Life cycle, financial frictions and informal labor markets: the case of Chile

We study the implications of economic policies on household’s decisions. focus Chile in 2019. Using a life-cycle search model and survey data, we found that an equivalent change labor tax rates non-contributory pensions (NCP) have opposite effects markets, specifically informality unemployment duration. NCP offers milder trade-off as it produces second-order increase informality. However, due to presence informal markets financial frictions, non-retired agents their current consumption only after cut. That is, positive wealth shock can reduce consumption. When consider impact welfare, households are assumed value consumption, cutting taxes seems be preferred. characterize market consumption-savings two operating directions: substitution wealth. The latter prevails suggesting life cycle aspects critical.