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Contents | Executive summary | How to obtain this publication | Additional info
The following OECD assessment and recommendations summarise chapter 4 of the Economic survey of Chile, published on 26 November 2007.
Contents
There is much scope for tackling informality in the labour market
International comparisons are difficult, but labour informality is thought to be less pervasive in Chile than in most of Latin America and to have fallen gradually over time. Nevertheless, slightly more than 20% of the Chilean population aged 15 years and above and working at least 20 hours per week did not have a formal labour contract in 2006. International experience suggests that informality typically arises from disincentives associated with restrictive employment protection legislation (EPL), which is burdensome on businesses, especially small and medium sized enterprises. Therefore, making the labour code more flexible would help to reduce informality. In this regard, as recommended in the 2005 Survey, some modification of regulations on full time work might be useful to clarify that working time can be cut by any number of hours, and not necessarily by as much as one third, a limit that currently triggers some special provisions. Recent changes in the legislation on labour dispatching and sub contracting have strengthened the regulatory framework by eliminating legal uncertainties that had discouraged the use of these more flexible labour contracts. While it is too soon to evaluate the impact of these recent measures, they may contribute to labour formalisation.
Informality by income level, 2003
Incidence by income quintile, in per cent
Source: MIDEPLAN (National Household Survey, CASEN).
Low human capital deters formalisation, leaving ample room for policy action
Empirical evidence based on Chilean household survey data suggests that low human capital is one of the main obstacles to lowering labour informality in Chile. Employers may find it prohibitively expensive to hire unskilled workers formally, because their productivity is low in relation to the burden of compliance with regulations and the tax code, which adds to direct costs. Policy effort to improve the skills of the labour force, recommended elsewhere in this Survey and in previous ones, is therefore likely to also contribute to reducing informality over the longer term. This can be done through the education system, given that Chile still lags considerably behind the OECD area in terms of student performance, at least on the basis of standardised tests. The authorities are well aware that policy action in this area is of paramount importance to break the vicious circle of low human capital, informality and low income that perpetuates Chile’s extant income disparities, despite years of sustained economic growth. For those already in the work force, training should be more readily available. The main shortcoming of the current tax break financed schemes is that they fail to reach informal workers. The grants available for small enterprises could be extended to those that currently operate informally, provided that support is conditional on the recipient enterprise taking the necessary steps to formalise itself. This option could be complemented with an expansion of the skill certification system, which currently exists for particular skills, such as installation work and tourism, for example, but not as yet for the most common occupations in industry and construction, or in the most dynamic sectors.
Upper-secondary gross graduation rates, 2005 or latest information(1)
1. The solid horizontal lines refer to the OECD average, excluding the emerging‑market economies within the OECD area (Czech Republic, Hungary, Korea, Mexico, Poland, Slovak Republic and Turkey). The dashed lines refer to the average of the emerging‑market economies within the OECD area and the non‑OECD countries included in the sample.
Source: OECD (2005, 2006 and 2007).
Chile’s product market regulations could be more investment friendly
While stricter enforcement of the tax code and regulations can do much to reduce business informality, it is also important to recognize economic factors that create incentives for many activities to go unregistered. Around 40 50% of Chilean enterprises are deemed to operate informally, even though its product market regulations (PMR) are reasonably pro competition. But, on the basis of the OECD PMR indicator (reported in the 2003 Survey), administrative regulation is more restrictive in Chile than in the OECD area, and the country’s indicators of barriers to entrepreneurship and regulatory burdens on start ups are sub par by OECD standards. This is consistent with the 2005 Doing Business indicators calculated by the World Bank, according to which the cost of obtaining licenses as a share of per capita income is high in Chile in relation to OECD comparators. So is the cost of closing businesses. Progress has been made at the central government level in streamlining the necessary procedures for business registration and closures. Recent measures are making it easier for small enterprises to register electronically as taxpayers, to file and pay taxes and to obtain general information on how to close a business, among others. But the municipal governments, which have regulatory purview over several aspects of business activity, are lagging. Procedures for opening and closing businesses should be streamlined and their costs reduced further. In particular, coordination needs to be enhanced between the central government and the municipalities, and between them and health, safety and other agencies.
Product market regulations, 2003
0‑6 increasing scale from least to most restrictive
1. The solid horizontal line refers to the OECD average, excluding the emerging‑market economies within the OECD area. The dashed line refers to the average of the emerging‑market economies within the OECD area (Czech Republic, Hungary, Korea, Mexico, Poland, Slovak Republic and Turkey) and Brazil.
Source: OECD.
Tax evasion is coming down due to improved tax administration and higher enforcement
Cognizant that the tax authorities have a role to play in tackling business informality, policy effort has been focused on making tax administration more taxpayer friendly, while upgrading its enforcement capabilities. This strategy is bearing fruit, and tax compliance appears to be increasing over time: nearly 11% of the potential tax base of the value added tax is estimated to have been undeclared in 2005, relative to nearly 24% in 1998. Chile’s tax code does not appear to be particularly burdensome on businesses. The tax to GDP ratio is about 17% of GDP, and reliance on the VAT – which accounts for nearly 44% of revenue – discourages non compliance as a result of the invoice credit mechanism used for collection: a registered taxpayer has a clear incentive to purchase intermediate goods and inputs from another registered taxpayer to obtain a credit for these purchases. The VAT is also uniformly rated at 19%, with few exemptions. But compliance costs may be particularly onerous for small enterprises. Currently, there is no estimate of such costs in Chile, but international experience suggests that they should not be underestimated. Undoubtedly, progress has been made in recent years to reduce the time and cost of paying taxes through e-government, including electronic invoicing and tax pre-filing services, as well as simplified accounting requirements for SMEs. But some additional effort should be made by the tax authority to estimate VAT compliance costs, especially for SMEs. The authorities should continue to work towards making the tax system more taxpayer-friendly to small businesses.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English or in Spanish. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Chile 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Chile Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Luiz de Mello and Diego Moccero under the supervision of Peter Jarrett. Research assistance was provided by Anne Legendre.
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