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Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Structure of UnemploymentCompensation, Labor Market Signaling and
Informal Sector Work
David N. MARGOLIS1
Paris School of Economics
May 4, 2009
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Unemployment in Brazil
The Pesquisa Mensal de Emprego (PME) data
The Econometric SpecificationData-Induced Econometric IssuesThe Modeling Strategy
Empirical ResultsFormal versus Informal, UI versus FGTSOther Covariates
ConclusionCaveatsPolicy Implications
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Brazilian Labor Market
I High Labor TurnoverI Annual job reallocation averages 33% over the 1991-98
periodI Average yearly job creation rate 17.3%I Average yearly job destruction rate 15.5%.
I Large Informal Sector (50 % of Labor Force)I Self employedI Workers sem carteira de trabalho assinadaI Ineligible for Unemployment Compensation
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Income Insurance in BrazilI Unemployment Insurance (seguro desemprego)
I Covered 43% of dismissals from formal sector by 1990I Average monthly benefit depends on the average wage of
the last three months prior to unemployment (averagebenefit level was ∼ 1.36 times minimum wage in 2005)
I Duration depends on previous formal sector experience
I FGTS (Fundo de Garantia do Tempo de Serviço)I Employer contributes 8% of the individual’s monthly wage
(roughly 1 month/year worked)I Worker can access his entire fund in case of dismissalI Fund augmented by a fine imposed on the employer in
proportion to the FGTS accumulated in the job (increasedin 2000 to reach a rate of 50%)
I For many workers, the amount received by FGTS is higherthan that received from unemployment insurance.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Pesquisa Mensal de Emprego (PME) data
Basic Structure:
I Monthly household surveyI Covers São Paulo, Rio de Janeiro, Salvador, Belo
Horizonte, Porto Alegre & RecifeI Follows CPS structureI Provides information on many variables including
education, age, gender and labor market status.I The sample used covers the period from March 2002 to
August 2007.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Construction of Data SetI PME provides information on the job duration and the
formal or informal status if unemployed ≤ 12 monthsI No direct information about UI benefits, can be simulatedI Maximum observable completed spell is 27 monthsI Exclude all first-time labor market entrants and individuals
with missing values for covariatesI Of the 319,402 initial unemployment spell observations:
I Lost 115,189: unable to determine UI eligibilityI Lost 10,969: stock > 12 months at first survey dateI 50,274 are eliminated as first-time labor market entrantsI 5,068 lost due to missing data
I Analysis data set contains 137,902 observations,corresponding to 72,897 unemployment spells (16,445spells not right censored)
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Descriptive Statistics for Unemployment Spells
Mean Std. Dev.
Total Observed Duration 5.251 4.756
Demographic Characteristics
Male 0.532 0.499
Age 29.772 10.912
Previous Training 0.228 0.420
Currently in School 0.190 0.392
1-3 Years of School 0.060 0.237
4-7 Years of School 0.274 0.446
8-10 Years of School 0.242 0.428
11 or More Years of School 0.394 0.489
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Descriptive Statistics for Unemployment Spells (cont.)
Mean Std. Dev.
Previous Job Characteristics
Formal Sector 0.425 0.494
Eligible for 3 Months UI 0.081 0.273
Eligible for 4 Months UI 0.083 0.276
Eligible for 5 Months UI 0.161 0.368
Salaried 0.786 0.410
Indefinite Term Contract 0.381 0.486
Metropolitan Labor Market Conditions
Unemployment Rate 11.192 2.708
Average Real Wage 1028.096 170.835
Participation Rate 56.307 3.113
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Raw Transition Rates by UI Eligibility
Formal InformalEx-Informal Sector 17.42% 82.58%
FGTS Only 52.28% 47.72%3 months UI 51.60% 48.40%4 months UI 52.82% 47.18%5 months UI 53.87% 46.13%
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Data-Induced Econometric Issues
The model needs to account for:
I Two possible destinations, formal and informal sectoremployment =⇒ competing risk model with correlatedrisks.
I Determinants of unemployment duration change with time=⇒ allow for time-varying covariates.
I Several unemployment spells possible within 16 monthwindow =⇒ accommodate multiple spells.
I Short panelI Only flow sample =⇒ too small sampleI Allow for stock sampling
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Data-Induced Econometric Issues
The model also needs to account for:
I No info on unemployment insurance or FGTS receipt indata =⇒ assume UI administration applies rules correctly& full takeup
I Only know info about spell of employment preceding theunemployment spell, only if unemployed ≤ 12 months
I There is the potential for selection biasI The duration models in the competing risk framework
provide the selection equationI Stock sampling correction serves two roles
1. Eliminate stock sampling bias2. Eliminate observability/selection bias
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Modeling Strategy
Caveats with Respect to Standard Job Search Models1. FGTS often larger than UI
I Disincentive effects primarily associated with FGTSI Marginal contribution of UI to job search disincentives may
be small2. Large informal sector
I If more productive workers are disproportionately found inthe formal sector, then ex-formal sector workers will receivemore job offers than ex-informal sector workers
I Since only ex-formal sector gets unemployment benefits,net effect on duration is ambiguous
3. Sensitivity of job offer arrival rates to job search intensitymay be different when looking for formal versus informalsector jobs.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Modeling Strategy
Implications for the Econometric Model1. Estimate separate effects for ex-informal sector workers,
those who can access their FGTS accounts but have no UIeligibility and those who have both FGTS and UI eligibility(broken down by the number of months of UI eligibility).
