Unemployment Insurance, Strategic Unemployment, and Firm-Worker Collusion

67 Pages Posted: 30 Apr 2018 Last revised: 25 Sep 2018

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

Janis Skrastins

Washington University in St. Louis

Date Written: July 24, 2018

Abstract

Recent years have seen a spread of unemployment insurance (UI) programs to mid-income and developing countries. Yet little is known about how labor market characteristics in these countries, for example large informal labor markets, interact with the incentive effects of UI. In this paper, we show that firms and workers collude to extract rents from the UI system in the presence of large informal labor markets. Exploiting a discontinuous effect of an unemployment insurance reform in Brazil, we document 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. Survey evidence suggests that firms employ workers informally while they are eligible for UI benefits and rehire them when benefits end. Combined with a lower probability of hiring replacement workers when laying off workers eligible for UI benefits, this suggests that firms employ workers informally while they are on benefits. Firms and workers share the rents extracted from the UI system through lower equilibrium wages. All the observed patterns are mostly driven by industries and municipalities with large informal labor markets. Our findings thus suggest that optimal UI design in mid-income and developing countries needs to take into account adverse incentive effects generated by collusion between firms and workers in the presence of informal labor markets.

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

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

Suggested Citation

Doornik, Bernardus Ferdinandus Nazar Van and Schoenherr, David and Skrastins, Janis, Unemployment Insurance, Strategic Unemployment, and Firm-Worker Collusion (July 24, 2018). 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

Janis Skrastins

Washington University in St. Louis ( email )

1 brookings drive
campus box 1133
st louis, MO St Louis 63130
United States

HOME PAGE: http://www.jskrastins.com

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