We examine the interaction between unemployment benefits and subsistence self-employment in developing countries, where limited opportunities in formal labor markets push low-productivity individuals into self-employment. We develop a model that incorporates occupational choices, search frictions, and borrowing constraints, allowing individuals to choose between wage work, own-account work, and entrepreneurship. Our model highlights how low-wealth, low-ability individuals select into own-account work due to their inability to sustain the search for wage employment in a frictional labor market. Calibrating the model to Mexico, we explore the effects of introducing U.S.-style unemployment benefits. Our results indicate that if own-account workers can conceal their employment status, unemployment benefits lead to an excessive increase in own-account work and a reduction in aggregate output. However, when employment status is effectively monitored, unemployment benefits can reduce subsistence self-employment by 15 percentage points and generate significant output gains of nearly 2%.