Unemployment insurance and informality in developing countries
We analyze whether the introduction of unemployment insurance (UI hereafter) benefits in developing countries would reduce the effort made by unemployed to secure a new job in the formal sector. We show that one shot UI benefits unambiguously increase the effort to secure a new job in the formal sector. The relative strength of income/substitution effects only determine how leisure and informal activities are affected. Consequently, our (partial equilibrium) analysis reveals that short term UI benefits in developing countries do not reduce incentives to secure a new formal job and therefore cannot be interpreted as a subsidy to the informal sector.
|Date of creation:||Sep 2011|
|Date of revision:||Nov 2011|
|Publication status:||Published in The World Bank Economic Review, 2015.|
|Contact details of provider:|| Phone: (+33) 5 61 12 86 23|
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