How Tax Incentives Could Trim The Jobless Rate

Changing the way unemployment-insurance taxes are levied on employers could cut the national jobless rate in a recession by up to a percentage point. That's the finding of David Card and Phillip Levine in a new National Bureau of Economic Research study.

The two economists note that in most states unemployment-insurance taxes paid by individual employers are determined at least in part by the employers' past layoff records. But this practice, which is called "experience rating," varies widely from state to state. Some states use complete experience rating, whereby the unemployment-insurance taxes paid by an employer are tightly linked with past jobless benefits drawn by its employees. In such states, companies with high past-layoff rates pay a lot more in taxes than those with low rates. In other states, past experience plays little or no part in setting an employer's insurance taxes.

Card and Levine analyzed the experience of five industry groups in 36 states from 1979 to 1987. Not surprisingly, they found that employers in states with complete experience rating had the lowest layoff rates. Apparently, the threat of higher insurance-tax levies made companies think twice before temporarily laying off workers. By contrast, employers located in states where their insurance taxes bore little or no relationship to their layoff records exhibited relatively high layoff rates. In other words, such employers were a lot more inclined to put workers on temporary furlough.

The analysis implies that adopting full experience rating in all states would benefit many employers and workers. By forcing some employers to bear more of the costs of their own layoff policies, it would lower the tax burden on other employers that currently subsidize high-layoff companies. And it would cut temporary unemployment appreciably during recessions and seasonal slowdowns.

Before it's here, it's on the Bloomberg Terminal.