Working Paper Revision

Designing Unemployment Insurance for Developing Countries

Abstract: The high incidence of informality in the labor markets of middle-income economies challenges the provision of unemployment protection. We show that, despite informational frictions, introducing an unemployment insurance savings account (UISA) system may provide substantial benefits. This system improves welfare by providing insurance to the unemployed and creating incentives to work in the formal sector. The optimal scheme generates a reduction in unemployment (from 4 to 3 percent), an increase in formality (from 68 to 72 percent), and a rise in total output (by 4 percent). Overall, individuals obtain welfare gains equivalent to a 2.4 percent increase in consumption in every period.

Keywords: Saving Accounts; Incomplete Markets; Moral Hazard; UISA; Mexico; Informality; Unemployment Insurance; Job Search;

JEL Classification: D82; H55; I38; J65;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-09-10

Number: 2018-006

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