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Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program

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  • Gerard, Francois
  • Gonzaga, Gustavo

Abstract

It is widely believed that the presence of a large informal sector increases the efficiency cost of social programs -- transfer and social insurance programs -- in developing countries. We evaluate such claims for policies that have been heavily studied in countries with low informality -- increases in unemployment insurance (UI) benefits. We introduce informal work opportunities into a canonical model of optimal UI that specifies the typical tradeoff between workers' need for insurance and the efficiency cost from distorting their incentives to return to a formal job. We then combine the model with evidence drawn from comprehensive administrative data to quantify the efficiency cost of increases in potential UI duration in Brazil. We find evidence of behavioral responses to UI incentives, including informality responses. However, because reemployment rates in the formal sector are low to begin with, most beneficiaries would draw the UI benefits absent behavioral responses, and only a fraction of the cost of (longer) UI benefits is due to perverse incentive effects. As a result, the efficiency cost is relatively low, and in fact lower than comparable estimates for the US. We reinforce this finding by showing that the efficiency cost is also lower in labor markets with higher informality within Brazil. This is because formal reemployment rates are even lower in those labor markets absent behavioral responses. In sum, the results go against the conventional wisdom, and indicate that efficiency concerns may even become more relevant as an economy formalizes.

Suggested Citation

  • Gerard, Francois & Gonzaga, Gustavo, 2016. "Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program," CEPR Discussion Papers 11485, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11485
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program
      by maximorossi in NEP-LTV blog on 2016-09-12 23:51:07
    2. Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program
      by maximorossi in NEP-LTV blog on 2016-09-28 23:36:08

    Citations

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    Cited by:

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    2. Julia Cage & Lucie Gadenne, 2014. "Tax Revenues, Development, and the Fiscal Cost of Trade Liberalization, 1792-2006," Sciences Po publications info:hdl:2441/4icc4hr7684, Sciences Po.
    3. François Gerard & Joana Naritomi, 2021. "Job Displacement Insurance and (the Lack of) Consumption-Smoothing," American Economic Review, American Economic Association, vol. 111(3), pages 899-942, March.
    4. Juliana MESÉN VARGAS & Bruno VAN DER LINDEN, 2017. "Is there always a trade-off between insurance and incentives? The case of unemployment with subsistence constraints," LIDAM Discussion Papers IRES 2017014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    5. Gadenne, Lucie, 2018. "Do Ration Shop Systems Increase Welfare? Theory and an Application to India," The Warwick Economics Research Paper Series (TWERPS) 1149, University of Warwick, Department of Economics.
    6. Johannes Spinnewijn, 2020. "The Trade‐Off between Insurance and Incentives in Differentiated Unemployment Policies," Fiscal Studies, John Wiley & Sons, vol. 41(1), pages 101-127, March.
    7. Gerard, Francois & Rokkanen, Miikka & Rothe, Christoph, 2015. "Identification and Inference in Regression Discontinuity Designs with a Manipulated Running Variable," IZA Discussion Papers 9604, Institute of Labor Economics (IZA).
    8. Bohne, Albrecht & Nimczik, Jan Sebastian, 2018. "Information Frictions and Learning Dynamics: Evidence from Tax Avoidance in Ecuador," IZA Discussion Papers 11536, Institute of Labor Economics (IZA).
    9. Carvalho, Cristiano C. & Corbi, Raphael & Narita, Renata, 2018. "Unintended consequences of unemployment insurance: Evidence from stricter eligibility criteria in Brazil," Economics Letters, Elsevier, vol. 162(C), pages 157-161.
    10. Cristiano C. Carvalho & Raphael Corbi, Renata Narita, 2017. "Unintended Consequences of Unemployment Insurance: Evidence from Stricter Eligibility Criteria in Brazil," Working Papers, Department of Economics 2017_16, University of São Paulo (FEA-USP).
    11. François Gerard & Miikka Rokkanen & Christoph Rothe, 2020. "Bounds on treatment effects in regression discontinuity designs with a manipulated running variable," Quantitative Economics, Econometric Society, vol. 11(3), pages 839-870, July.
    12. Gerard, Francois & Rokkanen, Miikka & Rothe, Christoph, 2016. "Bounds on Treatment Effects in Regression Discontinuity Designs under Manipulation of the Running Variable, with an Application to Unemployment Insurance in Brazil," CEPR Discussion Papers 11668, C.E.P.R. Discussion Papers.
    13. Mohammed Aït Lahcen, 2017. "Informality and the long run Phillips curve," ECON - Working Papers 248, Department of Economics - University of Zurich, revised Dec 2018.
    14. Garcia-Mandicó, Sílvia & Reichert, Arndt & Strupat, Christoph, 2021. "The Social Value of Health Insurance: Results from Ghana," Journal of Public Economics, Elsevier, vol. 194(C).

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    More about this item

    Keywords

    Informality; Unemployment insurance;

    JEL classification:

    • H00 - Public Economics - - General - - - General
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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