Technical Note
Unemployment insurance and income protection in Ecuador: an application of ECUAMOD

This note has been produced alongside a WIDER working paper assessing the effect of the Unemployment Insurance benefit on income protection in Ecuador. The aim of this note is to describe the methodology used to assess the effect of the Unemployment Insurance through the simulation of transitions from work to unemployment.

The note is based on ECUAMOD version 1.4 and the Net Replacement Rate add-on built in the model to simulate transitions from work to unemployment in the underlying microdata. The add-on is used to assess the effect of the introduction of the Unemployment Insurance benefit in Ecuador in 2016.

Two aspects of the methodology used in the paper are discussed. The first section describes the Net Replacement Rate (NRR) add-on that was created in EUROMOD to calculate NRRs and participation tax rates (PTR) by simulating transitions from work to unemployment for individuals observed to be working in the data.

NRRs and PTRs are indicators of work incentives at the extensive margin of labour supply. The former measures the fraction of disposable income that will be kept when moving to unemployment, whereas the latter measures the proportion of earnings in employment that would be kept in the form of increased benefits or reduced taxes and social insurance contributions in the event of unemployment. As such, both measures also capture the extent to which the tax-benefit system provides income protection in unemployment.

The second section describes the assumptions needed for the simulation of Unemployment Insurance in Ecuador, some aspects of which could be generalized for other countries in SOUTHMOD using cross-sectional data.