Abstract
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.
Highlights
Unemployment benefits (UBs) help laid-off individuals smooth consumption, but they can increase the duration of UB receipt and delay re-employment
While welfare effects of UBs have been studied in depth for high-income countries (Schmieder and von Wachter, 2016), fewer studies have focused on low- and middleincome countries, analyzing the insurance value (Gerard and Naritomi, 2021) or the efficiency costs of UBs (Britto, 2021; Gerard and Gonzaga, 2021)
We look at an UB scheme for which we can expect that labor supply responses differ given that program eligibility is conditional on previous labor market participation and program exit is dependent on being re-employed
Summary
Unemployment benefits (UBs) help laid-off individuals smooth consumption (insurance value), but they can increase the duration of UB receipt and delay re-employment (efficiency costs). This tradeoff determines the welfare effects of UBs. Outside of high-income countries, the prevalence of informal employment means that individuals might receive UBs while working informally. We jointly analyze the insurance value and the efficiency costs of UBs in a context of high informality, estimating for the first time overall welfare effects of UBs outside of a high-income country context While welfare effects of UBs have been studied in depth for high-income countries (Schmieder and von Wachter, 2016), fewer studies have focused on low- and middleincome countries, analyzing the insurance value (Gerard and Naritomi, 2021) or the efficiency costs of UBs (Britto, 2021; Gerard and Gonzaga, 2021). In this paper, we jointly analyze the insurance value and the efficiency costs of UBs in a context of high informality, estimating for the first time overall welfare effects of UBs outside of a high-income country context
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