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Unemployment Insurance, Strategic Unemployment and Firm-Worker Collusion

Author

Listed:
  • Bernardus Van Doornik
  • David Schoenherr
  • Janis Skrastins
Abstract
Recent years have seen a spread of unemployment insurance (UI) programs to mid-income and developing countries. Yet little is known about how labor market characteristics in these countries, for example large informal labor markets, interact with the incentive effects of UI. In this paper, we show that firms and workers collude to extract rents from the UI system in the presence of large informal labor markets. Exploiting a discontinuous effect of an unemployment insurance reform in Brazil, we document layoff and rehiring patterns consistent with collusion between firms and workers to extract rents from the UI system. Firms and workers time formal unemployment spells to coincide with workers' eligibility for UI benefits. Survey evidence suggests that firms employ workers informally while they are eligible for UI benefits and rehire them when benefits end. Combined with a lower probability of hiring replacement workers when laying off workers eligible for UI benefits, this suggests that firms employ workers informally while they are on benefits. Firms and workers share the rents extracted from the UI system through lower equilibrium wages. All the observed patterns are mostly driven by industries and municipalities with large informal labor markets. Our findings thus suggest that optimal UI design in mid-income and developing countries needs to take into account adverse incentive effects generated by collusion between firms and workers in the presence of informal labor markets.

Suggested Citation

  • Bernardus Van Doornik & David Schoenherr & Janis Skrastins, 2018. "Unemployment Insurance, Strategic Unemployment and Firm-Worker Collusion," Working Papers Series 483, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:483
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    References listed on IDEAS

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    3. Simon Jäger & Benjamin Schoefer & Josef Zweimüller, 2023. "Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(3), pages 1265-1303.
    4. Santiago Garriga & Dario Tortarolo, 2020. "Wage effects of employer-mediated transfers," Discussion Papers 2020-08, Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP).
    5. Laura Khoury, 2019. "Unemployment Benefits and the Timing of Redundancies: Evidence from Bunching," PSE Working Papers halshs-02057145, HAL.
    6. Guo, Audrey, 2020. "The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms," MPRA Paper 97919, University Library of Munich, Germany.
    7. Laura Khoury, 2021. "Unemployment Benefits and the Timing of Redundancies," Working Papers halshs-02057145, HAL.
    8. Tulio Cravo & Christopher J. O'Leary & Ana Cristina Sierra & Leandro Justino Veloso, 2020. "Heterogeneous impacts on layoffs of changes in Brazilian unemployment insurance eligibility rules," Upjohn Working Papers 20-318, W.E. Upjohn Institute for Employment Research.
    9. Cravo, Túlio & O’Leary, Christopher & Sierra, Ana Cristina & Veloso, Leandro, 2020. "Heterogeneous effects of Brazilian unemployment insurance reforms on layoffs," Economics Letters, Elsevier, vol. 197(C).

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