This paper examines the labor market impact of unemployment insurance (UI), with a particular emphasis on firm layoff behavior. I begin by providing empirical evidence that UI induces temporary layoffs of otherwise employed workers. I then estimate a search and matching model with endogenous job search effort and temporary layoffs. UI induces temporary layoffs through an interaction between worker moral hazard and firm layoff incentives, and perfect experience rating does not fully eliminate UI-driven temporary layoffs. The estimated model suggests that increasing the benefit level and extending the benefit duration have quantitatively different implications for the flow into unemployment.
JEL Classification: J63, J64, J65
Keywords: Unemployment; Layoffs; Unemployment Insurance; Experience Rating