Unemployment Insurance, Starting Salaries, and Jobs

Q1. How does the multi-state firm design separate UI effects from aggregate and local shocks?

The key innovation is including firm×year fixed effects alongside establishment fixed effects: within any given firm and year, the only remaining variation is which state the establishment is in — absorbing all firm-wide demand trends, management strategies, and capital-allocation decisions that would otherwise confound cross-state comparisons. Standard difference-in-differences compares reform states to non-reform states at the level of geographic unit or industry; this approach confounds UI changes with the economic conditions that prompted them. The multi-state firm design eliminates this confound because firms’ nationwide operational decisions are held constant. The identification concern is policy endogeneity — whether reform states had weaker economies motivating both the UI cuts and slow hiring. This is addressed in three ways: (1) the 27 other states whose UI trust funds became insolvent in the early 2010s did NOT cut benefits, ruling out insolvency per se as the trigger; (2) restricting the control group to only the insolvent states (Table 3 cols 2 and 5) leaves estimates nearly unchanged; (3) restricting further to insolvent states that experienced a Great Recession unemployment shock within ±2 percentage points of the reform states (Table 3 cols 3 and 6) again leaves estimates unchanged, ruling out mean reversion. The mean reversion hypothesis is additionally ruled out by the wage results: mean reversion predicts faster wage growth in reform states, but wages fall.

Q2. What are the quantitative employment effects, and how do they compare across specifications?

In the baseline specification (Table 3, column 1), NC establishments gain +1.26% employment on average over the post-reform period (ATT, SE 0.0052, p<0.05), with the effect growing from +1.2% in year 1 to +2.1% in year 2 (both p<0.01); moderate reform states gain +0.83% (ATT, SE 0.0022, p<0.01), reaching +1.5% by year 2. Alternative specifications (Table 5) using less-saturated fixed effects (firm+state+year FEs or establishment+year FEs only) produce estimates roughly twice as large — +2.5% for NC — confirming that firm×year fixed effects absorb a substantial share of cross-state employment variation that is not attributable to UI. This amplification underscores why controlling for firm-level trends matters: firms simultaneously expanding in many states would appear in the unconditioned data as UI-reform effects. Robustness to policy confounders (Table 4): excluding states with RTW law changes, minimum wage changes, Medicaid expansions, major corporate or personal tax reforms all leave ATTs statistically significant and economically similar (0.80%–1.25% for NC; 0.82%–1.18% for moderate states). A Fisher exact test places NC’s t-statistic in the top 2/42 (4.8%) of placebo assignments, consistent with a one-sided 5% test. Controlling for NC’s concurrent corporate tax cut, which bounds the maximum tax-driven employment effect at 0.76pp (Giroud and Rauh 2019), implies the UI reform accounts for between 0.5% and 1.26% of NC’s employment increase — broadly consistent with the 0.83% moderate reform estimate.

Q3. What do the wage results show, and how do posted wages rule out compositional explanations?

Table 7 (Glassdoor starting salaries, job and firm×year FEs): NC ATT = −5.5% (SE 0.021, p<0.01), moderate states ATT = −1.2% (SE 0.0051, p<0.05); the effect is concentrated in jobs with starting salaries at or below $100,000, where UI replacement rates are meaningfully binding, and is statistically insignificant for higher-wage jobs. Starting salary declines could in principle reflect worker composition (lower-skilled workers drawn into the labor force) or worse job matches (workers accepting jobs below their productivity) rather than firms lowering offer wages. Burning Glass Technologies (BGT) posted wages, which measure the wage advertised for the same job within the same firm over time (establishment-job and firm×year FEs), rule out both channels: Table 8 shows NC posted wage ATT = −3.5% (SE 0.013, p<0.01) and moderate states = −3.2% (SE 0.0071, p<0.01). The near-equality of posted and realized wage effects implies the wage decline is driven by firms lowering their wage offers — not by changes in worker composition or match quality. Occupational heterogeneity confirms the mechanism: high-exposure occupations (above-median fraction of workers with unemployment spells or employment tenures exceeding 20 weeks) exhibit NC posted wages −3.5% and moderate states −4.1%; low-exposure occupations show near-zero insignificant effects (Table 9). Posted wages also provide additional evidence against mean reversion: if reform states had faster-growing underlying wages, posted wages would rise relative to controls, but the opposite occurs.

Q4. How does the negative co-movement of employment and wages identify a labor supply shock and discipline the theoretical mechanism?

