Labor market effects of unemployment insurance with informality

Abstract

Unemployment Insurance (UI) is a Job Displacement Insurance program (JDI) that mitigates the fall in income and smooth consumption, in order to work not feel the adverse effects of job loss. However, the payment of such a social security policy entails problems, since by providing an overly generous policy, the worker may be induced to delay his return to the labor market. Morever, in a country where most workers do not have a formal work card, as in the case of Brazil, this interaction between UI and informality can lead to further problems, as the worker may be employed in the informal sector and still collect the benefit. With this, we seek to document empirically that workers go to unemployment/informality and then return to the same company in a collusion process in order to derive some rente-seeking from the unemployment insurance system. Based on this evidence, we developed a search and matching model that incorporates informality through this possibility of firm-worker collusion. We have added to our base model the possibility of eligibility and exhaustion of unemployment insurance. In addition, we also incorporate the fact that the worker can accumulate human capital during his employed period and also accumulate during unemployment. Thus, we will use the model developed to analyze the reform of UI that occurred in Brazil in 2015, empirically and quantitatively assessing its impacts on the Brazilian labor market. (AU)