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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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 7 (October)
Pages: 954-967

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Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:954-967
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

Keywords: Unemployment insurance Hidden labor markets Recursive contracts;

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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 010393, BANCO DE LA REPÚBLICA.
  2. 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.
  3. Martín González Rozada & Lucas Ronconi & Hernán Ruffo, 2011. "Protecting Workers against Unemployment in Latin America and the Caribbean: Evidence from Argentina," IDB Publications (Working Papers) 65298, Inter-American Development Bank.
  4. 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.
  5. Temel Taskin, 2010. "Unemployment Insurance and Home Production," 2010 Meeting Papers 93, Society for Economic Dynamics.
  6. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2012. "Unemployment insurance fraud and optimal monitoring," Working Papers 2012-024, Federal Reserve Bank of St. Louis.
  7. Jeremy Schwartz, 2012. "Unemployment Insurance and the Business Cycle: What Adjustments are Needed?," EcoMod2012 3674, EcoMod.
  8. Amélie Barbier-Gauchard & Francesco De Palma & Giuseppe Diana, 2013. "Why could Northern labor market flexibility save the eurozone ?," Working Papers of BETA 2013-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  9. 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.
  10. 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.
  11. David L. Fuller & Marianna Kudlyak & Damba Lkhagvasuren, 2013. "Productivity insurance: the role of unemployment benefits in a multi-sector model," Working Paper 13-11, Federal Reserve Bank of Richmond.
  12. David Bardey & Fermando Jaramillo & Ximena Pena, 2013. "Unemployment insurance in the presence of an informal," DOCUMENTOS DE TRABAJO 011014, UNIVERSIDAD DEL ROSARIO.

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