Unemployment benefits and redundancies: Incidence and timing effects

Abstract

The literature on unemployment insurance (UI) has primarily focused on its impact on unemployment outflows. Using administrative data and a discontinuity in UI benefits at a job tenure threshold, I show that inflows also respond to the generosity of UI. Based on bunching estimates, I measure that 10% of layoffs in an 4-week window before the threshold are delayed, creating a bunching mass on the high-benefit side of the cutoff. Examining the mechanisms, the evidence suggests that employers and employees bargain over contract termination. Taken together, employers and employees show sophisticated reactions to UI with effects on employment duration. However, this retiming response accounts for a very small share of the fiscal externality of differentiating UI benefits at a tenure threshold, relative to the moral hazard cost.