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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
    Note: Publisher DOI: https://doi.org/10.1016/j.jdeveco.2020.102565
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    References listed on IDEAS

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    Cited by:

    1. Ernst, Ekkehard & Merola, Rossana & Reljic, Jelena, 2024. "Fiscal policy instruments for inclusive labour markets: A review," GLO Discussion Paper Series 1406, Global Labor Organization (GLO).

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    More about this item

    Keywords

    savings accounts; Incomplete Markets; Moral Hazard; UISA; Mexico; Informality; Unemployment Insurance; Job Search;
    All these keywords.

    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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