Welfare effects of unemployment benefits when informality is high

Abstract

We investigate the welfare effects of unemployment benefits (UBs) in the context of high informality, analyzing matched administrative and survey data with detailed information on consumption, transfers and informal and formal employment of UB recipients. Difference-in-differences analysis reveals a comparatively large consumption drop after the loss of a formal job, resulting from shifts towards lower-quality informal employment and an associated earnings penalty. Exploiting a UB kink, we then show that higher UBs delay program exit through a substitution of formal with informal employment. Even when conservatively estimated, however, welfare effects are positive for coefficients of risk aversion exceeding two.