The Unemployment Insurance Payroll Tax and Interindustry and Interfirm Subsidies

Abstract

Unemployment insurance (UI) in the U.S. is financed through a payroll tax that is imperfectly experience rated, and thus only partially reflects a firm's use of the system. As a result, certain firms and industries receive many more dollars in unemployment benefits than they pay in taxes. We document that the same patterns of large interindustry subsidies have persisted for over 30 years, and we find that these subsidies are due mostly to differences in layoff rates across industries. Agriculture, mining, manufacturing, and particularly construction receive subsidies, while trade, finance, insurance and real estate, and services consistently pay more in taxes than they receive. Additionally, using previously unexamined firm level data, we document a persistent pattern of interfirm subsidies across several years. Together, these results indicate that UI benefit payments are predictable, thus weakening arguments for incomplete experience rating that focus on its insurance value to firms faced with large layoff costs. We also find that the efficiency costs of the cross-subsidies to less stable industries may be large, but such calculations depend on differences between marginal and average subsidies that are difficult to estimate.