Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets

43 Pages Posted: 30 Apr 2018 Last revised: 13 Jan 2022

See all articles by Bernardus Ferdinandus Nazar Van Doornik

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil

David Schoenherr

Princeton University, Bendheim Center for Finance; European Corporate Governance Institute (ECGI)

Janis Skrastins

Washington University in St. Louis - John M. Olin Business School

Date Written: October 29, 2021

Abstract

Exploiting an unemployment insurance (UI) reform in Brazil, we study incentive effects of UI in the presence of informal labor markets. We find that eligibility for UI benefits increases formal layoffs by eleven percent. Most of the additional layoffs are related to workers transitioning to informal employment. We further document formal layoff and recall patterns consistent with rent extraction from the UI system. Workers are laid off as they become eligible for UI benefits and recalled when benefits cease. These patterns are stronger for industries and municipalities with a high degree of labor market informality.

Keywords: unemployment insurance, informal labor markets, law and economics

JEL Classification: J21, J22, J46, J65, K31

Suggested Citation

Doornik, Bernardus Ferdinandus Nazar Van and Schoenherr, David and Skrastins, Janis, Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets (October 29, 2021). Available at SSRN: https://ssrn.com/abstract=3168769 or http://dx.doi.org/10.2139/ssrn.3168769

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

David Schoenherr (Contact Author)

Princeton University, Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Janis Skrastins

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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