Unemployment Outflow and Unemployment Insurance Taxes

Abstract

The system of Unemployment Insurance (UI) financing in the US draws its funds from a payroll tax on employers and varies the tax rate according to the individual employer's layoff history. There exists extensive evidence on the effect of this so-called experience rated tax on layoff decisions. However, since firms are liable for each dollar of regular UI benefits paid to laid off former employees, experience rating may also affect recall behavior. The present study therefore measures the effect of the UI financing system on the duration of unemployment. Using duration data is essential since tax charges to the firm vary over the duration of unemployment spells. Empirical results based on data with various sources of variation suggest that higher layoff tax costs shorten the duration of recall unemployment.