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Welfare effects of unemployment benefits when informality is high

Author

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  • Liepmann, Hannah.
  • Pignatti, Clemente.
Abstract
We analyze for the first time the welfare effects of unemployment benefits (UBs) in a context of high infor- mality, exploiting matched administrative and survey data with individual-level information on UB receipt, formal and informal employment, wages and consumption. Using a difference-in- differences approach, we find that dismissal from a formal job causes a large drop in consumption, which is between three to six times larger than estimates for developed economies. This is generated by a permanent shift of UB re- cipients towards informal employment, where they earn substantially lower wages. We then exploit a kink in benefits and show that more generous UBs delay program exit through a substitution of formal with informal employment. However, the disincentive effects are small and short-lived. Because of the high insurance value and the low efficiency costs, welfare effects from increasing UBs are positive for a range of values of the coefficient of relative risk aversion.

Suggested Citation

  • Liepmann, Hannah. & Pignatti, Clemente., 2021. "Welfare effects of unemployment benefits when informality is high," ILO Working Papers 995141693302676, International Labour Organization.
    • Handle: RePEc:ilo:ilowps:995141693302676
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    More about this item

    Keywords

    unemployment benefit.; social protection.; informal employment;
    All these keywords.

    JEL classification:

    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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