Talent Discovery, Layoff Risk and Unemployment Insurance

Abstract

In talent-intensive jobs, workers’ quality is revealed by their performance. This enhances productivity and earnings, but also increases layoff risk. Firms cannot insure workers against this risk if they compete fiercely for talent. In this case, the more risk-averse workers will choose less quality-revealing jobs. This lowers expected productivity and salaries. Public unemployment insurance corrects this inefficiency, enhancing employment in talent-sensitive industries and investment in education. The hypothesis that the generosity of unemployment insurance should be positively correlated with the share of workers in talent-sensitive industries is consistent with international and U.S. evidence.

Keywords: Talent, Learning, Layoff Risk, Unemployment Insurance

JEL Classification: D61, D83, I20, J24, J63, J65