Unemployment insurance in the presence of an informal sector

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...

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Detalles Bibliográficos
Autores Principales: Bardey, David, Jaramillo, Fernando, Peña, Ximena
Formato: Documento de trabajo (Working Paper)
Lenguaje:Español (Spanish)
Publicado: Universidad del Rosario 2013
Materias:
Acceso en línea:http://repository.urosario.edu.co/handle/10336/10860
id ir-10336-10860
recordtype dspace
institution EdocUR - Universidad del Rosario
collection DSpace
language Español (Spanish)
topic Economía laboral
Mercado laboral
Microeconomía
Desempleo temporal
Unemployment insurance
income effect
Developing countries
informal sector
spellingShingle Economía laboral
Mercado laboral
Microeconomía
Desempleo temporal
Unemployment insurance
income effect
Developing countries
informal sector
Bardey, David
Jaramillo, Fernando
Peña, Ximena
Unemployment insurance in the presence of an informal sector
description 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 worker´s effort to secure a formal job, their labor supply in the informal sector and leisure time. 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 behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort.The overall effect is ambiguous and depends on the relative strength of these two effects. Additionally, we show that an increase in UI benefits increases the efforts of long-run unemployed workers. We provide a simple simulation exercise which suggests that the income effect pointed out is not necessarily of second-order importance in comparison with moral hazard strength. This result softens the widespread opinion, usually based on the microeconomic/partial equilibrium argument that the presence of dual labor markets is an obstacle to providing UI in developing countries.
format Documento de trabajo (Working Paper)
author Bardey, David
Jaramillo, Fernando
Peña, Ximena
author_facet Bardey, David
Jaramillo, Fernando
Peña, Ximena
author_sort Bardey, David
title Unemployment insurance in the presence of an informal sector
title_short Unemployment insurance in the presence of an informal sector
title_full Unemployment insurance in the presence of an informal sector
title_fullStr Unemployment insurance in the presence of an informal sector
title_full_unstemmed Unemployment insurance in the presence of an informal sector
title_sort unemployment insurance in the presence of an informal sector
publisher Universidad del Rosario
publishDate 2013
url http://repository.urosario.edu.co/handle/10336/10860
_version_ 1645141753916817408
spelling ir-10336-108602019-09-19T12:37:01Z Unemployment insurance in the presence of an informal sector Bardey, David Jaramillo, Fernando Peña, Ximena Economía laboral Mercado laboral Microeconomía Desempleo temporal Unemployment insurance income effect Developing countries informal sector 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 worker´s effort to secure a formal job, their labor supply in the informal sector and leisure time. 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 behaviours that lower effort. Second, it generates an income effect as it reduces the marginal cost of searching for a formal job and increases effort.The overall effect is ambiguous and depends on the relative strength of these two effects. Additionally, we show that an increase in UI benefits increases the efforts of long-run unemployed workers. We provide a simple simulation exercise which suggests that the income effect pointed out is not necessarily of second-order importance in comparison with moral hazard strength. This result softens the widespread opinion, usually based on the microeconomic/partial equilibrium argument that the presence of dual labor markets is an obstacle to providing UI in developing countries. 2013-09 2015-09-22T12:50:39Z info:eu-repo/semantics/workingPaper info:eu-repo/semantics/acceptedVersion Bardey, D., Fernando, J., & Peña, X. (2013). Unemployment insurance in the presence of an informal sector. Bogotá: Universidad del Rosario. http://repository.urosario.edu.co/handle/10336/10860 spa info:eu-repo/semantics/openAccess application/pdf Universidad del Rosario Facultad de Economía instname:Universidad del Rosario reponame:Repositorio Institucional EdocUR instname:Universidad del Rosario Alvarez-Parra F. and J-M. Sanchez, 2009, "Unemployment insurance with a hidden labor market,", Journal of Monetary Economics , 56, (7), pp. 954-967. Bosch, M. and J. Esteban-Pretel, 2012, "Job creation and job destruction in the presence of informal markets," Journal of Development Economics , Vol 98, Issue 2, July, pp. 270 -286 Cardenas, J.C. and J. Carpenter, 2010, " Risk Attitudes and Well-being in Latin America," Documento CEDE , Universidad de los Andes, October. Carneiro, F.G and A. Henley, 2002, " Modelling Formal vs. Informal Employment and Earnings: Micro-econometric Evidence for Brazil," working paper, January. Chetty R., 2008, "Moral Hazard vs. Liquidity and Optimal Unemployment Insur- ance," Journal of Political Economy , 116 (2), pp. 173-234. Pissarides, C., 2000, Equilibrium Unemployment Theory, 2nd Edition , MIT Press Books, The MIT Press, ed. 1, vol. 1, number 0262161877. Fredriksson, Peter and Bertil Holmlund, 2001, "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics , Vol. 19, No. 2 (Apr., 2001), pp. 370-399. Hansen, G. D. and A. Imrohoro º glu, 1992, "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy , Vol. 100, No. 1, Feb., pp. 118-142. Hopenhayn, H. A. and J.P. Nicolini, 1997, "Optimal Unemployment Insurance," Journal of Political Economy , University of Chicago Press, vol. 105(2), pp. 412-38, April. Issler, J. V. and N. S. Piqueira, 2000, "Estimating Relative Risk Aversion, the Discount Rate, and the Intertemporal Elasticity of Substitution in Consumption for Brazil Using Three Types of Utility Function," Brazilian Review of Econometrics, Rio de Janeiro vol. 20, no. 2, pp.201-239, November. Karni E., 2000, "Optimal Unemployment Insurance: A Survey," Southern Economic Journal , vol. 66(2), pp. 442-465. Mazza, Jacqueline, 2000, "Unemployment Insurance: Case Studies and Lessons for Latin America and the Caribbean," No 4192, Research Department Publications, Inter- American Development Bank, Research Department. Shavell, Steven and Lawrence Weiss, 1979, "The Optimal Payment of Unemployment Insurance BeneÖts over Time," Journal of Political Economy , University of Chicago Press, vol. 87(6), pp. 1347-62.
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