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Unemployment insurance and informality in developing countries

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  • David Bardey
  • Fernando Jaramillo

Abstract

ABSTRACT: 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 securea new formal job and therefore cannot be interpreted as a subsidy to the informalsector.

Suggested Citation

  • David Bardey & Fernando Jaramillo, 2011. "Unemployment insurance and informality in developing countries," Documentos de Trabajo 9015, Universidad del Rosario.
    • Handle: RePEc:col:000092:009015
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    References listed on IDEAS

    as
    1. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
    2. 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.
    3. 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.
    4. 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.
    5. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
    6. 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.
    7. Jacqueline Mazza, 2000. "Unemployment Insurance: Case Studies and Lessons for Latin America and the Caribbean," IDB Publications (Working Papers) 6460, Inter-American Development Bank.
    Full references (including those not matched with items on IDEAS)

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Unemployment insurance in developing economies?
      by Economic Logician in Economic Logic on 2011-11-01 19:49:00

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    Cited by:

    1. Tamayo, Jorge Andrés & Núñez, Jairo & Medina, Carlos, 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.

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    More about this item

    Keywords

    Unemployment insurance; informal sector; income effects; develop-ing 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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