License to Fire? Unemployment Insurance and the Moral Cost of Layoffs

Abstract

Expanding unemployment insurance (UI) not only reduces the burden for the unemployed but also the moral cost of layoffs to firms and their managers. Using staggered expansions of UI across US states, we show that expanding UI leads to larger layoffs in firms experiencing negative economic shocks. The licensing effects are stronger for weakly governed or financially unconstrained firms, whose managers have greater discretion to avoid moral cost and keep marginal workers on their payroll, and for non-Republican or internally promoted CEOs, who show stronger prosocial concerns and lay off fewer workers despite low performance. This study presents moral cost as a novel microeconomic channel through which UI affects layoff decisions, which can compromise its effectiveness as a social insurance program and an automatic stabilizer.