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Experience Rating as an Automatic Stabilizer

In: Tax Policy and the Economy, Volume 37

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  • Mark Duggan
  • Audrey Guo
  • Andrew C. Johnston

Abstract

Unemployment insurance taxes are experience-rated to penalize firms that dismiss workers. We examine whether experience rating acts as an automatic stabilizer in the labor market. We exploit the fact that penalties for layoffs vary by state using detailed data on state tax schedules, and we measure whether firms react less to labor-demand shocks in the presence of greater layoff penalties. The average penalty for layoffs reduces firm adjustment to negative shocks by 11 percent. The results imply experience rating has a stabilizing influence on labor markets. Experience rating saved, for instance, nearly a million jobs in the Great Recession.
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Suggested Citation

  • Mark Duggan & Audrey Guo & Andrew C. Johnston, 2022. "Experience Rating as an Automatic Stabilizer," NBER Chapters, in: Tax Policy and the Economy, Volume 37, pages 109-133, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:14732
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    References listed on IDEAS

    as
    1. Topel, Robert H, 1983. "On Layoffs and Unemployment Insurance," American Economic Review, American Economic Association, vol. 73(4), pages 541-559, September.
    2. repec:hal:spmain:info:hdl:2441/5f63rk8j8i8vlpr3b1ernvsg0u is not listed on IDEAS
    3. Stéphane Auray & David L. Fuller, 2020. "Eligibility, experience rating, and unemployment insurance take‐up," Quantitative Economics, Econometric Society, vol. 11(3), pages 1059-1107, July.
    4. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
    5. Marta Lachowska & Isaac Sorkin & Stephen A. Woodbury, 2022. "Firms and Unemployment Insurance Take-Up," Upjohn Working Papers 22-369, W.E. Upjohn Institute for Employment Research.
    6. Card, David & Levine, Phillip B., 1994. "Unemployment insurance taxes and the cyclical and seasonal properties of unemployment," Journal of Public Economics, Elsevier, vol. 53(1), pages 1-29, January.
    7. Andrew C. Johnston, 2021. "Unemployment Insurance Taxes and Labor Demand: Quasi-Experimental Evidence from Administrative Data," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 266-293, February.
    8. Mark Duggan & Audrey Guo & Andrew C. Johnston, 2022. "Would Broadening the UI Tax Base Help Low-Income Workers?," AEA Papers and Proceedings, American Economic Association, vol. 112, pages 107-111, May.
    9. Patricia M. Anderson, 1993. "Linear Adjustment Costs and Seasonal Labor Demand: Evidence from Retail Trade Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 1015-1042.
    10. Feldstein, Martin S, 1978. "The Effect of Unemployment Insurance on Temporary Layoff Unemployment," American Economic Review, American Economic Association, vol. 68(5), pages 834-846, December.
    11. Audrey Guo & Andrew C. Johnston, 2021. "The Finance of Unemployment Compensation and Its Consequences," Public Finance Review, , vol. 49(3), pages 392-434, May.
    12. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-957, October.
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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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