Unemployment Insurance Schemes in Developing Countries

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This proposed research project will study the most efficient form of unemployment support using a large data set on the employment history of over 400,000 workers. This employment data will be combined with expenditure and unemployment compensation data for the study. The researchers will categorize different types of unemployment compensation (unemployment insurance, lump sum payments, and no insurance) and use sophisticated methods to analyze how the type of unemployment compensation unemployed workers receive affects affect their consumption over time. The researchers will then develop a theory that combines the insights of both economics and psychology to explain the observed differences in consumption patterns of unemployed workers receiving different types of unemployment compensation. The researchers will then use the results to discuss policy recommendations. The results of this research will provide valuable inputs into unemployment compensation policies in both developed and developing worlds. The results will also be used as an input to develop policies to improve the functioning of labor markets, hence enhance economic growth both in the US and around the world. Finally, the results of this research project can be used by individuals to plan their consumption during periods of unemployment. The debate about the optimal choice between (combinations of) unemployment insurance (UI) and lump sum payment at the time of layoff focuses on the tradeoff between the disincentive from the former to the inability to smoothen consumption because of the uncertainty of unemployment duration in the case of the latter. There is very little empirical and theoretical investigation of this tradeoff, especially in developing countries that are struggling to develop their unemployment compensation systems. The proposed research project will use theory and large data sets to investigate how the type of unemployment compensation scheme affects the consumption trajectories of laid off workers. The project follows a strand in the economics literature that documents consumption profiles around economic shocks. The PIs will build a new high-frequency longitudinal microdata of formal employment and expenditure for more than 400,000 individuals and exploit this dataset and a rich empirical setting with multiple sources of variation in unemployment insurance schemes across workers to document new empirical findings. The project will then estimate structural models of behaviors that explain these consumption patterns and evaluate their ability to explain the empirical observations. The project will then use the estimated models to discuss policy implications for unemployment compensation schemes, particularly for developing countries. The results of this research project will provide critical inputs into the formulation of unemployment compensations schemes and other labor market policies, improve the functioning of labor markets and in the process, increase economic growth.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.