angell, A., 294n21, 295n28, 297n60 Apprenticeship contracts, 84, 86, 200, 201, 312n56; apprenticeship program or apprentice-ships, 18, 178, 181, 196, 197, 199, 201, 204 Arenas, A., 11, 288n15, 311n43, 316n27 Argentina, 73, 215, 288n25, 291n50, 295n35, 296n40 Author’s Web site, 87, 131, 188, 192, 234, 289n25, 301n25, 302n35/46, 303n3, 304n9, 304n15/17/19, 305n22/27, 311n33/35/36, 312n48 Aylwin, P., President, administration or government, 15, 58, 59, 61–64, 66, 150, 296n47 Bachelet, M., President, administration or government, 17, 164, 209, 245, 256, 267, 289n27, 309n42, 316n25 Basic needs, 23, 28, 29, 31, 32, 212, 213, 221, 259, 263, 290n23/25 Blanchard, O., 251, 254, 256, 265, 304n13, 313n71, 315n15/16/17/18/19/20/22, 317n32 Brazil, 73, 129, 183, 215, 269, 270, 289n25, 296n40, 305n28, 305n3, 308n32, 313n66

Campero, G., 60, 68, 296n41, 297n50/56, 298n72 Capabilities, 18, 20, 21, 22, 26, 27–33, 37, 39–41, 43, 44, 48, 66, 69–71, 73, 81, 84, 87, 110, 114, 129, 137, 138, 140, 142, 156, 164, 167, 169, 171, 172, 174, 175, 178, 209, 211–214, 216–218, 221, 223, 225, 235, 237, 238, 240–242, 249, 257, 258, 260, 271–274, 289n3, 290n16, 291n39 Capability approach, 14, 17, 18, 21–25, 27–29, 31–33, 35, 37, 39–45, 71, 84, 142, 211, 212, 213, 224, 225, 238, 240, 266, 271, 273, 274, 289n1/2/3, 290n16/26, 291n40 Case studies: Sonia & Germán, 5, 6, 8, 9, 10, 18, 69, 73–75, 84, 170, 233, 236, 240–243, 267, 268 CASEN, 16, 74, 76, 77, 79, 81, 84, 86, 90, 92, 99, 101, 104, 106, 107, 108, 109, 114, 115, 116, 117, 118, 119, 122, 123, 124, 125, 126, 131, 139, 182, 189, 192, 194, 200, 217, 221, 224, 229, 263, 285, 286, 288n20, 298n28, 299n8/9/10/11, 301n34, 302n36/38, 303n54, 303n2, 304n7/11, 307n24, 308n34, 311n36, 312n56, 314n18/19 CEPAL, 51, 129, 290n26, 293n12 Certification of skills, 95, 207, 208, 209, 242, 243, 266, 313n66

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Index

Characteristics of employment, 18, 41, 43, 76, 77, 87, 123, 153, 214, 245, 262, 268, 272, 274, 300n18, 304n12 Chicago Boys, 53, 292 Christian Democratic Party, 55, 294n23 Collective bargaining, 12, 50, 54, 55, 57, 64, 65, 68, 70, 71, 108, 113, 133, 134, 140, 178, 200, 208, 241, 243, 273, 297n55, 304n21, 313n11 Comites Bipartitos de Capacitación, 181, 264, 311n34 Concertación, 48, 49, 59, 60, 61, 62, 63, 64, 65, 68, 69, 70, 79, 80, 129, 137, 142, 169, 179, 180, 183, 196, 267, 268, 293n11, 296n45/47, 298n74, 316n26 Congress, 61, 67, 296n47, 297n59, 315n8 CORFO, 176, 177 Cortázar, R., 59, 259, 293n11, 296n37/38/42, 297n49/50, 304n19, 305n5, 306n13, 307n26, 316n26 CPC, 62, 296n42, 298n73 CUT, 68, 134, 150, 296n42 Cuenta propia, see self-employed Debt crisis, 57, 73 Decent work, 40, 42, 212, 214, 215, 216, 217, 224, 227, 292n68/72 Deregulation, 16, 36, 37, 70, 73, 250, 251 Dirección del Trabajo, 64, 66, 77, 108, 109, 133, 134, 135, 136, 137, 146, 273, 299n7, 300n16/17, 304n18/19/21, 305n24/25/26, 305n27, 307n23 Doings and beings, 24–25, 27 ECLAC, see CEPAL. Economic crisis, 4, 8, 9, 15, 18, 35, 38, 55, 57, 58, 66, 101, 114, 116, 117, 119, 120, 122, 125, 127, 128, 130, 139, 141, 155, 157, 196, 201, 238, 251, 255, 260, 261, 268, 295n33, 304n12, 308n33; Korean economic crisis, 260–262 Economic sector, 12, 52, 55, 83, 93, 110, 123, 127, 128, 133, 135, 136, 154, 171, 179, 180, 183, 185, 190, 204, 207, 208, 215, 218, 226, 228, 229, 232, 233, 265, 268, 282, 295n32, 313n66 Electoral system, 61

