Working Paper: NBER ID: w31571
Authors: Abdoulaye Ndiaye; Kyle F. Herkenhoff; Abdoulaye Cisse; Alessandro Dellacqua; Ahmadou Aly Mbaye
Abstract: This paper studies the welfare effects associated with the provision of unemployment insurance (UI) benefits when formal workers represent only a small proportion of the labor market and informal workers can submit fraudulent claims for UI benefits. We develop a model that incorporates these features and also allows for varying degrees of enforcement and funding sources. We then estimate the model’s key parameters by conducting a custom labor force survey in Senegal. We show that the moral hazard response to the UI benefits among workers is small and their liquidity gains are large: an extra dollar of UI benefits yields a consumption-equivalent gain of 50–80 cents, which exceeds comparable U.S. estimates by a factor of 10–20. We then show that the welfare gains depend on the program design: UI funded through payroll taxes is effective and feasible as long as the ratio of formal workers to the benefit level is sufficiently high, while UI funded through consumption taxes generally offers lower welfare benefits but is more resistant to fraudulent claims. Our study highlights the welfare importance of the design of UI financing and suggests large liquidity and consumption smoothing gains of UI in contexts with high informality and potential fraud.
Keywords: unemployment insurance; informality; welfare gains; Senegal; moral hazard
JEL Codes: E0; E24; H21; J65; O10; O55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elimination of informality (J46) | substantial welfare gains (D69) |
| 1% labor tax under perfect enforcement (H31) | 14% consumption-equivalent welfare gain (D69) |
| 1% labor tax under high informality and false claims (J46) | 0.28% welfare gain (D69) |
| UI funded by broad-based taxation (H29) | better performance than traditional labor-tax-funded systems (J32) |
| 1% consumption tax allocated to UI (H29) | 0.33% consumption-equivalent welfare gain (D11) |
| high false claim rates (K42) | lower welfare gain from labor tax (H31) |
| expanding safety nets (H53) | reduce loan default rates (G51) |
| UI (Y10) | credit access (G21) |