The challenge and its solutions

Chapter 3 provides policy proposals to “the challenge [of] seizing the benefits from globalization, cognizant of the difficulties imposed by the need to adjust.” While this challenge is very general, the chapter then narrows it down and explains that the challenge is one of “[creating] employment … and [providing] social security in the LAC region.” The chapter proposes to re-regulate labor markets and provides three different solutions to this challenge. The solutions provided are very diverse and range from replacing social security taxes and dismissal costs with individual accounts to replacing the minimum wage with an income tax credit. All these solutions have in common that they respond to the challenge of keeping income security for workers but reducing inefficiencies in the labor market and, in particular, reducing employers' disincentives to hire. This challenge should be stated more clearly in the chapter.

The chapter proposes three specific responses to the challenge of keeping income security while reducing inefficiencies in the labor market. First, the chapter proposes to replace the current pay-as-you-go (PAYG) social security system, which exists in most LAC countries and around the world, with a fully-funded social security system. Second, it proposes to replace severance payments, which are paid to workers upon dismissal, with a system of severance payments savings accounts (SPSA).