Unemployment Insurance Taxes and Cyclical Layoff Incentives

Abstract

When unemployment insurance (UI) taxes are incompletely experience rated, a self-financing UI system has to impose additional taxes that are exogenous to the behavior of individual firms. In the United States, these nonrated tax components vary predictably over the business cycle. A model of firm behavior under such a tax is presented. Evidence suggests signs for the parameters of the model that predict that incomplete experience rating, while (as shown elsewhere) increasing the rate of temporary layoffs, leads to the use of multiple tax schedules in a way that exerts downward pressure on cyclical swings in aggregate unemployment.