Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program

Francois Gerard and Gustavo Gonzaga

No 11485, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is widely believed that the presence of a large informal sector increases the efficiency cost of social programs -- transfer and social insurance programs -- in developing countries. We evaluate such claims for policies that have been heavily studied in countries with low informality -- increases in unemployment insurance (UI) benefits. We introduce informal work opportunities into a canonical model of optimal UI that specifies the typical tradeoff between workers' need for insurance and the efficiency cost from distorting their incentives to return to a formal job. We then combine the model with evidence drawn from comprehensive administrative data to quantify the efficiency cost of increases in potential UI duration in Brazil. We find evidence of behavioral responses to UI incentives, including informality responses. However, because reemployment rates in the formal sector are low to begin with, most beneficiaries would draw the UI benefits absent behavioral responses, and only a fraction of the cost of (longer) UI benefits is due to perverse incentive effects. As a result, the efficiency cost is relatively low, and in fact lower than comparable estimates for the US. We reinforce this finding by showing that the efficiency cost is also lower in labor markets with higher informality within Brazil. This is because formal reemployment rates are even lower in those labor markets absent behavioral responses. In sum, the results go against the conventional wisdom, and indicate that efficiency concerns may even become more relevant as an economy formalizes.

Keywords: Informality; Unemployment insurance (search for similar items in EconPapers)
JEL-codes: E26 H00 J65 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ias, nep-iue, nep-lab, nep-lam and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Downloads: (external link)
https://cepr.org/publications/DP11485 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program (2016)
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:cpr:ceprdp:11485

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11485
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).