Unemployment Insurance Benefits and Income Smoothing

Labor unemployment insurance reduces unemployment concerns. We argue that these benefitsmoderate incentives to smooth earnings to reduce employees' concerns about unemployment risk.Using exogenous variations in unemployment insurance benefits, we find evidence consistent withthis argument. We also find that that link between unemployment insurance benefits and incomesmoothing is stronger when there is higher unemployment risk and when the firm is likely toemploy more low-wage workers, who find unemployment insurance benefits especially useful.Our paper contributes to the literature by showing that public policy decisions such asunemployment insurance have significant, albeit probably unintended, externalities on corporatefinancial reporting