Unemployment Insurance in the Presence of an Informal Sector

David Bardey, Fernando Jaramillo () and Ximena Peña

The World Bank Economic Review, 2015, vol. 29, issue suppl_1, S126-S134

Abstract: 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.

Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1093/wber/lhv026 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Unemployment Insurance in the Presence of an Informal Sector (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:wbecrv:v:29:y:2015:i:suppl_1:p:s126-s134.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The World Bank Economic Review is currently edited by Eric Edmonds and Nina Pavcnik

More articles in The World Bank Economic Review from World Bank Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().