Talent discovery, layoff risk and unemployment insurance

In talent-intensive jobs, workers’ quality is revealed by their performance. This enhances productivity and earnings, but also increases layoff risk. We show that, if firms compete for talent, they cannot insure workers against this risk, so that the more risk-averse will choose less quality-revealing jobs. lowers expected salaries. Our model predicts public unemployment insurance corrects inefficiency, increasing employment in talent-sensitive industries. prediction consistent with distribution of U.S. across occupations states. Unemployment dominates legal restrictions on firms’ dismissals, which penalize thus depress productivity.