IDEAS home Printed from https://ideas.repec.org/p/col/000089/010496.html
   My bibliography  Save this paper

Unemployment Insurance in the Presence of an Informal Sector

Author

Listed:
  • David Bardey

    ()

  • Fernando Jaramillo

    ()

  • Ximena Peña

    ()

Abstract

We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits and long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers´effort to secure a formal job, their labor supply inthe informal sector and leisure time. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. The overall effect is ambiguous and depends on the relative strength of these two effects. Additionally, we show that an increase in UI benefits increases the efforts of long-run unemployed workers. Using data from Brazil to calibrate the parameters of the model we provide a simple simulation exercise which suggests that the income effect pointed out is not necessarily of second-order importance in comparison with moral hazard strength: An increase in UI benefits may increase unemployed workers efforts to secure a job in the formal sector, instead of increasing informal-sector work. This result softens the widespread opinion that the presence of dual labor markets is an obstacle to providing UI in developing countries.

Suggested Citation

  • David Bardey & Fernando Jaramillo & Ximena Peña, 2013. "Unemployment Insurance in the Presence of an Informal Sector," DOCUMENTOS CEDE 010496, UNIVERSIDAD DE LOS ANDES-CEDE.
  • Handle: RePEc:col:000089:010496
    as

    Download full text from publisher

    File URL: http://economia.uniandes.edu.co/publicaciones/dcede2013-03.pdf
    Download Restriction: no

    Other versions of this item:

    More about this item

    Keywords

    Unemployment insurance; informal sector; income effect; developing countries.;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000089:010496. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Universidad De Los Andes-Cede). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.