License to Fire? Unemployment Insurance and the Moral Cost of Layoffs
73 Pages Posted: 7 Aug 2020 Last revised: 8 Apr 2023
Date Written: July 3, 2020
Abstract
This study presents moral cost as a novel behavioral constraint on firm resource adjustment, specifically layoff decisions that can cause severe harm to employees. Revising the prevailing view of managers as purely self-interested, we propose that managers care about their employees and incur moral cost from layoffs. We leverage expansions in unemployment insurance (UI) as a quasi-natural experiment that reduces economic hardship for laid-off workers and, in turn, the moral cost of layoffs. We find that these expansions license larger layoffs. The effects are stronger for CEOs with stronger prosocial preferences, such as non-Republican, internally-promoted, small-town, or family-firm CEOs, and weaker for CEOs who lack the discretion to avoid moral cost due to shareholder or financial pressures. Our results suggest the role of moral cost to be substantial but also highly heterogeneous and readily suppressed by external pressures.
Keywords: layoffs, managers, prosocial behavior, unemployment insurance
JEL Classification: D04, D91, J65
Suggested Citation: Suggested Citation