Abstract
The reserve ratio method of experience rating the unemployment insurance (UI) tax is an inherently dynamic process. A tax rate is assigned to a firm based on its reserve ratio, the ratio of the balance in its UI account to its taxable payroll. Therefore, in making layoff decisions that will deplete its UI balance, a firm will consider the effect on its future UI tax rate. This study explores the incentive effects of this method of UI financing on temporary layoff behavior of firms in a dynamic context.
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