Unintended Benefits of Employment Protection Laws: Households Increased Risk-Taking Behavior
52 Pages Posted: 2 Oct 2019 Last revised: 20 Dec 2019
Date Written: November 19, 2019
Using the adoption of US state-level labor protection laws, I provide novel findings on the effect of employment protection laws on households' portfolio choices. I find that households increase the share of stocks in financial wealth by 8.1 to 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 layoff 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. Overall, the findings in this paper suggest that employment protection laws effectively reduce households' labor income risk and induce them to take more financial risk, which is an indirect social benefit of the employment protection law.
Keywords: Wrongful discharge law, Good faith exception, Labor income risk, Portfolio choices, and Stock market participation
JEL Classification: D14, G11, G18, G51
Suggested Citation: Suggested Citation