Welfare Effects of Unemployment Benefits When Informality Is High

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 14601

Classification and Topics

• Classification: Wirtschaft ; Informal Labor Markets ; Unemployment Insurance; Severance Pay; Plant Closings ; Mobility, Unemployment, and Vacancies: Public Policy
• Subject: unemployment benefits ; welfare effects ; informal employment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Liepmann, Hannah ; Pignatti, Clemente
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245652
• Last update: 10.03.2025, 11:45 AM CET