Welfare Effects of Unemployment Benefits When Informality Is High

Hannah Liepmann and Clemente Pignatti

No 14601, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: informal employment; welfare effects; unemployment benefits (search for similar items in EconPapers)
JEL-codes: J46 J65 J68 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2021-07
New Economics Papers: this item is included in nep-dev, nep-ias, nep-isf, nep-iue and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Journal of Public Economics , 2024, 229, 105032.

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Journal Article: Welfare effects of unemployment benefits when informality is high (2024)
Working Paper: Welfare effects of unemployment benefits when informality is high (2021)
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