Unemployment Insurance, Strategic Unemployment, and Firm-Worker Collusion
72 Pages Posted: 30 Apr 2018 Last revised: 2 Aug 2018
Date Written: July 24, 2018
Exploiting a discontinuous effect of an unemployment insurance (UI) reform in Brazil, this paper documents layoff and rehiring patterns consistent with collusion between firms and workers to extract rents from the UI system. Firms and workers time formal unemployment spells to coincide with workers' eligibility for UI benefits. These patterns are mostly driven by industries and municipalities with large informal labor markets. Using survey data, we find that workers are more likely to flow from formal to informal unemployment when they are eligible for UI benefits, and return from informal to formal employment to the same firm when UI benefits eligibility ends. Combined with a lower probability of hiring replacement workers when laying off workers eligible for UI benefits, this suggests that firms continue employing workers informally while they are on benefits. Firms seem to benefit from collusion through lower equilibrium wages.
Keywords: unemployment insurance, informal labor markets, collusion, law and economics
JEL Classification: J21, J22, J46, J65, K31
Suggested Citation: Suggested Citation