The welfare effects of unemployment insurance in Argentina. New estimates using changes in the schedule of transfers

TL;DR

This paper examines how changes in unemployment insurance benefits in Argentina affect workers' re-employment behavior and wages, highlighting potential welfare gains despite challenges posed by informality.

Contribution

It provides new empirical estimates of unemployment insurance effects in Argentina using transfer schedule kinks and models welfare impacts considering informality.

Findings

Higher benefits lead to increased re-employment wages.

Moderate responses in job-finding rates to benefit changes.

Welfare could improve significantly with increased benefits.

Abstract

Unemployment insurance transfers should balance the provision of consumption to the unemployed with the disincentive effects on the search behavior. Developing countries face the additional challenge of informality. Workers can choose to hide their employment state and labor income in informal jobs, an additional form of moral hazard. To provide evidence about the effects of this policy in a country affected by informality we exploit kinks in the schedule of transfers in Argentina. Our results suggest that higher benefits induce moderate behavioral responses in job-finding rates and increase re-employment wages. We use a sufficient statistics formula from a model with random wage offers and we calibrate it with our estimates. We show that welfare could rise substantially if benefits were increased in Argentina. Importantly, our conclusion is relevant for the median eligible worker that is strongly affected by informality.