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Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets

Author

Listed:
  • Bernardus Van Doornik

    (Banco Central do Brasil)

  • David Schoenherr

    (Princeton University)

  • Janis Skrastins

    (Washington University in St. Louis)

Abstract

Exploiting an unemployment insurance (UI) reform in Brazil, we study incentive effects of UI in the presence of informal labor markets. We find that eligibility for UI benefits increases formal layoffs by twelve percent. Most of the additional formal layoffs are related to workers transitioning to informal employment. We further document formal layoff and recall patterns consistent with rent extraction from the UI system. Workers are laid off as they become eligible for UI benefits and recalled just when benefits cease. Salary patterns around the reform are consistent with firms and workers sharing rents through lower equilibrium salaries.

Suggested Citation

  • Bernardus Van Doornik & David Schoenherr & Janis Skrastins, 2020. "Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets," Working Papers 2020-5, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-5
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    Cited by:

    1. Cecilia Machado & Valdemar Neto & Christiane Szerman, 2023. "Firm and Worker Responses to Extensions in Paid Maternity Leave," CESifo Working Paper Series 10736, CESifo.

    More about this item

    Keywords

    unemployment insurance; informality; labor supply; rent-seeking;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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