Is the Brazilian unemployment insurance program cost-efficient?

Responsible researcher: Viviane Pires Ribeiro

Article title: INFORMAL LABOR AND THE EFFICIENCY COST OF SOCIAL PROGRAMS: EVIDENCE FROM THE BRAZILIAN UNEMPLOYMENT INSURANCE PROGRAM

Article authors: François Gerard and Gustavo Gonzaga

Location of intervention: Brazil

Sample size: 27 Brazilian states

Sector: Job Market

Type of Intervention : Analysis of the cost efficiency of unemployment insurance

Variable of main interest: Unemployment insurance

Assessment method: Others - Canonical model

Assessment Context

The informal sector, the part of an economy that escapes government monitoring, represents a larger share of employment in developing countries. In a context of high informality, the conventional wisdom is that social programs – transfer programs and social insurance programs – impose high efficiency costs, especially when they require that beneficiaries are not formally employed. In this scenario, the concern is that these social programs and the availability of informal work opportunities will reduce incentives to work in the formal sector.

Despite this widespread view, the evidence behind it remains limited. First, partly due to data constraints, few studies estimate the impact of social programs on employment choices in developing countries. Second, studies that conclude that social programs induce some beneficiaries not to work in the formal sector typically do not have a theoretical framework for interpreting this evidence in relevant efficiency-equity or tradeoff between efficiency and insurance.

Intervention Details

Gerard and Gonzaga (2018) study the efficiency cost of increases in unemployment insurance benefits in a context of high informality, combining an ideal unemployment insurance framework and empirical evidence for Brazilian unemployment insurance beneficiaries. The analysis is mainly based on two sets of administrative data. RAIS is a law-matched employee-employer dataset of the universe of formal employees, including civil servants. RAIS has information on tenure, age, gender, education, industry, size and location, reason for dismissal, and since 2002, hiring and dismissal dates for each one-year employment period. The main analysis uses data from 2005 to 2010.

Microdata from two surveys carried out by the Brazilian Institute of Geography and Statistics (IBGE) were used. Both surveys ask for the labor market status of each household member over the age of ten, including information on salary, tenure and employment record signature. Domestic surveys (PNAD), representative at the state level, were used annually to measure informality rates in the 27 Brazilian states. Monthly workforce surveys (PME) were also used to assess the importance of informal work opportunities for laid-off formal employees and to explore their need for insurance.

Brazil is an interesting empirical setting for several reasons. First, unemployment insurance has existed in Brazil for many years, so workers are aware of its associated incentives. Second, the longest potential duration of unemployment insurance in the country was five months. Third, Brazil is not an outlier in terms of informality: its average informality rate is close to the average in Latin American countries. Fourth, there is a lot of heterogeneity in informality rates across Brazilian labor markets. Lastly, the authors had access to comprehensive administrative data, which, combined with quasi-experimental variation in unemployment insurance benefits, allowed them to estimate all of the statistics that go into the efficiency cost measure.

Methodology Details

The methodology used by Gerard and Gonzaga (2018) was the canonical model of optimal unemployment insurance, which specifies the “tradeoff” between workers’ needs for insurance and the efficiency cost of distorting their incentives to return to formal work. The model was combined with evidence drawn from comprehensive administrative data to quantify the efficiency cost of increases in the potential duration of Brazilian unemployment insurance.

Using administrative data, the authors documented patterns of insurance benefit collection and formal reemployment, which differ from those observed in developed countries. Subsequently, they sought to document how these patterns compare across Brazilian labor markets with different rates of informality. This allowed us to provide an efficiency cost estimate that can be compared with estimates from countries with low informality.

Results

The results show that the average duration of unemployment insurance paid is high compared to the potential duration of insurance, as most policyholders exhaust their benefits, for example, more than 80% of those eligible for five months of unemployment insurance. unemployment do. That's only about 35% in the US, where unemployment insurance is typically eligible for 24 weeks. This difference arises from the fact that the number of workers who find a new formal job is smaller when they are eligible for unemployment insurance in Brazil. The share that finds new formal work increases shortly after insurance exhaustion, suggesting clear behavioral responses to unemployment insurance incentives. Despite the existence of behavioral responses, the efficiency cost of increases in unemployment insurance benefits may not be relatively high. Furthermore, laid-off workers may choose to work informally, for reasons that are not related to the incentives of this type of insurance.

Estimates indicate that a one-month increase in the potential duration of unemployment insurance leads to a large increase in the average duration of paid insurance (0.86 months). Behavioral responses account for 14.6% of the increase in insurance duration. Thus, workers postpone formal reemployment by 0.39 months and reduce, on average, the time spent formally employed by 0.24 months.

The analysis of the 27 Brazilian states shows that the cost of efficiency is lower in states with greater informality. Furthermore, the impacts of behavioral responses on duration in insurance, duration out of formal employment, and time spent formally employed are all low (in absolute values).

Finally, the authors turned to the marginal value of insurance, as the results suggest a shift in the political debate towards the real need for insurance by workers. In this sense, an efficiency cost of $0.2 per $1 implies that the welfare effect of an increase in the duration of unemployment insurance would be positive if the average marginal utility of $1 were at least 20% greater for recipients mechanics than for formal jobs.

Public Policy Lessons

Gerard and Gonzaga (2018) study the efficiency cost of increases in unemployment insurance benefits in a context of high informality, combining an ideal unemployment insurance framework and empirical evidence for Brazilian unemployment insurance beneficiaries. Their findings run counter to widespread claims in policy circles that raise concerns about the usual moral hazard problem—that unemployment insurance distorts incentives to return to formal work—preventing the existence or expansion of unemployment insurance in this context. Thus, the authors argue that the associated efficiency cost is not necessarily high. Because, the cost of efficiency is low in Brazil when compared to countries with low informality.

Furthermore, the results have implications for other policies that aim to help formal workers in developing countries. Unemployment insurance savings accounts are sometimes presented as an alternative to unemployment insurance in these countries. In this sense, there is also evidence that Brazilian workers are willing to negotiate low formal wages for mandatory benefits, including benefits related to job loss.

References

Gerard, F., & Gonzaga, G. (2016). Informal labor and the efficiency cost of social programs: evidence from the Brazilian unemployment insurance program (No. w22608). National Bureau of Economic Research .