Elections, of 1988, 58, 296n47, of 1999, 65, 67, of 2006, 315n8, municipal and parliamentary, 65 Emergency employment programs, 57, 166, 167, 182, 259, 261, 273, 294n24, 295n29 Encla, 77, 78, 79, 133, 134, 300n16, 304n18, 307n23 Fantuzzi, R., 7, 287n10, 310n28, 312n61 Feres, M.-E., 136, 137, 290n25, 306n11 Flexibility, of labor market, 16, 36, 50, 58, 64, 68, 70, 148, 164, 172, 243, 250–252, 255, 266, 297, 311, of wages, 57; at the margins, 250–252 FONASA or public health insurance system, 95, 96, 97, 302n42/44 FONCAP, 181, 182, 203, 205, 310n31 Frank, V., 62, 295n33, 297n55 France, 123, 139, 251, 256, 288n22, 310n21, 316n15 Franquicia Tributaria, 170, 177, 179, 180, 181, 182, 183, 184, 185, 186, 189, 193, 195, 200, 202, 205, 207, 208, 242, 313n69 Freelance workers, see Honorarios Frei, E., President, administration or government, 58, 59, 63, 64, 65, 68, 150, 297n56/59 Fundacion Chile, 205, 207, 313n66 HDI, 31, 43, 211, 212, 213, 214, 215, 216, 224, 225, 226, 237, 313n3 High quality employment, 218, 227, 232 HLSS, (survey on social security and employment histories), 78, 79, 80, 81, 95, 300n18, 308n34 Honorarios, 85, 91, 93, 96, 100, 102, 103, 107, 108, 145, 161, 244, 247, 301n32/33/34, 308n39 IDB, 173, 196, 310n11 ILO, 8, 40, 42, 74, 75, 81, 82, 83, 84, 85, 103, 111, 113, 142, 153, 163, 176, 184, 197, 212, 214, 215, 216, 217, 225, 227, 233, 238, 288n14, 292n68/69/72, 293n5, 300n21/22, 311n43/45, 312n50/52, 313n7 Immobility law, 53, 56, 64 Import substitution industrialisation, 48, 50, 51, 52, 54, 173, 176, 271

