Labor Unemployment Insurance and Pension Asset Allocations

Abstract

This paper examines the effect of unemployment risk on pension investment decisions of defined benefit (DB) pension plans. In particular, we examine whether unemployment insurance benefits affect pension investment risk. Using fixed-effects and difference-in-difference analysis, we find evidence that firms take higher pension investment risk by investing more heavily in equities after unemployment insurance benefits increase. These results are consistent with the notion that firms undertake more risk when the costs of unemployment decrease. The findings are robust to a number of sensitivity tests, including a falsification test to examine the timing of the relationship between the riskiness of the pension portfolio and unemployment insurance benefits, a three-year window, alternative matching methods and to removing firms that operate in geographically dispersed industries. Additional analysis suggests that the findings are more pronounced for firms with skilled labor and high labor intensity, while they are less pronounced when the risk of layoffs is high, in less competitive industries and highly unionized firms.