2. Allow for separate destinations (formal and informal sectorjobs)
3. Allow unobserved heterogeneity to influence the speed ofreturn to employment differently for formal and informalsector jobs.
4. Allow the effects of FGTS and UI receipt to differ by thesort of job found (formal or informal).
5. Allow the unobserved determinants that affect the speed oftransition to each type of job to be correlated.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
The Modeling Strategy
Competing risk, proportional hazards model with correlatedunobserved heterogeneity
Compare specifications for baseline hazard:I Common baseline hazard, shifted by ex-formal sector
indicatorI Common baseline hazard, shifted differently by eligibility
I Only FGTSI 3 months of UI (6-11 months previous work)I 4 months of UI (12-23 months previous work)I 5 months of UI (24+ months previous work)
I Separate baseline hazard for ex-formal sector, shifted bytype and length of benefit eligibility
I Separate baseline hazards for each type and length ofbenefit eligibility.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Unemployment Compensation Eligibility
4
5
6
Log
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Figure 1: Relative Speed of Exit from Unemployment by Worker Type and Sector of Job Found
Ex-Informal: Transition to Formal Sector
Ex-Formal: Transition to Formal Sector
Ex-Informal: Transition to Informal Sector
Ex-Formal: Transition to Informal Sector
0
1
2
3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Log
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Months of Unemployment
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Unemployment Compensation Eligibility
5.5
6
6.5
7
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Figure 2: Hazard Rates for Transitions to Formal Sector Jobs
Ex-Informal
FGTS Only
3 Months UI
4 Months UI
5 Months UI
3
3.5
4
4.5
5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Log
(Bas
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d R
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Months of Unemployment
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Unemployment Compensation Eligibility
3
4
5
6
Log
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Figure 3: Hazard Rates for Transitions to Informal Sector Jobs
-2
-1
0
1
2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Log
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Months of Unemployment
Ex-Informal
FGTS Only
3 Months UI
4 Months UI
5 Months UI
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Other Covariates
Demographic Characteristics
I Men return to work faster than women, as do heads ofhouseholds.
I Transition rate to both destinations decreases with ageI More highly educated workers transit slower to informal
sector jobsI Still in school transits slower to both destinationsI Previous professional training transits faster to both
destinationsI Previously salaried employees transit faster to formal
sector jobs but slower to informal sector ones.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Other Covariates
Macroeconomic Variables
I High local unemployment rate pushes people towardinformal sector jobs
I Higher average real wages in the metropolitan area reducethe speed of return to employment in either sector.
I High local labor force participation rates slow transitions toboth sectors.
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Other Covariates
Unobserved Heterogeneity
Table: Joint Distribution of Unobserved Heterogeneity Terms
Formal \ Informal 0 δI
0 0.888 0.089δF 0.005 0.018
cov(δF , δI) = 0.116
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Caveats
Only FGTS or UI Eligibility, Not Receipt, Available
I Fundamental non-identifiability implicit in theunemployment safety net
I The same situations that make an individual eligible forFGTS or UI can also generate other effects
I No natural experiments or regression discontinuity possible
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Caveats
Distribution of unobserved heterogeneity is commonto workers coming from the formal and informal sector
I Separate distributions not nonparametrically identifiableI Implies ex-formal sector workers can not experience
disproportionately fast (or slow) transitions to formal (orinformal) sector jobs on the basis of unobservedcharacteristics
I Can say that being eligible for UI slows the exit rate afterconditioning on the marginal distribution of unobservedcharacteristics
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Caveats
Only have information on the job held immediatelyprior to the unemployment spell in progress
I 120 day filing window =⇒ short undeclared informal jobpossible but invisible
I May underestimate formal job seniority if multiple formalspell in 24 months before enrollment
I Of the 30950 unemployment spells that are preceded byformal sector employment in our data, 11765 werepreceded by jobs of at least 24 months
I Others have potential undermeasurementI May explain non-monotonically increasing (in absolute
value) coefficients on the impact of the length of UI benefitson transitions to informal sector employment
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Policy Implications
Result: Unemployment safety net affects transitions
Stylized facts:
I Slows transitions to informal sectorI FGTS speeds transitions to formal sector, slows transitions
to informal sectorI UI only slows transitions to informal sector
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Policy Implications
Possible Implications
I Capital Constraints Slow Expansion of Informal SectorI FGTS provides some startup capitalI Longer wait on UI =⇒ more savings available
I Employer selection is important: dual labor markets
I Individuals prefer formal sector and unemployment safetynet allows some individuals to put off transition to informalwork for subsistence
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
Unemployment in Brazil PME Data Econometric Model Results Conclusion
Policy Implications
Thank you
David N. MARGOLIS
The Structure of Unemployment Compensation, Labor Market Signaling and Informal Sector Work
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