Index INACAP, 176, 177, 182, 203 Income distribution, 5, 10, 15, 18, 19, 22, 48, 70, 92, 129, 131, 132, 140, 169, 171, 288n23 Individual savings accounts, 63, 70, 142, 143, 144, 148, 150, 152, 166, 253, 255, 256, 280, 308n32 INE, 74, 76, 79, 80, 83, 101, 295n32, 299n3, 300n21, 301n26, 303n2 Infante, R. and Sunkel, O., 82, 292n70, 301n24 Informal sector, based on the ILO’s definition, 37, 48, 52, 58, 74, 75, 81, 83, 86, 103, 109, 111, 113, 119, 147, 154, 157, 163, 214, 263, 268, 288n14, 293n5, 295n33, 306n12, 313n7 Informal employment, 83, 86, 141, 149, 241, 246, 268, 271 Information policy, with regard to employment data, 262 Institutions, general, 16, 168, 175; related to the labor market, 48, 79, 80, 114, 135, 136, 138, 170, 173, 177, 180, 181, 185, 189, 197, 204, 205, 242, 250, 258, 259, 260, 262, 263, 264, 279 ISAPRE(s), see private health insurance Korea, 133, 172, 239, 260, 261, 262, 268, 310n8, 312n48/60, 317n30/31 Labor Code of 1925, of 1980, of 1990, 48 Labor Office, see Dirección del Trabajo. Labor policy, 13, 16, 18, 19, 23, 35, 39, 51, 55, 56, 59, 60, 61, 62, 64, 66, 70, 142, 165, 167, 171, 177, 179, 196, 201, 209, 223, 233, 235, 240, 241, 242, 243, 260, 271, 274, 287n8, 309n2 Labour reform, 9, 36, 47, 48, 50, 53, 55, 56, 59, 61, 62, 65, 67, 68, 69, 70, 81, 102, 134, 177, 179, 209, 243, 244, 249, 259, 260, 293n3, 296n38, 298n65/74 Labor relations, 7, 8, 53, 54, 61, 62, 63, 65, 78, 108, 133, 134, 152, 153, 208, 209, 239, 243, 264, 265, 266, 267 Lagos, R., President, administration or government, 9, 65, 66, 67, 69, 138, 141, 151, 157, 164, 165, 298n67/68/73/77, 300n23, 307n281, 29, 309n41/43, 315n8 Las Vegas, 265, 266, 317n33

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337

Lavín, J., 64, 258, 307n28 Low quality employment,10, 19, 215, 226 Malaysia, 269, 270, 289n25 Marquez, 166, 171, 172, 183, Mexico, 47, 269, 270, 289n25, 305n28, 313n66 MIDEPLAN, 77, 299n9 Minimum pension, 6, 10, 11, 61, 80, 236, 245, 302n48, 316n20 Minimum wage, 3, 4, 6, 13, 52, 54, 57, 61, 81, 93, 94, 116, 118, 122, 127, 128, 150, 152, 156, 178, 179, 193, 200, 202, 215, 216, 221, 222, 234, 240, 273, 294n24, 302n39, 314n17 Ministry of Economy, 80 Ministry of Education, 207 Ministry of Finance, 11 Ministry of Health, 34 Ministry of Labor, 11, 80, 81, 143, 177, 215, 259, 260, 298n68, 300n22, 305n4, 308n33, 316n27 Ministry of Planning, see MIDEPLAN Necesidad de la empresa, 51, 62 National Employment Survey, 11, 74, 75, 76, 263 National health insurance, see FONASA Nussbaum, M., 28, 289n11, 290n18 OTECs and vocational training institutions, 177, 181, 182, 185, 198, 204, 206, 310n23, 311n31 OTICs, 178, 185, 204, 205, 209, 310n23, 311n35 OMILs, 178, 181, 196, 202, 205, 206, 258, 259, 310n23 Palma, G., 269, 270, 288n23 Paredes, R., 291n47, 293n18, 295n30, 297n57, 305n5, 306n18/20, 310n19 Pension funds, 52, 80, 96, 279, 301n23, 302n43, administrators, 245, 260, 279, 316n27, regulator, 279 Pension reform, 57, 259, 300n23 Pinochet, administration or regime, 20, 29, 54–61, 67, 68, 197, 294n21/26, 295n35, 296n47 Piñera, J. 294n26, 296n38

