Introducing unemployment insurance to developing countries

Abstract

The paper analyzes key labor market and institutional features of developing countries that affect functioning of unemployment insurance: a large informal sector, weak administrative capacity, and large political risk. It argues that these countries should tailor an OECD-style unemployment insurance program to their circumstances, among others by relying on self-insurance (via unemployment insurance savings accounts), complemented by solidarity funding, as a key source of financing; by simplifying monitoring of job-search behavior and labor market status; and by piggybacking on existing networks to administer benefits. The paper also addresses the question whether developing countries should introduce unemployment insurance.JEL codes: J65, J68

How unemployment insurance savings accounts affect employment duration: evidence from Chile

“…Severance pay is a widespread form of unemployment protection, particularly in developing countries (Vodopivec 2004;2013) due to large informal labor markets and limited administrative and financial capacities to introduce unemployment insurance (Holzman, Pouget, Vodopivec, & Weber 2011). Severance pay is however often criticized and considered an inappropriate option for income protection: while severance pay intends to provide compensation for job loss and to stabilize the economy by discouraging layoffs and encouraging long-term work relations, it distorts the behavior of workers and firms, and often provides workers with limited protection during unemployment spells (Feldstein & Altman 2007;Hopenhayn & Hatchondo 2012).…”

Informality and Long‐Run Growth

“…A report by the World Bank (, p. 23) states that a third of developing economies do not have any social protection policy or strategy, and the number of such countries has grown very recently, meaning that the effects of many of these programs have yet to be seen. In the absence of social protection, informality is widely tolerated because it provides people with an alternative, in the absence of, for example, unemployment insurance (as argued in Vodopivec, ; Robalino and Weber, ; Margolis et al ., ; Charlot et al ., , among others) and/or a minimum wage (as argued by, among others, Basu et al ., , ).…”

Unemployment, rural–urban migration and environmental regulation

“… Some forms of unemployment insurance (UI) currently exist in a handful of developing countries (see Vodopivec, ; Velásquez, ; Gerard and Gonzaga, ), most of them Latin American countries. …”