Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245652 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14601
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
unemployment benefits
welfare effects
informal employment
JEL: 
J46
J65
J68
Document Type: 
Working Paper

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