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Unemployment Compensation and the Allocation of Labor in Developing Countries

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  • Charlot, Olivier

    ()
    (University of Cergy-Pontoise)

  • Malherbet, Franck

    ()
    (University of Rouen)

  • Ulus, Mustafa

    ()
    (Galatasaray University)

Abstract

This paper studies the effects of the introduction of unemployment compensation (UC) in countries characterized by pervasive informality. We provide a simple framework to analyze the impact of UC on the allocation of workers between formal and informal activities, as well as the allocation of workers between sectors featuring different incentives to go informal. We show that a reasonable amount of UC may reduce informality, while larger amounts of UC induce large disincentives to go formal because of the level of taxation involved. We also argue that the financing of UC should be part and parcel of a well- conceived UC system. We show that UC finance based on payroll taxes is likely to entail an excess level of informality resulting from cross-subsidies between heterogenous sectors. The introduction of a simple layoff tax meant to finance the UC system is then shown to reduce informality, hence highlighting how a well-designed financing scheme may be used as a supplementary instrument to curb informality.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7233.

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Length: 52 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7233

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Keywords: informality; labor market imperfections; unemployment compensation;

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  10. Ravi Kanbur, 2009. "Conceptualising Informality: Regulation and Enforcement," Working Papers id:2005, eSocialSciences.
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  15. Robalino, David A. & Zylberstajn, Eduardo & Robalino, Juan David, 2011. "Incentive Effects of Risk Pooling, Redistributive and Savings Arrangements in Unemployment Benefit Systems: Evidence from a Job-Search Model for Brazil," IZA Discussion Papers 5476, Institute for the Study of Labor (IZA).
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  21. Franck Malherbet & Mustafa Ulus, 2003. "Unemployment Insurance and Labor Reallocation," Working Papers 2003-17, Centre de Recherche en Economie et Statistique.
  22. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
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  24. Mário Centeno & Álvaro Novo, 2009. "Reemployment wages and UI liquidity effect: a regression discontinuity approach," Portuguese Economic Journal, Springer, vol. 8(1), pages 45-52, April.
  25. Ulyssea, Gabriel, 2010. "Regulation of entry, labor market institutions and the informal sector," Journal of Development Economics, Elsevier, vol. 91(1), pages 87-99, January.
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