Optimal unemployment benefits in the presence of informal labor markets

Abstract

We assess optimal unemployment benefit level and duration in a labor market with many informal jobs. Using administrative data from Argentina, a country with high informality, we exploit discontinuities in duration, and a reform that increases benefits. We find that increasing benefits hardly extends unemployment spells but raises re-employment wages. In contrast, extending unemployment benefits prolongs unemployment spells with no effect on re-employment wages. In a search model, we derive sufficient statistics to analyze the welfare effects of a reform that increases benefits by shortening duration. Calibrating our formula using our empirical results, we find that welfare would increase with higher benefits and shorter duration.