License to Fire? Unemployment Insurance and Moral Cost of Layoffs

Expanding unemployment insurance (UI) not only reduces the burden for the unemployed but also the moral cost of layoffs to firms and their managers. Using staggered expansions of UI across US states, we show that expanding UI leads to larger layoffs in firms experiencing negative economic shocks. The effects are stronger in weakly governed and financially unconstrained firms, where managers have greater discretion to avoid moral cost. This study presents moral cost as a novel microeconomic channel through which UI affects layoff decisions, which can compromise its effectiveness as a social insurance program and an automatic stabilizer.