combination of ensuring funds for smoothing shocks and search while mitigating moral hazard.<sup>18</sup> Kugler (2004), for instance, shows that moving to ISAs in Colombia led to shorter unemployment periods and higher post-unemployment wages.<sup>19</sup> The Brazilian program where workers could access their account only upon firing appeared to create the perverse incentive to lobby to be fired and the alternative _pago a todo evento_ contemplated in Mexico may in fact stimulate turnover that perhaps discourages investments in human capital.

In Brazil, which also had a true **unemployment insurance** program (UI) that pools risks and hence might be more prone to moral hazard, no improvement in matching, evidenced through higher wages was found, nor did the unemployment spells lengthen. However, those who collect UI were more likely to become self employed than those who did not, suggesting that UI is an alternative source of (hard to obtain) credit for firm start-up.<sup>20</sup> Similar results are found for training programs in Mexico.<sup>21</sup> Both examples suggest, again, the need to view the market in an integrated fashion- if poor formal sector workers seek to start their own businesses, UI programs designed without this in mind can facilitate a movement to informality.

**_Informal insurance mechanisms still dominate household coping strategies._** As Fiszbein (2004) notes, Latin America has evolved something a truncated welfare state where formal social protection schemes are concentrated among the better off leaving large segments of the population not only poor but without defense against shocks.

Private mechanisms may be more effective than thought. Despite understandable, although perhaps unhelpful assertions of their imperfection, informal mechanisms seem moderately effective alternatives to formal coverage and the primary source of insurance in countries with limited UI mechanisms and large informal sectors.<sup>22</sup> In a striking example from Europe, Bentolila and Ichino (2000) argue that household incomes fell substantially less in Italy and Spain in response to unemployment of the household head than it did in Germany where formal protection systems were more advanced. That said, the informal labor market itself cannot be complacently viewed as a safety net: in Argentina, Brazil and Mexico, the sector generates roughly 60% of the flows into unemployment (consistent with self employed sectors showing high mortality rates everywhere) and generated the majority of the increase in unemployment during the Mexican crisis.<sup>23</sup> However, the existence of informal mechanisms for pooling risk at the family or community level blurs the line between “protected” and “unprotected” work and must be integrated into the design of incentives in overall social protection programs.

**_However, informal mechanisms fail in the presence of covariate shocks:_** Local pooling of risk mitigates the moral hazard of national programs, but often fails in the presence of prolonged

> 18 Gill, Indermit and Nadeem Ilahi (2000) “Economic Insecurity, Individual Behavior, and Social Policy” LCRCE/World Bank, _unpublished manuscript_ . Guasch (1999) recommends a combined UI and individual savings account program where the ISA serves as a premium, and only once the ISA is depleted will a person collect UI

> 19 Kugler, Adriana (2000) “Does Replacing Employer Insurance for Self-Insurance Improve the Performance of the Labor Market?  The Case of the Colombian Severance Payments Savings Accounts” LCRCE/World Bank, _unpublished manuscript_ .

> 20 Cunningham, Wendy (2000) “Unemployment Insurance in Brazil:  Unemployment Duration, Wages, and Sectoral Choice” LCRCE/World Bank, _unpublished manuscript_ . Gonzaga (2003)

> 21 Wodon, Quentin and C. Siaens (1999) “Training for the Urban Unemployed:  A Reevaluation of Mexico’s Probecat” in World Bank (ed) _Government Programs and Poverty in Mexico_ , Report No. 19214-ME.

> 22 In available studies a decrease of income by 10 percent leads to a fall in consumption by only one to four percent. See World Bank (2001) _Household Risk, Self-Insurance, and Coping Strategies in Urban Argentina_ , Report No. 22426-AR (World Bank:  Washington, DC) for a review of the literature.

> 23 See Fajnzylber, Maloney and Montes (2003) and Bosch and Maloney (2004)

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