Unemployment insurance (UI) in low-income countries faces unique challenges, particularly in regions with high informality, weak enforcement of UI claims, and significant job search frictions. Despite these hurdles, UI can significantly improve the well-being of workers and their dependents. This policy brief illuminates the findings of a study conducted in Senegal, evaluating the impact of three distinct UI schemes, each with different enforcement levels and funding sources. Among these, broad-based taxation has emerged as a viable solution to counter potentially high levels of fraudulent UI claims. These insights contribute to the design of practical UI schemes and provide actionable recommendations for effective labor market policies in low-income countries.
Unemployment insurance serves as a major social safety net for workers in developed countries, where labor markets are marked by high formality and the traceability of employment spells and wages through comprehensive labor force surveys and employer-employee matched data. This structure explains why UI operates effectively and covers a broad spectrum of workers in these regions.
However, the prevalence of UI diminishes in low-income countries, a trend attributable to challenges in monitoring work statuses, financing the UI budget, and verifying the legitimacy of UI claims.1 Specifically, labor markets in developing nations are often mired in...
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