Unemployment Insurance, Starting Salaries, and Jobs: Evidence from Multi-state Firms

Abstract We study the labor market effects of permanent 30-64% reductions in unemployment insurance benefits available in seven states. Leveraging linked firm-establishment data, we find that establishments based in reform states experience employment increases that are 0.8-1.3% larger than those of the same firm's establishments in other states. Using a similar multi-state firm design, starting salaries are 1.2-5.5% lower in reform states and posted salaries for the same job fall by 3.2-3.5%. The negative co-movement of employment and wages after the reform suggests a labor supply shock, and mitigates against confounding changes in labor demand driving the results. Our findings are consistent with workers lowering their reservation wages as outside options fall, and employers taking advantage of this by offering lower wages and increasing employment.