Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71713
Authors: 
Charlot, Olivier
Malherbet, Franck
Ulus, Mustafa
Year of Publication: 
2013
Series/Report no.: 
Discussion Paper Series, Forschungsinstitut zur Zukunft der Arbeit 7233
Abstract: 
This paper studies the effects of the introduction of unemployment compensation (UC) in countries characterized by pervasive informality. We provide a simple framework to analyze the impact of UC on the allocation of workers between formal and informal activities, as well as the allocation of workers between sectors featuring different incentives to go informal. We show that a reasonable amount of UC may reduce informality, while larger amounts of UC induce large disincentives to go formal because of the level of taxation involved. We also argue that the financing of UC should be part and parcel of a well- conceived UC system. We show that UC finance based on payroll taxes is likely to entail an excess level of informality resulting from cross-subsidies between heterogenous sectors. The introduction of a simple layoff tax meant to finance the UC system is then shown to reduce informality, hence highlighting how a well-designed financing scheme may be used as a supplementary instrument to curb informality.
Subjects: 
informality
labor market imperfections
unemployment compensation
JEL: 
E24
E26
J60
L16
O1
Document Type: 
Working Paper

Files in This Item:
File
Size
536.55 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.