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Unemployment insurance with a hidden labor market

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  • Álvarez-Parra, Fernando
  • Sánchez, Juan M.

Abstract

We consider the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of search effort. The optimal unemployment insurance system in an economy with a hidden labor market is simple, with an initial phase in which payments are relatively flat during unemployment and with no payments for long-term unemployed individuals. This scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries.

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  • Álvarez-Parra, Fernando & Sánchez, Juan M., 2009. "Unemployment insurance with a hidden labor market," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 954-967, October.
    • Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:954-967
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    1. Vargas Juliana Mesén & Linden Bruno Van der, 2019. "Why Cash Transfer Programs Can Both Stimulate and Slow Down Job Finding," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 8(1), pages 1-27, June.
    2. Carlos medina & Jairo Núñez & Jorge Andrés Tamayo, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," Borradores de Economia 750, Banco de la Republica de Colombia.
    3. Pontus Rendahl, 2012. "Asset‐Based Unemployment Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(3), pages 743-770, August.
    4. Fuller, David L. & Kudlyak, Marianna & Lkhagvasuren, Damba, 2014. "Productivity insurance: The role of unemployment benefits in a multi-sector model," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 39-53.
    5. Espino, Emilio & Sánchez, Juan M., 2013. "Unemployment Insurance in High Informality Countries," IDB Publications (Working Papers) 4550, Inter-American Development Bank.
    6. Cheng Wang, 1995. "Dynamic Insurance with Private Information and Balanced Budgets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 577-595.
    7. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    8. Finkelstein-Shapiro, Alan & Sarzosa, Miguel, 2012. "Unemployement Protection for Informal Workers in Latin America and the Caribbean," IDB Publications (Working Papers) 4542, Inter-American Development Bank.
    9. Juliana MESÉN VARGAS & Bruno VAN DER LINDEN, 2017. "Is there always a trade-off between insurance and incentives? The case of unemployment with subsistence constraints," LIDAM Discussion Papers IRES 2017014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Cirelli, Fernando & Espino, Emilio & Sánchez, Juan M., 2021. "Designing unemployment insurance for developing countries," Journal of Development Economics, Elsevier, vol. 148(C).
    11. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2015. "Unemployment Insurance Fraud and Optimal Monitoring," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 249-290, April.
    12. Ho Christine, 2019. "Optimal Disability Insurance with Informal Child Care," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(2), pages 1-42, April.
    13. David Bardey & Fernando Jaramillo, 2011. "Unemployment insurance/severance payments and informality in developing countries," Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS 2012-06-ccr, Condorcet Center for political Economy.
    14. Romain Duval & Prakash Loungani, 2021. "Designing Labor Market Institutions in Emerging Market and Developing Economies: A Review of Evidence and IMF Policy Advice," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(1), pages 31-83, March.
    15. Amélie Barbier-Gauchard & Francesco de Palma & Giuseppe Diana, 2013. "Why could Northern labor market flexibility save the eurozone?," Working Papers of LaRGE Research Center 2013-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    16. Martin Gonzalez-Rozada & Hernan Ruffo, 2014. "The Effects of Unemployment Insurance Under High Informality: Evidence from Argentina," Department of Economics Working Papers wp201403, Universidad Torcuato Di Tella.
    17. Bosch, Mariano & Esteban-Pretel, Julen, 2015. "The labor market effects of introducing unemployment benefits in an economy with high informality," European Economic Review, Elsevier, vol. 75(C), pages 1-17.
    18. Doligalski, Paweł & Rojas, Luis E., 2023. "Optimal redistribution with a shadow economy," Theoretical Economics, Econometric Society, vol. 18(2), May.
    19. David Bardey & Fermando Jaramillo & Ximena Pena, 2013. "Unemployment insurance in the presence of an informal," Documentos de Trabajo 11014, Universidad del Rosario.
    20. Martín Gonzalez Rozada & Lucas Ronconi & Hernan Ruffo, 2011. "Protecting Workers against Unemployment in Latin America and the Caribbean: Evidence from Argentina," Research Department Publications 4759, Inter-American Development Bank, Research Department.
    21. Jeremy Schwartz, 2012. "Unemployment Insurance and the Business Cycle: What Adjustments are Needed?," EcoMod2012 3674, EcoMod.
    22. Esteban-Pretel, Julen & Kitao, Sagiri, 2021. "Labor Market Policies in a Dual Economy," Labour Economics, Elsevier, vol. 68(C).
    23. Bardey, David & Jaramillo, Fernando, 2011. "Unemployment insurance and informality in developing countries," TSE Working Papers 11-257, Toulouse School of Economics (TSE), revised Nov 2011.
    24. Temel Taskin, 2010. "Unemployment Insurance and Home Production," 2010 Meeting Papers 93, Society for Economic Dynamics.
    25. Jeremy Schwartz, 2013. "Unemployment Insurance and the Business Cycle: What Adjustments are Needed?," Southern Economic Journal, John Wiley & Sons, vol. 79(3), pages 680-702, January.

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