IDEAS home Printed from https://ideas.repec.org/p/tut/cccrwp/2012-06-ccr.html
   My bibliography  Save this paper

Unemployment insurance/severance payments and informality in developing countries

Author

Listed:
  • David Bardey

    (University of Rosario (Bogotá) and Toulouse School of Economics)

  • Fernando Jaramillo

    (University of Rosario (Bogotá))

Abstract

We analyze whether the introduction or an increase of unemployment insurance (UI hereafter) benefits in developing countries reduces the e¤ort made by unemployed workers to secure a new job in the formal sector. We adopt a comparative static approach and we consider the consequences of an increase of current UI benefits on unemployed workers?decision variables in this same period, i.e. we focus on an intra-temporal trade-off, allowing us to assume away moral hazard complications. When there is no informal sector, unemployed workers may devote their time between effort to secure a new job in the formal sector and leisure. In the presence of an informal sector, unemployed workers may also devote time to remunerated informal activities. Consequently, the amount of effort devoted to secure a new (formal) job generates an opportunity cost, which ceteris paribus, reduces the amount of time devoted to remunerated activities in the informal sector. We show that in the presence of an informal sector, an increase of current UI benefits decreases this marginal opportunity cost and therefore unambiguously increases the effort undertaken to secure a new job in the formal sector. This intra-temporal effect is the only one at play in presence of one-shot UI benefits or with severance payments mechanism.

Suggested Citation

  • David Bardey & Fernando Jaramillo, 2011. "Unemployment insurance/severance payments and informality in developing countries," Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS 2012-06-ccr, Condorcet Center for political Economy.
  • Handle: RePEc:tut:cccrwp:2012-06-ccr
    as

    Download full text from publisher

    File URL: https://crem-doc.univ-rennes1.fr/wp/2012/2012-06-ccr.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
    2. 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.
    3. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jorge Andrés Tamayo & Jairo Núñez & Carlos Medina, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," IDB Publications (Working Papers) 4622, Inter-American Development Bank.
    2. Luz Adriana Flórez, 2014. "The Efficiency of the Informal Sector on the Search and Matching Framework," Borradores de Economia 832, Banco de la Republica de Colombia.

    More about this item

    Keywords

    Unemployment insurance; informal sector; income effects; developing countries;

    JEL classification:

    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tut:cccrwp:2012-06-ccr. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CODA-POIREY Hélène). General contact details of provider: http://edirc.repec.org/data/cccrmfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.