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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
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    References listed on IDEAS

    as
    1. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    2. 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.
    3. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    4. 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.
    5. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
    6. Jacqueline Mazza, 2000. "Unemployment Insurance: Case Studies and Lessons for Latin America and the Caribbean," IDB Publications (Working Papers) 6460, Inter-American Development Bank.
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    Cited by:

    1. Carlos medina & Jairo Núñez & Jorge Andrés Tamayo, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," Borradores de Economia 750, Banco de la Republica de Colombia.
    2. Luz Adriana Flórez, 2014. "The Efficiency of the Informal Sector on the Search and Matching Framework," Borradores de Economia 11954, Banco de la Republica.

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    More about this item

    Keywords

    Unemployment insurance; informal sector; income effects; developing countries;
    All these keywords.

    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

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