Mitigating the Consequences of Job Loss in Lower-Income Countries: Evidence from Ethiopia

Job loss is an understudied risk for formal workers in lower-income countries. In these settings, lump-sum severance pay is often the only source of job-loss insurance. We quasi experimentally show that female factory workers in Ethiopia displaced by a tariff hike experience lasting declines in employment and consumption spending, and rising poverty. Experimentally, we find that additional lump-sum support induces early spending and reduces overall and manufacturing employment persistently. Disbursing an equivalent amount in tranches improves consumption smoothing and avoids adverse employment effects. Further, we document a high willingness to pay for additional insurance, alongside heterogeneous preferences over disbursement modality that shape responses to our interventions. These findings imply that increasing job-loss insurance raises welfare, although moving away from the lump-sum default can generate substantial additional gains.