The simultaneous rise in employment (+1.26% NC, +0.83% moderate) and fall in posted wages (−3.5% NC, −3.2% moderate) is the signature of a labor supply shock under the standard Mortensen-Pissarides (1994) framework: when workers’ outside option (the value of UI) falls, their reservation wages fall, inducing firms to post more jobs at lower wages. A positive demand shock would raise both employment and wages; a positive supply shock raises employment while lowering wages. The posted wage channel further implies that firms’ labor demand responds to the wage reduction (not just to the supply expansion): if firms were passive price takers, posted wages would not change. The data imply that firms internalize workers’ changed outside options and lower their wage offers accordingly, consistent with the monopsonistic wage-setting in Mortensen-Pissarides with free entry. The labor demand elasticity calculated as (Δlog employment / Δlog posted wage) = 1.26/3.5 ≈ −0.36 (SE 0.21) for NC and 0.83/3.2 ≈ −0.26 or using preferred specification −0.42 (SE 0.18) for moderate states; these fall in the middle of the distribution of prior estimates from cross-country labor demand elasticity studies (Hamermesh 1996; Acemoglu et al. 2004). A Chodorow-Reich et al. (2019) decomposition suggests that if labor market tightness increased (fewer unemployed and more vacancies), the reservation wage (opportunity cost) effect dominates the tightness effect — since we observe posted wages falling.

Q5. What do the CPS results add, and how do employment duration effects inform the mechanism?

Using individual-level CPS data with state and year fixed effects (no within-firm comparison), combining all reform states: employment probability +1.0pp (SE 0.43pp, a 1.5% increase relative to the 65% baseline) [Table 10 col 1]; new-hire wages (tenure <1yr) −6.3% [col 2]; unemployment duration −2.8 weeks/year ATT (relative to 33.48-week control mean, an 8% reduction) [col 3]. The CPS results are qualitatively consistent with the multi-state firm findings and use an entirely different data source, sampling frame, and identification approach. The unemployment duration effects are instructive about timing and mechanism: the ATT is negligible in the first two post-reform years (−1.0 and −1.2 weeks, insignificant), rises to −1.7 weeks in year 3, −3.6 in year 4, −4.2 in year 5, and −5.6 in year 6 — consistent with gradual stock-flow dynamics (the stock of workers who began unemployment before the reform exhausts gradually, so average duration in the reform states drifts lower over time as a larger share of the unemployed pool faces the new rules). This pattern helps interpret the gradual employment growth in the event studies.

Q6. How does the paper explain divergence from prior literature finding small UI effects?

The paper argues that prior work finds small effects because reforms studied were smaller in size, temporary, and enacted during deep recessions — all conditions where the job creation channel from lower reservation wages is muted. Schmieder et al. (2010), Rothstein (2011), Farber-Valletta (2015), Chodorow-Reich et al. (2019) and others study UI extensions/expirations that are often 13–20% changes in duration (versus NC’s 44% duration cut and 64% total benefit cut), enacted during high unemployment (when moral hazard is lower) or temporary (so workers discount the change in outside options). A 13-week contrast off a high base of 83 weeks (the EUC expansions) differs fundamentally in moral hazard intensity from an 11.5-week cut off a low base of 26 weeks plus a benefit level reduction — the effective present value of UI falls far more in the NC reform. Additionally, the border county-pair design used in much prior work (Chodorow-Reich et al. 2019, Hagedorn et al. 2025) compares establishments on opposite sides of a state border within the same labor market; these competing establishments cannot fully exploit lower reservation wages because they compete for the same workers — suppressing both the employment and wage responses. Notable exceptions that do find sizable effects — Johnston-Mas (2018) and Karahan et al. (2025), both studying large permanent post-recession reforms — corroborate this paper’s findings.

Key concepts

multi-state firm design : the identification strategy that compares establishments of the same firm operating in reform states against the same firm’s establishments in non-reform states; with establishment and firm×year fixed effects, this absorbs firm-wide demand trends, product market shocks, and management decisions that affect all of a firm’s establishments equally, isolating state-level UI variation as the sole source of identification.

reservation wage : the minimum wage at which an unemployed worker is willing to accept a job offer, determined by the outside option value (UI benefits plus expected future wages from continued search); UI cuts reduce the outside option value, lowering the reservation wage and enabling firms to post and fill vacancies at lower wages.

posted wage : the wage listed in a job advertisement before any worker-firm negotiation or match quality sorting; measured here using Burning Glass Technologies (BGT) data at the establishment-job level, controlling for the same job across time within the same firm; distinct from realized starting salary in that it reflects the firm’s wage-setting decision independent of which worker accepts.

labor supply shock : an exogenous change in the willingness of workers to supply labor at given wages; identified here by the negative co-movement of employment (up 1.3–0.8%) and wages (down 3.5–3.2%), which is the opposite of what a positive labor demand shock would predict, ruling out confounding from corporate tax cuts or mean-reverting demand.

outside option : the payoff available to an unemployed worker from continued search rather than immediate job acceptance; UI benefits are the dominant component; when UI generosity falls, the outside option value falls and firms can hire more workers at lower wages — the core mechanism linking permanent UI cuts to simultaneous employment gains and wage reductions.