Job search, unemployment protection, and informal work

Informal work is a significant feature of labour markets in many developed countries, despite having unemployment protection (UP) programmes. We use a model of job search over the duration of unemployment to study how the structure of these programmes influences the incentive of the unemployed to engage in informal work while searching for formal jobs. Accounting for informality enables the model to jointly explain three known features on job search dynamics: a temporary re-employment spike, low search effort, and negative duration dependence. The quantitative analysis finds that both informality and unemployment can be reduced by redistributing (across either workers or programmes), rather than increasing, the overall UP budget.