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
Gerard, François, and Gustavo Gonzaga.
"Informal Labor and the Efficiency Cost of Social Programs: Evidence from Unemployment Insurance in Brazil."
American Economic Journal: Economic Policy,
Asymmetric and Private Information; Mechanism Design
Informal Economy; Underground Economy
Informal Labor Markets
Unemployment Insurance; Severance Pay; Plant Closings
Economic Development: Human Resources; Human Development; Income Distribution; Migration
Formal and Informal Sectors; Shadow Economy; Institutional Arrangements