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Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets

  • Bernardus Van Doornik
  • David Schoenherr
  • Janis Skrastins
American Economic Journal: Applied Economics
vol. 15, no. 1, January 2023
(pp. 292-318)
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Abstract

Exploiting an unemployment insurance reform in Brazil, we study incentive effects of UI in the presence of informal labor markets. We find that eligibility for UI benefits increases formal layoffs by 11 percent. Most of the additional layoffs are related to workers transitioning to informal employment. We further document formal layoff and recall patterns consistent with rent extraction from the UI system. Workers are laid off as they become eligible for UI benefits and recalled when benefits cease. These patterns are stronger for industries and municipalities with a high degree of labor market informality.

Citation

Van Doornik, Bernardus, David Schoenherr, and Janis Skrastins. 2023. "Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets." American Economic Journal: Applied Economics, 15 (1): 292-318. DOI: 10.1257/app.20200787

Additional Materials

JEL Classification

  • J22 Time Allocation and Labor Supply
  • J46 Informal Labor Markets
  • J63 Labor Turnover; Vacancies; Layoffs
  • J65 Unemployment Insurance; Severance Pay; Plant Closings
  • K31 Labor Law
  • O15 Economic Development: Human Resources; Human Development; Income Distribution; Migration
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