License to Layoff? Unemployment Insurance and the Moral Cost of Layoffs

Abstract

This study presents moral cost as a novel behavioral constraint on firm resource adjustment, specifically layoff decisions in response to negative economic shocks. Unemployment insurance (UI) reduces not only economic hardship for laid-off workers but also the moral cost of layoffs to managers. Using the expansions of UI benefits across US states, we show that expanding UI leads to larger layoffs in firms experiencing negative economic shocks. We find consistent evidence at the individual- and state-level using Census data. The effects are stronger for managers with greater discretion to act on moral concerns due to weaker corporate governance and for internally-promoted and non-Republican CEOs and firms that are family-owned or located in less populous zip codes that show stronger prosocial concerns.