The effects of firm specific taxes and government mandates with an application to the U.S. unemployment insurance program

Abstract

We examine the common, but unexamined, case of a tax or government mandate whose cost differs across firms within the same labor market. Our theoretical model shows that this variation can lead to employment reallocation across firms and dead-weight losses, even if there is no aggregate employment effect. Using firm level unemployment insurance tax data, we find that while the market level tax is mostly born by the worker, individual firms can only pass on a small share of the within market differences. Thus, in some cases differences in taxes across firms can lead to large dead-weight losses.