Optimal Unemployment Insurance and Informal Labour Markets

In developing countries, weak enforcement of labour and tax regulations creates an opportunity for employers to collude with employees and manipulate the unemployment insurance system. In particular, workers who are eligible for benefits have an incentive to agree with their employers to transition into informality and share the proceeds from unemployment checks. We study the importance of this mechanism for the design of optimal unemployment insurance policies in a quantitative Diamond-Mortensen-Pissarides model calibrated with Brazilian data.