How to Fund Unemployment Insurance with Informality and False Claims: Evidence From Senegal

Abdoulaye Ndiaye, Kyle Herkenhoff, Abdoulaye Cisse, Alessandro Dell'Acqua and Ahmadou Aly Mbaye

No 31571, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the welfare effects of unemployment insurance (UI) in low-income countries characterized by high levels of informality, weak enforcement of UI claims, and job search frictions. We assess the impact of UI on workers’ welfare in the presence of moral hazard and liquidity constraints. Our analysis highlights the significance of the UI scheme design on workers’ welfare and identifies potential funding constraints in implementing UI in imperfect labor markets. Using a custom labor force survey conducted in Senegal, we estimate the key parameters of an extended Chetty (2006) model incorporating an informal sector, and we evaluate the welfare implications of three different UI schemes with varying degrees of enforcement and funding sources. Our results demonstrate that workers respond to UI benefits and that welfare gains depend on the design of the UI system. We find that broad-based taxation through a VAT, inflation tax, or external funding can compensate for weak enforcement (i.e., high false UI claim rates), leading to substantial and quantifiable welfare gains. Moreover, safety net expansions reduce loan default rates, potentially fostering greater credit access. This study suggests that increasing the prevalence of UI in low-income countries could raise standard measures of consumer welfare.

JEL-codes: E0 E24 H21 J65 O10 O55 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-iue, nep-lab, nep-pbe and nep-pub
Note: EFG LS
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