Labor Markets in Latin America: Combining Social Protection with Market Flexibility

By Sebastian Edwards; Nora Lustig Claudia | Go to book overview

CHAPTER FOUR
Designing an Optimal Unemployment Insurance Program, with Application to Argentina

Hugo A. Hopenhayn

Juan Pablo Nicolini

THE PURPOSE of this chapter is to evaluate the unemployment insurance program introduced in Argentina in 1992. It might seem paradoxical that while the welfare state seems to be in crisis in developed economies, a developing economy should introduce a program that has been widely criticized in recent years. In fact, in several countries, including Spain, Italy, and to some extent the United States, there seems to be agreement that existing programs need rather radical reform. Such criticism is mainly justified by the perverse effects that unemployment insurance has on incentives. For instance, unemployment insurance reduces an unemployed worker's incentive to look for a job. It is also possible that unemployment insurance increases the incentive to participate in the labor force because it increases the private value of being unemployed. In fact, there is clear evidence that the current unemployment insurance programs in the United States and Canada suffer from incentive problems.1

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1
See Meyer ( 1990) and Christofides and McKenna ( 1995).

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