Unemployment Insurance as a Subsidy to Risky Firms

Bernardus Van Doornik; Dimas Fazio; David Schoenherr; Janis Skrastins

doi:10.1093/rfs/hhac013

Review of Financial Studies Vol. 35 No. 12 2022

Unemployment Insurance as a Subsidy to Risky Firms

Bernardus Van Doornik¹; Dimas Fazio²; David Schoenherr³; Janis Skrastins⁴

¹ Banco Central do Brasil and Bank for International Settlements , Brazil · ² National University of Singapore Singapore · ³ Princeton University , USA · ⁴ Washington University in St. Louis , USA

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Abstract

We document that a more generous unemployment insurance (UI) system shifts labor supply from safer to riskier firms and reduces the compensating wage differentials that risky firms need to pay. Consequently, a more generous UI system increases risky firms’ value and fosters entrepreneurship by reducing new firms’ labor costs. Exploiting a UI reform in Brazil that affects only part of the workforce allows us to compare labor supply for workers with different degrees of UI protection within the same firm, sharpening the identification of the results. Altogether, our results suggest that UI provides a transfer system from safe to risky firms.

DOI: 10.1093/rfs/hhac013
Volume: 35
Issue: 12
Pages: 5535-5595
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Unemployment Insurance as a Subsidy to Risky Firms

Abstract

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