Universal Basic Income in a DevelopingEconomy with a Large Informal Sector

Abstract

We analyze the implication of a Universal Basic Income (UBI) policy introduction in a country with a large informal sector. The model features frictions in the labor market, incomplete markets, risk-averse workers, and heterogeneity in occupation and asset position. A payroll tax on formal firms finances policies to insure workers. We calibrate the model to the Brazilian economy. The introduction of a budget-neutral UBI that replaces an existing Unemployment Insurance (UI) policy reduces welfare by around 1%. However, introducing UBI together with the UI policy increases the welfare of workers by around 0.8%. Poorer households are the ones that benefit the most from the UBI. The maximum welfare gain is achieved with a combined UBI+UI policy with an ex-post payroll tax of 20%. When replacing UI, UBI cannot increase aggregate welfare for any value of the transfer.