Unintended Benefits of Employment Protection: Households' Stock Market Participation

Abstract

By leveraging US state-level employment protection laws, we provide evidence that such laws increase stock market participation, on both intensive and extensive margins. Young, low-income, low-wealth, and less-educated households exhibit stronger effects. Conversely, when the protection law is reversed, we observe the opposite risk-taking behaviors. Our findings remain robust across various stock market participation measures, datasets, and stacked difference-in-differences research design, underscoring the significance of employment protection in encouraging households to take financial risks, and potentially enhancing wealth accumulation. This represents a novel economic channel through which employment protection can benefit households.

Keywords: Wrongful discharge law, Employment protection laws, Good faith exception, Left-tail labor income risk, Portfolio choices, local-bias, Stock market participation.

JEL Classification: D14, G11, G18, G51