and ALMP indicators across regions and income groups; Section 4 presents and discusses the findings of the regression analyses, and Section 5 concludes the paper.

# **2. Review of the Literature on the Linkages of UB and ALMP with Labor Market Outcomes**

This section provides an overview of theoretical and empirical literature investigating the effects of UB and ALMP on labor market outcomes in developing and developed countries.

## **2.1. UB and labor market outcomes**

Conceptually, UB can affect unemployment and reemployment wages through two channels: the substitution effect and the liquidity effect. The substitution effect of UB arises from the distortion it creates in the prices of leisure and consumption, reducing the marginal incentive to search for a job and potentially leading to moral hazard that in turn promotes unemployment and reduces reemployment wage. The potential for moral hazard is expected to be higher in less developed economies due to a larger informal sector and limited institutional capacity to monitor the job search activities of UB recipients. The liquidity effect stems from the liquidity provided by UB, allowing unemployed individuals to effectively manage and sustain their consumption over an extended period. This prompts UB recipients to devote more time to seeking employment opportunities that align with their skills and offer higher wages. Unlike moral hazard, the liquidity effect proves socially advantageous, fostering better employment opportunities and productivity, even though it may temporarily elevate the unemployment rate in the short term.

Empirical studies of UB typically concentrate on Europe and North America and show that longer UB periods or higher amounts of UB result in prolonged unemployment and reduced formal employment, suggesting, to some degree, the presence of moral hazard (Hagedorn et al. 2015; Tatsiramos and Van Ours 2014; Caliendo et al. 2013; Farber and Valletta 2013; Rothstein 2011; Tatsiramos 2009; Van Ours and Vodopivec 2006). Using macro level panel data, Pignatti and Van Belle (2018) showed that in developed countries, when coupled with sufficiently high spending on ALMP, higher public spending on PLMP can cut unemployment and boost employment rates. However, in developing countries, increased public spending on PLMP did not significantly affect unemployment or employment rates.

Country-level research on developing economies suggests that while generous UB tend to increase unemployment and reduce their formal employment more prominently compared to developed economies, this is not necessarily due to moral hazard. For instance, in Turkey, a two-month extension of UB during 2002-2012 decreased the likelihood of job finding by 15 percent, surpassing effects observed in the United States, Germany, and Austria (Filiz 2017). However, individuals entitled to longer UB periods showed reduced tendency to exploit the system, indicating lower moral hazard. Similarly, an increase in UB duration in 2002-2010 led to a lower probability of returning to a formal job. Yet, its efficiency cost was lower than observed in the United States (Gerard and Gonzaga 2021). In Mauritius, Liepmann and Pignatti (2021) found positive and significant welfare effects of UB during 2012-2108 in a highly informal context, with smaller efficiency costs than in developed economies. In addition, the shift to informal employment was more influenced by layoffs than by UB generosity. Therefore, contrary to studies 5