The effects of unemployment insurance accounts on labor market equilibrium with informality

Abstract

The Great Recession has brought renewed interest in the study of labor market fluctuations and the effects of job displacement programs. The typical government policy for supporting laid-off workers is the unemployment insurance, which poses a key trade-off between damaging workers' employment incentives and providing workers with insurance. Recent literature has indicated that unemployment individual accounts (UIA) can improve this trade-off between the incentive to work and insurance provision since it internalizes the cost of receiving funds during unemployment. However, this literature has paid little attention on the effect of UIA programs on informality and has focused on developed economies. Thus, little is known about its effect on developing economies, where labor markets are characterized by widespread informality. This research project intends to filling this gap. In particular, we develop an overlapping generation search-matching model with an informal sector to quantitatively investigate how UIA affects unemployment, job creation and the size of the informal sector. We also aim to compare the performance of UIA with others job displacement programs like unemployment insurance and the severance payment. We will estimate the model for the Brazilian economy. Brazil is an interesting case since it has a large job displacement program known as Length of Service Guarantee Fund (FGTS), which combines the firing compensation structure of a severance pay program and the savings plans feature of a severance savings account.