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Designing unemployment insurance for developing countries

Fernando Cirelli, Emilio Espino () and Juan Sanchez

Journal of Development Economics, 2021, vol. 148, issue C

Abstract: The high incidence of informality in the labor markets of middle-income economies challenges the provision of unemployment protection. We show that, despite informational frictions, the introduction of an unemployment insurance savings account (UISA) system may provide substantial benefits. This system improves welfare by providing insurance to the unemployed and creating incentives to work in the formal sector. The optimal scheme generates a reduction in unemployment (from 4 to 3 percent), an increase in formality (from 68 to 72 percent) and a rise in total output (by 4 percent). Overall, individuals obtain welfare gains equivalent to a 2.4 percent increase in consumption in every period.

Keywords: Unemployment insurance; Informality; Moral hazard; Saving accounts; UISA; Mexico; Incomplete markets; Job search (search for similar items in EconPapers)
JEL-codes: D82 H55 I38 J65 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jdeveco.2020.102565

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