Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets
43 Pages Posted: 30 Apr 2018 Last revised: 13 Jan 2022
Date Written: October 29, 2021
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: Suggested Citation