| Abstract |
This paper examines the labor market impact of unemployment insurance (UI), with a particular emphasis on firm layoff behavior. I begin by providing empirical evidence that UI induces temporary layoffs of otherwise employed workers. I then build and estimate an equilibrium labor market model in which unemployed workers choose job search intensity and firms, in response to productivity shocks, choose between employment, temporary layoff, and permanent layoff. In the model, UI induces temporary layoffs through a novel interaction between worker moral hazard and firm layoff incentives, and the estimated model demonstrates the quantitative significance of this interaction. Due to the link between worker job search behavior and firm layoff decisions, a sizable portion of the equilibrium employment gains from policies that facilitate worker job finding—such as changes in UI generosity or job search assistance—actually arises from changes in firm layoff behavior. |