Strategic Formal Layoffs: Unemployment Insurance and Informal Labor Marketst

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 transi-tioning to informal employment. We further document formal layoff and recall patterns consistent with rent extraction from the UI sys-tem. Workers are laid off as they become eligible for UI benefits and recalled when benefits cease. These patterns are stronger for indus-tries and municipalities with a high degree of labor market informal-ity. (JEL J22, J46, J63, J65, K31, O15)