Unemployment Insurance as a Subsidy to Risky Firms

55 Pages Posted: 18 Oct 2019 Last revised: 29 Oct 2020

See all articles by Bernardus Ferdinandus Nazar Van Doornik

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil

Dimas Fazio

National University of Singapore (NUS) - Department of Finance

David Schoenherr

Princeton University, Bendheim Center for Finance; European Corporate Governance Institute (ECGI)

Janis Skrastins

Washington University in St. Louis

Date Written: July 1, 2020

Abstract

In this paper, we document that a more generous unemployment insurance (UI) system shifts labor supply from safer to riskier firms and reduces the compensating wage differential that riskier firms are required to pay. Reallocation of labor supply towards riskier firms has real implications for firm performance and risk-taking. We find that a more generous UI system increases risky firms' value and fosters entrepreneurship by reducing labor costs of new firms. For our analysis, we exploit a UI reform in Brazil that affects only part of the work force. This allows us to compare labor supply for workers with different degrees of UI protection within the same firm, sharpening the identification of the results. Overall, our results suggest that UI provides a transfer system from safe to risky firms reducing labor costs associated with corporate risk.

Keywords: unemployment insurance, labor supply, firm risk, entrepreneurship

JEL Classification: J21, J22, J46, J65, K31

Suggested Citation

Doornik, Bernardus Ferdinandus Nazar Van and Fazio, Dimas and Schoenherr, David and Skrastins, Janis, Unemployment Insurance as a Subsidy to Risky Firms (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3466314 or http://dx.doi.org/10.2139/ssrn.3466314

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Dimas Fazio

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

David Schoenherr (Contact Author)

Princeton University, Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Janis Skrastins

Washington University in St. Louis ( email )

1 brookings drive
campus box 1133
st louis, MO St Louis 63130
United States

HOME PAGE: http://www.jskrastins.com

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