American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Informal Labor and the Efficiency Cost of Social Programs: Evidence from Unemployment Insurance in Brazil
American Economic Journal: Economic Policy
vol. 13,
no. 3, August 2021
(pp. 167–206)
Abstract
It is widely believed that the presence of a large informal sector increases the efficiency cost of social programs in developing countries. We evaluate such claims for the case of unemployment insurance (UI) by combining an optimal UI framework with comprehensive data from Brazil. Using quasi-experimental variation in potential UI duration, we find clear evidence for the usual moral hazard problem that UI reduces incentives to return to a formal job. Yet, the associated efficiency cost is lower than it is in the United States, and it is lower in labor markets with higher informality within Brazil. This is because formal reemployment rates are lower to begin with where informality is higher, so that a larger share of workers would draw UI benefits absent any moral hazard. In sum, efficiency concerns may actually become more relevant as an economy formalizes.Citation
Gerard, François, and Gustavo Gonzaga. 2021. "Informal Labor and the Efficiency Cost of Social Programs: Evidence from Unemployment Insurance in Brazil." American Economic Journal: Economic Policy, 13 (3): 167–206. DOI: 10.1257/pol.20180072Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- E26 Informal Economy; Underground Economy
- J46 Informal Labor Markets
- J65 Unemployment Insurance; Severance Pay; Plant Closings
- O15 Economic Development: Human Resources; Human Development; Income Distribution; Migration
- O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
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