Bardey, David, Jaramillo, Fernando and Peña, Ximena (2015) Unemployment Insurance in the Presence of an Informal Sector. World Bank Economic Review, vol.29. pp. 126-134.

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Identification Number : 10.1093/wber/lhv026


We study the effect of UI bene?ts in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment, ruling out the macroeconomic consequences of UI benefits, we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits or long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers'effort to secure a formal job and their labor supply in the informal sector. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. Even though in general it is ambiguous which effect dominates, we show that for short durations UI benefits increase unemployed worker's effort to secure a formal-sector job and decreases informal-sector work.

Item Type: Article
Language: English
Date: 2015
Refereed: Yes
Uncontrolled Keywords: Unemployment insurance, informal sector, income effects, developing countries
JEL Classification: H55 - Social Security and Public Pensions
I38 - Government Policy; Provision and Effects of Welfare Programs
J65 - Unemployment Insurance; Severance Pay; Plant Closings
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:56
Last Modified: 18 Apr 2024 11:51
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