Unintended Benefits of Employment Protection Laws: Households Increased Risk-Taking Behavior
61 Pages Posted: 2 Oct 2019 Last revised: 10 Feb 2020
Date Written: February 9, 2020
Using the staggered exogenous adoption of US state-level labor protection laws and longitudinal survey data, I provide novel findings on the effect of employment protection laws on households' portfolio choices. I find that households increase the share of risky assets in financial wealth by 8.9% following the adoption of these laws. Stock market participation accounting for indirect investment also increases one year after the adoption. These effects are stronger for households with a higher unemployment risk, associated with young and low-income households. The exact opposite risk-taking behaviors are observed when the law is reversed. I also find that already discharged households at the time of the adoption reduce their stock holding and participation after the adoption. The adoption of the law contributes to wealth accumulation: purchases of stocks following the laws lead to 7% increase in the total equity value five years after trades. Finally, households are more likely to invest in out-of-state stocks than in-state stocks after the adoption, reducing investors' local-bias. Overall, the findings imply the economic and statistical significance of employment protection laws in effectively inducing households to take more financial risk, thereby improving wealth accumulation. This is an indirect social benefit of the employment protection law.
Keywords: Wrongful discharge law, Good faith exception, Labor income risk, Portfolio choices, Stock market participation
JEL Classification: D14, G11, G18, G51
Suggested Citation: Suggested Citation