Autor: Ruffo Hernán
Institución: UTDT
Año: 2025
JEL: J65, O17
Resumen:
This paper examines how the presence of a large informal sector alters the design and effects of unemployment insurance (UI) in developing countries. It reviews the existing literature and distills empirical evidence from several countries, and then interprets these observations through a job-search model with novel features. In the model, informality arises endogenously as a search outcome: unemployed workers can direct effort toward formal or informal jobs. The framework also incorporates fiscal externalities—particularly salient in developing economies—and accounts for repeated UI spells, allowing future benefit eligibility to shape current incentives to formalize. These elements make it possible to revisit traditional UI effects and uncover new ones, such as the directed moral hazard and the eligibility effects. Overall, the paper underscores the importance of explicitly considering informal employment when evaluating the welfare effects of UI and designing unemployment protection systems in contexts where informality is widespread.