Talent Discovery, Layoff Risk and Unemployment Insurance
39 Pages Posted: 2 Aug 2017 Last revised: 14 Apr 2020
Date Written: April 14, 2020
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. Unemployment insurance dominates legal restrictions on firms' dismissals, which penalize more talent-sensitive firms and thus depress expected productivity. Finally, unemployment insurance fosters education, by encouraging investment in risky human capital that enhances talent discovery.
Keywords: Talent, Learning, Layoff Risk, Unemployment Insurance
JEL Classification: D83, J24, J63, J65
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