Unemployment insurance in the presence of an informal sector

David Bardey, Fernando Jaramillo, Ximena Peña

Resultado de la investigación: Contribución a RevistaArtículo

Resumen

© The Author 2015.We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment, ruling out the macroeconomic consequences of UI benefits, we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits or long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers' effort to secure a formal job and their labor supply in the informal sector. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviors that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. Even though in general it is ambiguous which effect dominates, we show that for short durations UI benefits increase unemployed worker's effort to secure a formal-sector job and decreases informal-sector work.
Idioma originalEnglish (US)
Páginas (desde-hasta)S126-S134
PublicaciónWorld Bank Economic Review
DOI
EstadoPublished - ene 1 2015

Huella dactilar

unemployment insurance
informal sector
unemployment
insured person
income effect
worker
marginal costs
labor supply
macroeconomics
developing country
economy
developing world
hazard
income
insurance
effect
Informal sector
Unemployment insurance
cost

Citar esto

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Unemployment insurance in the presence of an informal sector. / Bardey, David; Jaramillo, Fernando; Peña, Ximena.

En: World Bank Economic Review, 01.01.2015, p. S126-S134.

Resultado de la investigación: Contribución a RevistaArtículo

TY - JOUR

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AU - Jaramillo, Fernando

AU - Peña, Ximena

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N2 - © The Author 2015.We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment, ruling out the macroeconomic consequences of UI benefits, we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits or long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers' effort to secure a formal job and their labor supply in the informal sector. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviors that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. Even though in general it is ambiguous which effect dominates, we show that for short durations UI benefits increase unemployed worker's effort to secure a formal-sector job and decreases informal-sector work.

AB - © The Author 2015.We study the effect of UI benefits in a typical developing country where the informal sector is sizeable and persistent. In a partial equilibrium environment, ruling out the macroeconomic consequences of UI benefits, we characterize the stationary equilibrium of an economy where policyholders may be employed in the formal sector, short-run unemployed receiving UI benefits or long-run unemployed without UI benefits. We perform comparative static exercises to understand how UI benefits affect unemployed workers' effort to secure a formal job and their labor supply in the informal sector. Our model reveals that an increase in UI benefits generates two opposing effects for the short-run unemployed. First, since search efforts cannot be monitored it generates moral hazard behaviors that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort. Even though in general it is ambiguous which effect dominates, we show that for short durations UI benefits increase unemployed worker's effort to secure a formal-sector job and decreases informal-sector work.

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