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Informal Labor and the Efficiency Cost of Social Programs: Evidence from Unemployment Insurance in Brazil

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  • François Gerard
  • Gustavo Gonzaga

Abstract

It is widely believed that the presence of a large informal sector increases the efficiency cost of social programs in developing countries. We evaluate such claims for the case of unemployment insurance (UI) by combining an optimal UI framework with comprehensive data from Brazil. Using quasi-experimental variation in potential UI duration, we find clear evidence for the usual moral hazard problem that UI reduces incentives to return to a formal job. Yet, the associated efficiency cost is lower than it is in the United States, and it is lower in labor markets with higher informality within Brazil. This is because formal reemployment rates are lower to begin with where informality is higher, so that a larger share of workers would draw UI benefits absent any moral hazard. In sum, efficiency concerns may actually become more relevant as an economy formalizes.

Suggested Citation

  • François Gerard & Gustavo Gonzaga, 2021. "Informal Labor and the Efficiency Cost of Social Programs: Evidence from Unemployment Insurance in Brazil," American Economic Journal: Economic Policy, American Economic Association, vol. 13(3), pages 167-206, August.
    • Handle: RePEc:aea:aejpol:v:13:y:2021:i:3:p:167-206
    DOI: 10.1257/pol.20180072
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    Cited by:

    1. Pinotti, Paolo & Bhalotra, Sonia & Britto, Diogo & Sampaio, Breno, 2021. "Job Displacement, Unemployment Benefits and Domestic Violence," CEPR Discussion Papers 16350, C.E.P.R. Discussion Papers.
    2. Diogo G. C. Britto & Alexandre Fonseca & Paolo Pinotti & Breno Sampaio & Lucas Warwar, 2022. "Intergenerational Mobility in the Land of Inequality," CESifo Working Paper Series 10004, CESifo.
    3. Gaurav Khanna & Carlos Medina & Anant Nyshadham & Jorge Tamayo & Nicolas Torres, 2023. "Formal Employment and Organised Crime: Regression Discontinuity Evidence from Colombia," The Economic Journal, Royal Economic Society, vol. 133(654), pages 2427-2448.
    4. Diogo G. C. Britto & Paolo Pinotti & Breno Sampaio, 2022. "The Effect of Job Loss and Unemployment Insurance on Crime in Brazil," Econometrica, Econometric Society, vol. 90(4), pages 1393-1423, July.
    5. Liepmann, Hannah & Pignatti, Clemente, 2024. "Welfare effects of unemployment benefits when informality is high," Journal of Public Economics, Elsevier, vol. 229(C).
    6. Leyva Gustavo & Urrutia Carlos, 2021. "Informal Labor Markets in Times of Pandemic: Evidence for Latin America and Policy Options," Working Papers 2021-21, Banco de México.
    7. Gerard,François,Naritomi,Joana,Silva,Joana C. G., 2021. "Cash Transfers and Formal Labor Markets : Evidence from Brazil," Policy Research Working Paper Series 9778, The World Bank.
    8. Antonia Asenjo & Verónica Escudero & Hannah Liepmann, 2024. "Why Should we Integrate Income and Employment Support? A Conceptual and Empirical Investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 60(1), pages 1-29, January.
    9. Bíró, Anikó & Prinz, Dániel & Sándor, László, 2022. "The minimum wage, informal pay, and tax enforcement," Journal of Public Economics, Elsevier, vol. 215(C).
    10. D’Ambrosio, Anna & Scrutinio, Vincenzo, 2022. "A few Euro more: benefit generosity and the optimal path of unemployment benefits," LSE Research Online Documents on Economics 117803, London School of Economics and Political Science, LSE Library.
    11. Britto, Diogo & Melo, Caíque & Sampaio, Breno, 2022. "The Kids Aren't Alright: Parental Job Loss and Children's Outcomes within and beyond Schools," IZA Discussion Papers 15591, Institute of Labor Economics (IZA).
    12. Ana Margarida Fernandes & Joana Silva, 2023. "Adjusting to Transitory Shocks: Worker Impact, Firm Channels, and (Lack of) Income Support," CESifo Working Paper Series 10479, CESifo.
    13. Gustavo Leyva & Carlos Urrutia, 2023. "Informal Labor Markets in Times of Pandemic," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 158-185, January.
    14. Cecilia Machado & Valdemar Neto & Christiane Szerman, 2023. "Firm and Worker Responses to Extensions in Paid Maternity Leave," CESifo Working Paper Series 10736, CESifo.
    15. Herreño, Juan & Ocampo, Sergio, 2023. "The macroeconomic consequences of subsistence self-employment," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 91-106.
    16. Paolo Pinotti & Diogo G. C. Britto & Alexandre Fonseca & Breno Sampaio & Lucas Warwar, 2022. "Intergenerational Mobility in the Land of Inequality," CReAM Discussion Paper Series 2322, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
    17. Huang, Po-Chun & Yang, Tzu-Ting, 2021. "The welfare effects of extending unemployment benefits: Evidence from re-employment and unemployment transfers," Journal of Public Economics, Elsevier, vol. 202(C).
    18. Oscar Becerra, 2023. "Effects of future pension benefits on pre‐retirement labor supply: Evidence from Chile," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 198-219, February.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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