Unemployment Insurance as a Subsidy to Risky Firms
55 Pages Posted: 18 Oct 2019 Last revised: 29 Oct 2020
Date Written: July 1, 2020
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
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