Impacts of an employer’s contributory pillar: evidence from Chile

Abstract We estimate labor demand elasticities to predict the employment effects of an employer’s contributory pillar in Chile’s pension system. The Chilean system has been a model for reform in many countries worldwide. We find labor demand to be inelastic, with baseline estimates ranging from −0.27 to −0.91. We predict that the implementation of an employer contributory pillar with contribution rates of 1% increase would increase unemployment rates by 0.20 to 0.71 percentage points (pp) from a baseline unemployment of 6.51%. Our results show sizable differences in labor demand elasticities and employment impacts by industry and workforce characteristics. Simulations imply implementing a uniform employer contributory pillar would especially reduce employment for low-skilled workers and workers in industries where labor is easily substitutable.