Labor Market Effects of UBI in Developing Economies

• Grant number: 23/12592-1
• Support Opportunities: Scholarships abroad - Research Internship - Doctorate (Direct)
• Start date: January 24, 2024
• End date: December 23, 2024
• Field of knowledge: Applied Social Sciences - Economics - Growth, Fluctuations and Economic Planning
• Principal Investigator: Marcelo Rodrigues dos Santos
• Grantee: Guilherme Gomez Gallego
• Supervisor: Gustavo Ventura
• Host Institution: Instituto de Ensino e Pesquisa (Insper). São Paulo , SP, Brazil
• Institution abroad: Arizona State University, Tempe (ASU), United States
• Associated to the scholarship: 22/07879-7 - Labor market effects of universal basic income in developing economies, BP.DD

Abstract

While means-tested transfer programs have effectively reduced poverty and inequality, they can also generate threshold traps in the labor market. We contribute to this literature by studying an unexpected reform in Brazil's Unemployment Insurance (UI) policy that tightened the eligibility criteria for most (but not all) formal workers. We provide evidence that unemployment benefits reduce formal employment, and this effect is amplified by informality. Given these observed effects associated with a conditional cash transfer program like UI, we then shift our focus to an alternative: an unconditional universal transfer. Beyond the effects on distributive indicators, this paper studies the impact of universal transfer programs on vacancy creation, wages, and welfare using a search-and-matching model where workers and firms jointly sort between formal and informal jobs. This study aims to unravel and analyze the aggregate and distributive effects of replacing the current transfer system with a Universal Basic Income (UBI) program in Brazil, a developing economy with widespread informality. We calibrate the general equilibrium model to match key moments concerning unemployment, wages, wealth distributions, and the distribution of transfers for the Brazilian economy. Note that the unemployment insurance benefits are related to pre-unemployment earnings and subject to exhaustion, after which agents can only rely on transfers and savings. Moreover, informal workers are not eligible for such benefits. Therefore, we model the unemployment insurance benefits in our market economy and explore the welfare change associated with introducing a Universal Basic Income, replacing the existing transfer programs and unemployment benefits.