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Designing Unemployment Insurance for Developing Countries

Author

Listed:
  • Fernando Cirelli
  • Emilio Espino
  • Juan M. Sanchez

Abstract

The high incidence of informality in the labor markets of middle-income economies challenges the provision of unemployment protection. We show that, despite informational frictions, introducing an unemployment insurance savings account (UISA) system may provide substantial benefits. This system improves welfare by providing insurance to the unemployed and creating incentives to work in the formal sector. The optimal scheme generates a reduction in unemployment (from 4 to 3 percent), an increase in formality (from 68 to 72 percent), and a rise in total output (by 4 percent). Overall, individuals obtain welfare gains equivalent to a 2.4 percent increase in consumption in every period.

Suggested Citation

  • Fernando Cirelli & Emilio Espino & Juan M. Sanchez, 2018. "Designing Unemployment Insurance for Developing Countries," Working Papers 2018-006, Federal Reserve Bank of St. Louis, revised 10 Sep 2020.
    • Handle: RePEc:fip:fedlwp:2018-006
    DOI: 10.20955/wp.2018.006
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    References listed on IDEAS

    as
    1. Fuller, David L., 2014. "Adverse selection and moral hazard: Quantitative implications for unemployment insurance," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 108-122.
    2. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    3. Javier Cano-Urbina, 2016. "Informal Labor Markets And On-The-Job Training: Evidence From Wage Data," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 25-43, January.
    4. Jose Mustre-del-Rio, 2015. "Wealth and Labor Supply Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 619-634, July.
    5. 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.
    6. Arpad Abraham & Nicola Pavoni, 2008. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 781-803, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Saving Accounts; Incomplete Markets; Moral Hazard; UISA; Mexico; Informality; Unemployment Insurance; Job Search;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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