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Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets

Author

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  • Bernardus Van Doornik
  • David Schoenherr
  • Janis Skrastins

Abstract

Exploiting an unemployment insurance 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 11 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.

Suggested Citation

  • Bernardus Van Doornik & David Schoenherr & Janis Skrastins, 2023. "Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Markets," American Economic Journal: Applied Economics, American Economic Association, vol. 15(1), pages 292-318, January.
    • Handle: RePEc:aea:aejapp:v:15:y:2023:i:1:p:292-318
    DOI: 10.1257/app.20200787
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    Cited by:

    1. Cecilia Machado & Valdemar Neto & Christiane Szerman, 2023. "Firm and Worker Responses to Extensions in Paid Maternity Leave," CESifo Working Paper Series 10736, CESifo.
    2. Khoury, Laura, 2023. "Unemployment benefits and redundancies: Incidence and timing effects," Journal of Public Economics, Elsevier, vol. 226(C).
    3. Bernardus Van Doornik & Armando Gomes & David Schoenherr & Janis Skrastins, 2024. "Savings-and-Credit Contracts," Working Papers Series 610, Central Bank of Brazil, Research Department.
    4. Santiago Garriga & Dario Tortarolo, 2024. "Wage effects of means-tested transfers: Incidence implications of using firms as intermediaries," IFS Working Papers W24/49, Institute for Fiscal Studies.

    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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