Welfare Effects of Unemployment Benefits when Informality is High

This paper analyzes for the first time how the high incidence of informal employment affects the welfare effects of unemployment benefits (UBs) outside of developed economies, exploiting matched administrative and survey data from the UB scheme of Mauritius. We find positive and large welfare effects, because the consumption drop at layoff exceeds what studies find for high-income countries, while the efficiency costs are comparatively low. In addition, UB recipients appear to move into informal employment out of economic necessity, rather than as part of a strategic choice.