How to Fund Unemployment Insurance with Informality and False Claims: Evidence From Senegal
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 suggests that increasing the prevalence of UI in low-income countries could raise standard measures of consumer welfare.
We have nothing to disclose. We express our gratitude to Abdou Khadir Dia for providing excellent research assistance. Our acknowledgments also extend to the National Agency of Statistics and Demography of Senegal, as well as Amadou Asseloka, for their indispensable support in conducting the survey. Finally, we thank Binta Zahra Diop, Larry White, and various seminar participants for their insightful comments that greatly enriched this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Kyle F. Herkenhoff
We have nothing to disclose.