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Unemployment insurance/severance payments and informality in developing countries

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Author Info

  • David Bardey

    (University of Rosario (Bogotá) and Toulouse School of Economics)

  • Fernando Jaramillo

    (University of Rosario (Bogotá))

Abstract

We analyze whether the introduction or an increase of unemployment insurance (UI hereafter) benefits in developing countries reduces the e¤ort made by unemployed workers to secure a new job in the formal sector. We adopt a comparative static approach and we consider the consequences of an increase of current UI benefits on unemployed workers?decision variables in this same period, i.e. we focus on an intra-temporal trade-off, allowing us to assume away moral hazard complications. When there is no informal sector, unemployed workers may devote their time between effort to secure a new job in the formal sector and leisure. In the presence of an informal sector, unemployed workers may also devote time to remunerated informal activities. Consequently, the amount of effort devoted to secure a new (formal) job generates an opportunity cost, which ceteris paribus, reduces the amount of time devoted to remunerated activities in the informal sector. We show that in the presence of an informal sector, an increase of current UI benefits decreases this marginal opportunity cost and therefore unambiguously increases the effort undertaken to secure a new job in the formal sector. This intra-temporal effect is the only one at play in presence of one-shot UI benefits or with severance payments mechanism.

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Bibliographic Info

Paper provided by Condorcet Center for political Economy in its series Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS with number 2012-06-ccr.

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Date of creation: Sep 2011
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Handle: RePEc:tut:cccrwp:2012-06-ccr

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Related research

Keywords: Unemployment insurance; informal sector; income effects; developing countries;

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References

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  1. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
  2. 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.
  3. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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Cited by:
  1. 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.

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