IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Unemployment insurance/severance payments and informality in developing countries

Listed author(s):
  • David Bardey

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

  • Fernando Jaramillo

    (University of Rosario (Bogotá))

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Condorcet Center for political Economy in its series Economics Working Paper from Condorcet Center for political Economy at CREM-CNRS with number 2012-06-ccr.

in new window

Date of creation: Sep 2011
Handle: RePEc:tut:cccrwp:2012-06-ccr
Contact details of provider: Postal:
CREM (UMR CNRS 6211) – Faculty of Economics, 7 place Hoche, 35065 RENNES Cedex

Phone: 02 23 23 35 63
Fax: (33) 2 23 23 35 99
Web page:

More information through EDIRC

Order Information: Postal: CREM (UMR CNRS 6211) - Faculty of Economics, 7 place Hoche, 35065 Rennes Cedex - France

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  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)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.