Unemployment Insurance Benefits and Income Smoothing
43 Pages Posted: 2 Aug 2014 Last revised: 12 May 2019
Date Written: January 2019
Labor unemployment insurance reduces unemployment concerns. We argue that these benefits
moderate incentives to smooth earnings to reduce employees’ concerns about unemployment risk.
Using exogenous variations in unemployment insurance benefits, we find evidence consistent with
this argument. We also find that that link between unemployment insurance benefits and income
smoothing is stronger when there is higher unemployment risk and when the firm is likely to
employ more low-wage workers, who find unemployment insurance benefits especially useful.
Our paper contributes to the literature by showing that public policy decisions such as
unemployment insurance have significant, albeit probably unintended, externalities on corporate
Keywords: Income smoothing, Unemployment insurance
JEL Classification: M41, J65, H32
Suggested Citation: Suggested Citation