Workers as Insurance: Anticipated Government Assistance and Factor Demand

Arye Hillman (), Eliakim Katz and Jacob Rosenberg

Oxford Economic Papers, 1987, vol. 39, issue 4, 813-20

Abstract: This paper investigates the effect of anticipation of government assistance on factor demand when the likeliho od of intervention is perceived to increase with the numbers of worke rs laid off in the event of an adverse realization of product price. Workers thus serve, imperfectly, an insurance function for the firm. Internalization by firms of the political sensitivity of governments of unemployment results in more labor being employed and more output produced, although not necessarily by more labor-intensive methods. T he effect can be an implicit subsidy to capital. An adverse-selection effect on firms' locational choice is also identified. Copyright 1987 by Royal Economic Society.

Date: 1987
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