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ILO Working paper 39

Welfare Effects of Unemployment Benefits when Informality is High (mobi)

We analyze for the first time the welfare effects of unemployment benefits (UBs) in a context of high informality, exploiting matched administrative and survey data with individual-level information on UB receipt, formal and informal employment, wages and consumption.

We analyze for the first time the welfare effects of unemployment benefits (UBs) in a context of high informality, 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 recipients 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.

Additional details

Author(s)

  • Hannah Liepmann, Clemente Pignatti

References

  • ISBN: 9789220351833 (print)
  • ISBN: 9789220351840 (web pdf)
  • ISBN: 9789220351857 (epub)
  • ISBN: 9789220351864 (mobi)
  • ISSN: 2708-3438