Unemployment Insurance in Chile: A New Model of Income Support for Unemployed Workers

This paper describes the Chilean experience concerning the implementation of a new unemployment insurance (UI) program. The use of individual savings accounts and private management are essential elements. In addition, a redistributive fund (Common Fund) helps workers pool risks, distributing resources from employed to unemployed workers and from stable firms to workers with low incomes and unstable jobs. The combination of personal accounts and redistribution reduces moral hazard problems endemic to traditional UI schemes and keeps costs at manageable levels. The paper discusses the political, social, and economic context in which this program was enacted and implemented, it reviews its key characteristics, it assesses the initial performance of the system in terms of coverage and benefits and it assesses the challenges that lie ahead. Finally the paper discusses the potential of this system as a model for other middle- and low- income countries.