Working Paper

Designing Unemployment Insurance for Developing Countries

Abstract: The benefits of implementing Unemployment Insurance Savings Accounts (UISAs) are studied in the presence of the multiple sources of information frictions often existing in developing countries. A benchmark incomplete markets economy is calibrated to Mexico in the early 2000s. The unconstrained optimal allocation would imply very large welfare gains relative to the benchmark economy (similar to an increase in consumption of 23% in every period). More importantly, in presence of multiple sources of information frictions, about half of those potential gains can be accrued through the implementation of UISAs with replacement rates between 40-50%, contribution rates between 10-15%, an initial liquidity transfer of about 20 quarters of average income, and higher payroll taxes to finance those initial stocks.

Keywords: Unemployment Insurance; Informality; Moral Hazard; savings accounts; UISA; Mexico; Incomplete Markets; Job Search;

JEL Classification: D82; H55; I38; J65;

Status: Published in Journal of Development Economics

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2018-04-16

Number: 2018-6

Note: Publisher DOI:

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