NEW YORK – New research from Columbia Business School shows that when at-risk workers have a more generous social insurance program to fall back, managers may become morally licensed to lay off more workers. 

The rapid spread of COVID-19 has led to nearly 20 million Americans and counting, to lose their jobs. For 16 straight weeks, more than 1 million Americans per week have filed for unemployment benefits, and these numbers are likely to continue to rise if states resume earlier shelter-in-place orders. Under these conditions, unemployment benefits for workers who lose their jobs have become as critical as ever, but this new research shows that generous unemployment benefits may have a psychological impact on corporate behavior. 

In the study, License to Fire? Unemployment Insurance and the Moral Cost of Layoffs, Columbia Business School professors Daniel Keum and Stephan Meier examine how expanding unemployment insurance benefits affect the decisions of managers and firms to lay off workers. They find that expanding unemployment insurance programs lead to larger layoffs in companies experiencing negative economic shocks, such as low performance or increased Chinese import competition, or an economic downturn – as caused by COVID-19. 

“In the midst of the COVID-19 pandemic, companies are being forced to make difficult choices that impact the livelihoods of their employees and in some cases, their entire families. By reducing the burden for the unemployed, more generous unemployment insurance benefits could reduce the moral cost of layoffs to these managers,” said Daniel Keum, Assistant Professor of Business at Columbia Business School. “Managers will be able to better justify layoffs if they know that the employees that they’re letting go will have a strong safety net to fall back on and will not starve.” 

“Understanding the relationship between managerial decisions and social insurance programs is critical when designing and implementing programs like unemployment insurance,” said Stephan Meier, the James P. Gorman Professor of Business at Columbia Business School. “It is necessary to understand how companies might take into account social safety nets in order to best prepare for various scenarios.” 

By examining staggered expansions in state unemployment insurance benefits between 1976 and 2007 and more than 6,000 companies, combined with negative economic shocks during this period, Professors Keum and Meier conducted a series of analyses to determine whether increased layoffs stem from a manager’s reduced moral concern or instead reflect their response to pressures from external stakeholders. 

The research highlights moral cost as a novel channel through which unemployment insurance affects layoff decisions and labor market dynamics and presents new competing considerations for expanding unemployment insurance and social insurance programs in general. 

Key takeaways include: Excuse to reduce prosocial behaviors: Expanding social insurance programs runs a significant risk of substituting and crowding out a manager’s prosocial preferences to help other people. Unintended consequences: Evaluating how expanded unemployment insurance helps the unemployed likely overestimates its benefits, as unemployment insurance contributes to the job loss in the first place. 

Democratic vs Republican CEOs: Democratic CEOs, compared to Republican CEOs, typically dismiss fewer workers in response to low performance. They are also  most heavily impacted by the moral licensing effect of the expansions in unemployment benefits. Corporate governance: shareholder and financial pressure leaves little room for CEOs to exercise their prosocial preferences and in turn, force them to dismiss more people. 

Internally vs externally-promoted CEOs: The researchers find a similar pattern to Republican vs Democratic CEOs when comparing internally promoted CEOs who are expected to incur larger moral costs from layoffs to externally hired CEOs. The study, License to Fire? Unemployment Insurance and the Moral Cost of Layoffs, is available online here. 

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu. 

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