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The Impact of Taxing Unemployment Insurance Benefits on Unemployment Duration and Post-unemployment Earnings

  • Chul-In Lee

In 1979, unemployment insurance benefits became taxableincome for recipients with income above a specified threshold.Further legislation in 1982 lowered the income threshold. Thispaper uses the Continuous Wage and Benefit History (CWBH) database to evaluate the effects of the 1982 change on the compensatedduration of unemployment and post-unemployment earnings. The1982 episode is a particularly useful “natural experiment”because the “treatment group” (those newly subject to benefittaxation) is the middle income category and the two “controlgroups” (those whose benefits were already taxed and those whosebenefits still were not taxed) are the high and low income categories.If the two control groups show similar trends in unemploymentduration (or post-unemployment earnings) and the treatment groupshows a strikingly different pattern, this is compelling evidenceof a tax effect. The empirical results suggest that taxing unemploymentbenefits reduced the affected workers' mean compensated durationby more than a week, but did not have a statistically significanteffect on their post-unemployment earnings. Copyright Kluwer Academic Publishers 2000

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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 7 (2000)
Issue (Month): 4 (August)
Pages: 521-546

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Handle: RePEc:kap:itaxpf:v:7:y:2000:i:4:p:521-546
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  1. Woodbury, Stephen A & Spiegelman, Robert G, 1987. "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois," American Economic Review, American Economic Association, vol. 77(4), pages 513-30, September.
  2. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  3. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  4. Gary Solon, 1984. "Work Incentive Effects of Taxing Unemployment Benefits," NBER Working Papers 1260, National Bureau of Economic Research, Inc.
  5. Card, David & Levine, Phillip B., 2000. "Extended benefits and the duration of UI spells: evidence from the New Jersey extended benefit program," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 107-138, October.
  6. Lawrence F. Katz & Bruce D. Meyer, 1988. "The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment," NBER Working Papers 2741, National Bureau of Economic Research, Inc.
  7. Moffitt, Robert & Nicholson, Walter, 1982. "The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 1-11, February.
  8. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  9. Lancaster, Tony, 1985. "Generalised residuals and heterogeneous duration models : With applications to the Weilbull model," Journal of Econometrics, Elsevier, vol. 28(1), pages 155-169, April.
  10. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
  11. Ehrenberg, Ronald G & Oaxaca, Ronald L, 1976. "Unemployment Insurance, Duration of Unemployment, and Subsequent Wage Gain," American Economic Review, American Economic Association, vol. 66(5), pages 754-66, December.
  12. Lippman, Steven A & McCall, John J, 1976. "The Economics of Job Search: A Survey," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 347-68, September.
  13. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
  14. Burdett, Kenneth, 1979. "Unemployment Insurance Payments as a Search Subsidy: A Theoretical Analysis," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 333-43, July.
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