338

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Index

Plan Laboral, 55, 56 Plebiscite, 59 Poverty rate, 8, 15, 19, 20, 47, 129, 140, 267, 293n3 Prebisch, R., 51 Primary education, 6, 91, 190, 196, 230 Private health insurance, 7, 96, 278, 300n23, 302n44 Pro-empleo program, 167 Protrac, 150, 152, 307n27 Quality of employment, 10, 16, 17, 19, 22, 34, 36, 37, 39, 40, 41, 42, 75, 79, 80, 83, 84, 91, 94, 101, 114, 120, 121, 125, 126, 127, 128, 134, 211–230, 232–240, 242, 244, 252, 262, 272, 281, 285, 286, 292n68 Quality of employment indicator, 19, 211, 214, 217, 219, 226, 229, 236, 237, 285 Quality of employment survey, 17, 114, 120, 121, 125, 126, 127, 128, 134, 281, 305n22 Rawls, J., 22, 33, 290n23 Regulation, enforcement of, 135, 136, 137, 146 Reno, 265, 317n33 Robeyns, I., 23, 289n5, 291n41 Scholnik, M., 296n36 Secondary education, 34, 91, 154, 190, 200, 230 Self-employed, 37, 52, 69, 74, 75, 78, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 96, 97, 98, 100, 101, 102, 104, 105, 106, 108, 110, 113, 116, 119, 120, 121, 124, 125, 126, 127, 130, 131, 145, 155, 161, 163, 167, 182, 192, 194, 213, 219, 220, 221, 223, 235, 236, 241, 244, 245, 246, 247, 275, 301n32/34, 302n37/38/40/41, 303n56, 305n22, 309n48 Sen, A., 14, 21, 22, 23, 24, 25, 26, 27, 28, 32, 33, 39, 40, 41, 43, 44, 70, 173, 211, 213, 289, 290, 291, 292 Senate, 61, 64, 65, 67, 69, 296n47, 297n59/62, 298n69 SENCE, 170, 171, 175, 177, 178, 179, 180, 181, 182, 183, 184, 185, 188, 189, 190, 193, 194, 195, 196, 197, 198, 200, 202, 204, 205, 207, 208,

209, 223, 278, 310n20/23/31, 311n32/33/35, 312n46, 313n69 Severance pay, including legislation, 4, 16, 49, 50, 51, 53, 54, 56, 58, 62, 63, 70, 85, 101, 102, 103, 138, 141, 144, 146, 147, 148, 150, 152, 153, 159, 160, 165, 166, 174, 219, 242, 248, 249, 250, 251, 252, 253, 254, 255, 256, 257, 263, 275, 276, 284, 301n34, 306n10/21, 316n19 Skills, 6, 148, 169, 170, 172, 178, 195, 199 Social exclusion, 23, 28, 32, 170, 212, 239, 290n28/29 Social policy, 29, 37, 38, 49, 52, 142, 165, 196, 274, 298n67, 313n65 Socialist Party, 59 SOFOFA, 204, 205 Solari, R., 306n13, 309n43 Solidarity Fund, 144, 145, 146, 152, 157, 159, 160, 161, 162, 163, 165, 204, 206, 245, 253, 256, 276, 277, 278, 280 South Korea, see Korea Spain, 123, 139, 151, 216, 251, 288n22, 295n35, 315n16 Stallings, B., 268, 317n38 Streeten, P., 28, 36, 43, 290n22/24, 292n56 Strikes, 53, 55, 63, 64, 68, 151, 265 Subcontracting, 8, 11, 58, 67, 71, 78, 83, 108, 248, 315n8 Superintendencia de AFPs, see pension fund regulator Supiot, A., 35, 36, 37, 291n51, 292n57 Taiwan, 269, 270 Targeting, 22, 35, 59, 194, 291n52 Tarjeta de indigencia, 6, 100, 302n42 Tourism, 91, 183, 207, 270, 313n66 Turnover, 36, 223, 241, 252, 307n23 Underemployment, 43, 77, 114, 115, 116, 117, 139, 172, 292n55, 303n5/6 Unemployment insurance scheme or system, 4, 9, 11, 15, 18, 38, 51, 80, 81, 101, 139, 140, 141, 143, 147, 148, 149, 151, 152, 153, 156, 157, 159, 160, 164, 165, 168, 222, 241, 244, 249, 253, 255, 256, 257, 259, 262, 273, 275, 280, 305n2/4/6, 306n19, 307n23, 308n38, 308n39, 309n43, 314n24; South Korea (employment insurance), 260

Index Unionization rates, 52, 108, 132, 133, 140, 304n18/19 Universidad de Chile employment survey, 9, 77, 78, 101, 288n19, 295n32, 299n7/8/13, 307n23 Utilitarianism, 22, 32, 33, 289n3 Voluntary unemployment insurance (Pacto de Indemnización Sustitutiva), 147

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339

Wage indexation, 50, 53, 57 Weighting, of quality of employment index, 220, 224–226 Weller, J., 268, 311n45, 317n38 World Bank, 146, 288n25, 292n55/69, 313n7, 314n2 Wynn, S., 265 Youth training scheme (Chile Joven), 171, 311n43

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