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The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance

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  • Patricia M. Anderson
  • Bruce D. Meyer

Abstract

In this paper we theoretically and empirically examine the common, but previously unexamined, case of a firm-varying tax that is used to finance a fringe benefit. While we use data from the experience-rated unemployment insurance (UI) system, it is important to realize that differential treatment of firms (such as special considerations for small business) under mandated benefits laws leads to costs that vary across firms and are analogous to experience-rated taxes. We present a theoretical model that highlights the importance of considering this variation in taxes or costs both within and across markets. We examine annual changes in either firm average earnings and employment or individual worker earnings at the same firm. This method removes unmeasured firm and worker characteristics, and thus avoids the omitted variable bias that has plagued past work on incidence and compensating differentials. Our results suggest that most of the market level tax is borne by the worker. However, this does not imply that there are no employment effects of the tax. Rather, we find that individual firms can only pass on a small share of the within market differences in the tax they face, leading to substantial employment reallocation across firms.

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Paper provided by Institute for Policy Resarch at Northwestern University in its series IPR working papers with number 95-23.

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Handle: RePEc:wop:nwuipr:95-23

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  1. John M. Abowd & Orley C. Ashenfelter, 1981. "Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials," NBER Chapters, in: Studies in Labor Markets, pages 141-186 National Bureau of Economic Research, Inc.
  2. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
  3. Medoff, James L, 1979. "Layoffs and Alternatives under Trade Unions in U.S. Manufacturing," American Economic Review, American Economic Association, vol. 69(3), pages 380-95, June.
  4. Anderson, Patricia M & Meyer, Bruce D, 1993. "Unemployment Insurance in the United States: Layoff Incentives and Cross Subsidies," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages S70-95, January.
  5. Baker, Jonathan B. & Bresnahan, Timothy F., 1988. "Estimating the residual demand curve facing a single firm," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 283-300.
  6. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  7. David Card & Phillip B. Levine, 1992. "Unemployment Insurance Taxes and the Cyclical and Seasonal Properties of Unemployment," NBER Working Papers 4030, National Bureau of Economic Research, Inc.
  8. Jonathan Gruber & Alan B. Krueger, 1991. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 111-144 National Bureau of Economic Research, Inc.
  9. Stephen A. Woodbury & Wei-Jang Huang, 1991. "The Tax Treatment of Fringe Benefits," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ttfb, December.
  10. Robert S. Smith & Ronald G. Ehrenberg, 1981. "Estimating Wage-Fringe Trade-Offs: Some Data Problems," NBER Working Papers 0827, National Bureau of Economic Research, Inc.
  11. Katz, Lawrence F & Meyer, Bruce D, 1990. "Unemployment Insurance, Recall Expectations, and Unemployment Outcomes," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 973-1002, November.
  12. Arleen Leibowitz, 1983. "Fringe Benefits in Employee Compensation," NBER Chapters, in: The Measurement of Labor Cost, pages 371-394 National Bureau of Economic Research, Inc.
  13. Topel, Robert H, 1984. "Experience Rating of Unemployment Insurance and the Incidence of Unemployment," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 61-90, April.
  14. Besley, Timothy & Case, Anne, 2000. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," Economic Journal, Royal Economic Society, vol. 110(467), pages F672-94, November.
  15. Rosen, Sherwin, 1987. "The theory of equalizing differences," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 12, pages 641-692 Elsevier.
  16. Edward B. Montgomery & Kathryn Shaw & Mary Ellen Benedict, 1990. "Pensions and Wages: An Hedonic Price Theory Approach," NBER Working Papers 3458, National Bureau of Economic Research, Inc.
  17. Topel, Robert H, 1983. "On Layoffs and Unemployment Insurance," American Economic Review, American Economic Association, vol. 73(4), pages 541-59, September.
  18. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  19. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
  20. Brown, Charles, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 113-34, February.
  21. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
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Cited by:
  1. Hans H. Glismann & Klaus Schrader, 2001. "Alternative Systeme der Arbeitslosenversicherung � Das Beispiel der Vereinigten Staaten und des Vereinigten Königreichs," Kiel Working Papers 1032, Kiel Institute for the World Economy.
  2. Jonathan Gruber & Aaron Yelowitz, 1997. "Public Health Insurance and Private Savings," NBER Working Papers 6041, National Bureau of Economic Research, Inc.
  3. Kamhon Kan & Yen-Ling Lin, 2007. "The Labor Market Effects of National Health Insurance : Evidence From Taiwan," IEAS Working Paper : academic research 07-A001, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  4. John Bound & Julie Berry Cullen & Austin Nichols & Lucie Schmidt, 2002. "The Welfare Implications of Increasing Disability Insurance Benefit Generosity," NBER Working Papers 9155, National Bureau of Economic Research, Inc.
  5. Jan Ondrich & Katharina C. Spieß & Qing Yang, 2002. "The Effect of Maternity Leave on Women's Pay in Germany 1984-1994," Discussion Papers of DIW Berlin 289, DIW Berlin, German Institute for Economic Research.
  6. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
  7. John Bound & Julie Berry Cullen & Austin Nichols & Lucie Schmidt, 2002. "The Welfare Implications of Increasing DI Benefit Generosity," Working Papers wp024, University of Michigan, Michigan Retirement Research Center.

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