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100523-WP-How to Fund Unemployment Insurance with Informality and False Claims-Ndiaye Herkenhoff Cisse DellAcqua and Mbaye


Authors:
Abdoulaye Ndiaye, New York University 
Kyle Herkenhoff, University of Minnesota
Abdoulaye Cissé, University of California, Berkeley
Alessandro Dell’Acqua, Bocconi University
Ahmadou A. Mbaye, Brookings Institution

Abstract:

This paper studies the welfare effects of unemployment insurance (UI) in low-income countries characterized by high levels of informality, weak enforcement of UI claims, and job search frictions. We assess the impact of UI on workers’ welfare in the presence of moral hazard and liquidity constraints. Our analysis highlights the significance of the UI scheme design on workers’ welfare and identifies potential funding constraints in implementing UI in imperfect labor markets. Using a custom labor force survey conducted in Senegal, we estimate the key parameters of an extended Chetty (2006) model incorporating an informal sector, and we evaluate the welfare implications of three different UI schemes with varying degrees of enforcement and funding sources. Our results demonstrate that workers respond to UI benefits and that welfare gains depend on the design of the UI system. We find that broad-based taxation through a VAT, inflation tax, or external funding can compensate for weak enforcement (i.e., high false UI claim rates), leading to substantial and quantifiable welfare gains. Moreover, safety net expansions reduce loan default rates, potentially fostering greater credit access. This study emphasizes the need to increase the prevalence of UI in low-income countries and provides insights into the design of achievable UI schemes that deliver significant welfare improvements.

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Felecia Phillips Ollie DD (h.c.) is the inspiring leader and founder of The Equality Network LLC (TEN). With a background in coaching, travel, and a career in news, Felecia brings a unique perspective to promoting diversity and inclusion. Holding a Bachelor's Degree in English/Communications, she is passionate about creating a more inclusive future. From graduating from Mississippi Valley State University to leading initiatives like the Washington State Department of Ecology’s Equal Employment Opportunity Program, Felecia is dedicated to making a positive impact. Join her journey on our blog as she shares insights and leads the charge for equity through The Equality Network.

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