The objective of unemployment insurance is consumption smoothing rather than poverty reduction,42 but it nonetheless has an important role to play in limiting downward mobility among the middle sectors. Evidence from Central and Eastern Europe suggests that unemployment insurance reduced poverty among the unemployed by more than 50% in Hungary and 45% in Poland – noting its extensive coverage in this region (78% and 65% of households with unemployed members received the benefit, respectively).43

This income-smoothing role, the looser relationship between unemployment and poverty in Latin America (compared with OECD countries), and the scarcity of public resources all make it harder to implement non-contributory unemployment assistance schemes. Prevalent and flexible informality makes it hard to provide unemployment benefit even to formal workers. The typical conditions imposed by OECD countries in their unemployment insurance systems – being unemployed and available to work – become very difficult to enforce in these circumstances. The "moral hazard" problem, whereby incentives to seek work are diminished by the receipt of a benefit, is compounded with the possibility of "double dipping", that is claiming benefits while in fact working informally. Nevertheless, there remains substantial scope for policy to secure efficiency gains through risk-pooling or mechanisms for self-insurance.

In most Latin American countries it is severance pay, rather than unemployment benefit, that is expected to provide for the unemployed during spells out of work. This brings the risk that workers who lose their job as a consequence of their employer’s bankruptcy may not receive their due, at least where accrued severance pay is unfunded. To counter this many countries in the region have introduced self-insurance in the form of individual unemployment savings accounts. Argentina, Brazil, Chile, Colombia, Ecuador, Panama, Peru and Venezuela have all introduced such schemes, especially for salaried workers.44 Such accounts do not constitute unemployment insurance, however, since they do not pool risk across individuals.

Six Latin American countries do offer unemployment insurance, in the sense that the schemes offer net payments contingent on unemployment. In Brazil, Ecuador and Uruguay these are integrated into the social security system. In Argentina and Venezuela unemployment insurance is compulsory but separate from the social security system. Chile relied on an unemployment assistance programme until 2001 when it put in place an innovative system that combines individual accounts with a solidarity fund. Brazil has both unemployment insurance linked to social security and severance pay based on individual accounts.45 There are also some sub-national systems, such as the Mexico DF unemployment benefit, which acts rather like unemployment assistance – it is non-contributory and there is limited monitoring.

Coverage rates for traditional unemployment insurance systems have historically been low. Prior to the latest reform, only 6.7% of unemployed Chileans received the benefit. The highest coverage rate in the region in the early 2000s was in Uruguay, where 14.7% of the unemployed received benefits.46 Coverage rates for Unemployment Insurance Savings Account (UISA) systems are better, but still low. Only Brazil has as many accounts as employed workers,47 while in Chile, Panama and Colombia coverage rates are as low as 20%.48

Among the existing schemes, the Chilean system (established in 2002) is often proposed as a possible model for other middle-income countries.49 Instead of channelling workers’ contributions into a single risk pool, employers and employees contribute a monthly percentage of salary into an individual savings account. Part of the employer’s contribution is goes to a solidarity fund, which also receives public money from the state. This solidarity fund provides top-up benefits in cases where individual savings are low. Employees who have formal written contracts and who have contributed to the scheme for at least 12 months are entitled to access their savings accounts and withdraw funds. Individuals who have accumulated less than two months’ salary in their accounts are covered by the solidarity fund, unless their dismissal was for fair cause (employee misconduct, for example). Since the individual account balance is owned by the worker, the scheme incentivises work search. Double dipping remains a possible issue, but the fiscal cost is limited to the solidarity-fund element.

However, despite its potential, unemployment insurance based on individual accounts currently covers only formal employees. Given the mobility of workers between formal and informal work, this means that the proportion of the unemployed with access to insurance remains low. Even in Chile, where informality is the lowest in Latin America, unemployed workers are much less likely than average to have been in formal jobs with written contracts – around one-third report having had an atypical contract in their last job, and around 30% no contract at all. What is more, about 60% of the unemployed had been in their last job for less than 12 months.50

Moreover, dependent on contribution history the replacement rates provided by such schemes can be low. Workers who just fulfil the minimum eligibility criteria and who are not eligible for solidarity-fund top-ups would receive a single withdrawal worth about a third of their monthly salary. Unemployed workers who are eligible for solidarity-fund financing – which is the case only 22% of the time51 – are guaranteed an initial replacement rate of 50%, decreasing by 5 percentage points every month until the fifth and final payment. This is at the lower end of replacement rates in OECD countries. Since unemployment is far more likely among the lower-income categories than the higher, a vast majority of the unemployed population will receive little or no benefit. The insurance element in the programme is therefore relatively modest, as is the potential coverage. On the positive side, programmes like the Chilean one that link unemployment insurance to individual savings accounts can easily be implemented in those countries that already have UISAs, with more or less generous insurance payments.

Integrating UISA and unemployment-benefit schemes with labour and social policy remains a challenge for most countries in Latin America. Informality and lack of administrative capacity seriously limit the scope for continuous eligibility monitoring, though a requirement to take up placement services or training could easily be made a condition of benefit receipt. On the social protection side, a possible avenue to more generous benefits without large increases in labour costs would be to link UISA accounts and pension accounts in a funded defined-contribution system.52