Cash-on-hand in Developing Countries and the Value of Social Insurance

This paper studies the value of Social Insurance in developing countries. First, it explores a national wide cash bonus policy in Brazil with a RD design to provide new estimates on liquidity effects within the context of high labor informality. The bonus, equivalent to 15 days of earnings, reduces by 1.3 percentage points the probability that displaced workers find a new formal job in the first 12 weeks of the spell. Second, by exploiting the Unemployment Insurance (UI) schedule with a RD design, it estimates that an additional month of entitlement decreases the same outcome by 1.8 percentage points. By matching administrative and survey data, it exploits the same design to deliver novel estimates of informal labor responses to UI: an extra month of entitlement strongly increases informal employment. The magnitude of this effect is similar to the negative response on formal employment. Based on a labor supply model extended with labor informality, it is shown that, despite some implementation challenges, these empirical results can be used to estimate a lower bound of the insurance value of UI. Liquidity effects account for 58% of the total response to longer benefit entitlement on formal employment. A calibration exercise based on sufficient statistics suggests that providing UI in developing countries, where labor informality is high, may yield substantial welfare gains. Further exploiting state level heterogeneity in informality rates indicates that it is not obvious how the optimal UI generosity should vary as the market formalizes.

Britto, D., 2015. Cash-on-hand in Developing Countries and the Value of Social Insurance: Evidence from Brazil.