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

This study investigates the concept of moral cost as a behavioral constraint influencing managerial layoff decisions, proposing that managers experience moral costs from harming employees and that expansions in unemployment insurance (UI) reduce this moral cost, thereby enabling larger layoffs. Using U.S. state-level UI benefit expansions from 1977 to 2007 as a quasi-natural experiment, the authors find that increased UI benefits lead to significantly larger layoffs in firms facing negative economic shocks, with stronger effects for CEOs exhibiting prosocial preferences—such as non-Republican, internally promoted, small-town, or family firm CEOs—and weaker effects when managerial discretion is limited by shareholder or financial pressures. The findings suggest that moral cost plays a substantial but heterogeneous role in layoff decisions and that social insurance expansions, while intended to aid workers, may paradoxically facilitate layoffs by lowering managers' moral constraints. The study contributes to understanding managerial prosociality's impact on firm resource adjustments and highlights implications for corporate governance and social insurance policy design.