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

Dongil Daniel Keum () and Stephan Meier ()
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Dongil Daniel Keum: Management, Columbia University Business School, New York, New York 10027
Stephan Meier: Management, Columbia University, New York, New York 10027

Organization Science, 2024, vol. 35, issue 3, 994-1014

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 negative 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 as a quasi-natural experiment that reduces economic hardship for laid-off workers and, in turn, the moral cost of layoffs to managers. We find that these expansions license larger layoffs. The effects are stronger for chief executive officers (CEOs) with stronger prosocial preferences who dismiss fewer workers despite low performance, 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 findings suggest that the role of moral cost is substantial but also highly heterogeneous and readily suppressed by external pressures.

Keywords: managerial prosocial preferences; moral cost; layoffs; unemployment insurance; resource adjustment (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:35:y:2024:i:3:p:994-1014

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