18 June 2017 – 0000
Talent Discovery, Layoff Risk and Unemployment Insurance
In talent intensive jobs, workers’ performance is informative about their quality, allowing higher productivity and expected wages. But such learning also implies greater layoff risk. Firms can insure employees against such risk by providing severance pay, if workers cannot resign from their employers. This implements both efficient production and risk sharing. When instead workers can resign, private insurance can no longer be provided, and more risk-averse workers will choose less informative jobs. This lowers expected productivity and wages. Public provision of unemployment insurance corrects this inefficiency, enhancing employment in talent-sensitive industries. This efficiency gain cannot be obtained by forbidding layoffs.