GLOBAL BUSINESS CULTURAL ANALYSIS

Global business Cultural Analysis



Global Business Cultural Analysis

Introduction

We explore the stabilizing effects of unemployment insurance in Chile. A dynamic general equilibrium model is calibrated for the Chilean economy for the 1960-2000 period. We assume that the economy is subject to exogenous technological shocks and that a fraction of the population is liquidity constrained. Our main conclusion is that unemployment insurance has some stabilizing effect on the business cycle, especially on consumption, but that this effect is of the second order of magnitude. We also find that the larger the fraction of the population that is liquidity constrained, the more likely the program is welfare improving. Our results suggest that the objective of stabilizing the business cycle would be more efficiently achieved using alternative instruments. (Schady 2003 )

Stabilizing effects ensue if liquidity constrained agents are allowed access to unemployment insurance funds when they become unemployed in a recession, allowing them to reduce their consumption by less than they would have done if there were no unemployment insurance system. (Montenegro 2003 )As contributions to the fund are larger in booms than in recessions, this potentially provides an additional stabilizing effect. We assume non-diversifiable aggregate technological shocks that produce fluctuations in variables such as production, employment and consumption. People are assumed to be liquidity constrained and they do not have perfect access to the capital market.

The benefits of reducing business fluctuation have been widely studied in the literature. Lucas (1987) voiced doubts as to the value of these benefits, calculating that the effects on welfare are minimal. He compared his estimate of the benefits of attenuating the volatility of the business cycle with the large welfare benefits that attend economic growth, concluding that the profession would do better to focus on growth rather than on stabilization policies.

Discussion

The unemployment insurance fund in Chile is financed from three sources: workers, employers and the state. Workers contribute 0.6% of their gross income every month, which is deposited directly in their individual accounts. The employer contributes 2.4% of each employee's income, with two thirds of this going to the individual's account, and the remainder going to a 'solidarity fund'. (Haslam 2004 )The third source of funding is a yearly fiscal contribution of US$ 15 million to the solidarity fund, a contribution that can be adjusted yearly.

Every worker that voluntarily leaves his job, or is fired for a reason attributable to him can access his individual unemployment account. The maximum number of monthly withdrawals that this worker can make from his account is equal to the number of years that he has been contributing to the unemployment insurance, up to a maximum of five. The amount of the withdrawal falls every month, following a formula stipulated in the law2 that created the scheme.

If the person is fired for reasons attributable to the firm, in addition to his individual account he also has access to the solidarity fund. However, to be eligible for this he must also fulfill several conditions: first, the individual must have contributed ...