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Unemployment insurance and informality in developing countries


  • David Bardey


  • Fernando Jaramillo



ABSTRACT: We analyze whether the introduction of unemployment insurance (UI hereafter)benefits in developing countries would reduce the effort made by unemployed to secure a new job in the formal sector. We show that one shot UI benefits unambiguously increase the effort to secure a new job in the formal sector. The relative strength of income/substitution effects only determine how leisure and informal activities are affected. Consequently, our (partial equilibrium) analysis reveals that short term UI benefits in developing countries do not reduce incentives to securea new formal job and therefore cannot be interpreted as a subsidy to the informalsector.

Suggested Citation

  • David Bardey & Fernando Jaramillo, 2011. "Unemployment insurance and informality in developing countries," DOCUMENTOS DE TRABAJO 009015, UNIVERSIDAD DEL ROSARIO.
  • Handle: RePEc:col:000092:009015

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    References listed on IDEAS

    1. 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.
    2. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
    3. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Unemployment insurance in developing economies?
      by Economic Logician in Economic Logic on 2011-11-01 19:49:00

    More about this item


    Unemployment insurance; informal sector; income effects; develop-ing 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

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