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This paper argues that moderate unemployment insurance not only reduces the uncertainty faced by risk-averse workers but also improves efficiency and raises output. We develop a model in which the decentralized equilibrium is inefficient without unemployment insurance, because the labor market endogenously creates jobs that provide risk-averse workers with low unemployment risk and low wages. Essentially, the labor market offers its own version of insurance. In doing so, however, it inefficiently distorts resource allocation. This is because the flip side of workers facing low unemployment risk, is that firms are often unable to fill their vacancies. They respond to this high vacancy risk by reducing capital investments. Unemployment insurance makes workers accept more unemployment risk, thus inducing firms to create high wage, high capital jobs, and restoring efficiency. A by-product of this analysis is a very tractable general equilibrium model of search with risk-averse workers and incomplete insurance.