Unemployment Insurance as a Subsidy to Risky Firms
68 Pages Posted: 18 Oct 2019 Last revised: 5 Aug 2021
Date Written: July 27, 2021
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 identification of the results. Altogether, our results suggest that UI provides a transfer system from safe to risky firms.
Keywords: unemployment insurance, labor supply, firm risk, entrepreneurship
JEL Classification: J21, J22, J46, J65, K31
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