This paper extends the equilibrium search and match model of Albrecht et al. (2009), by including a government sector that collects and distributes tax revenues. Tax revenues are used to provide unemployment insurance (UI) benefits to workers laid off from formal sector jobs. I perform two labor market experiments, changing the severance and payroll taxes, to understand how UI benefits affect the flow of the labor market in an economy with a large informal sector. I find that benefits decrease labor market tightness, increase the size of the informal sector, and increase total unemployment.