David Bardey, and Fernando Jaramillo, Unemployment insurance and informality in developing countries, TSE Working Paper, n. 11-257, September 2011, revised November 2011.


We analyze whether the introduction of unemployment insurance (UI hereafter) benefits in developing countries would reduce the effort made by unemployed to secure a new job in the formal sector. We show that one shot UI benefits unambiguously increase the effort to secure a new job in the formal sector. The relative strength of income/substitution effects only determine how leisure and informal activities are affected. Consequently, our (partial equilibrium) analysis reveals that short term UI benefits in developing countries do not reduce incentives to secure a new formal job and therefore cannot be interpreted as a subsidy to the informal sector.


Unemployment insurance; informal sector; income effects; developing countries;

JEL codes

  • H55: Social Security and Public Pensions
  • I38: Government Policy • Provision and Effects of Welfare Programs
  • J65: Unemployment Insurance • Severance Pay • Plant Closings
  • Replaced by

    David Bardey, Fernando Jaramillo, and Ximena Peña, Unemployment Insurance in the Presence of an Informal Sector, The World Bank Economic Review, vol. 29, 2015, pp. 126–134.