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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 which 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 which vary across firms and are analogous to experience-rated taxes. We present a theoretical model which 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.

Suggested Citation

  • Patricia M. Anderson & Bruce D. Meyer, 1995. "The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance," NBER Working Papers 5201, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5201
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    References listed on IDEAS

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    1. Robert S. Smith & Ronald G. Ehrenberg, 1983. "Estimating Wage-Fringe Trade-Offs: Some Data Problems," NBER Chapters,in: The Measurement of Labor Cost, pages 347-370 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. 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.
    2. Jonathan Gruber & Aaron Yelowitz, 1999. "Public Health Insurance and Private Savings," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1249-1274, December.
    3. Jonathan Gruber, 1998. "Health Insurance and the Labor Market," NBER Working Papers 6762, National Bureau of Economic Research, Inc.
    4. Deergha Raj Adhikari & Lynn Gray & Jackie Burns, 2009. "Effect of unemployment insurance tax on wages and employment: a partial equilibrium analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 16(3), pages 247-250.
    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. Kamhon Kan & Yen-Ling Lin, 2009. "The labor market effects of national health insurance: evidence from Taiwan," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(2), pages 311-350, April.
    7. Deergha Raj Adhikari & Wayne Everson & Lynn Gray, 2009. "Effect of unemployment insurance tax on wages and reallocation of labour," Applied Economics Letters, Taylor & Francis Journals, vol. 16(2), pages 147-150.
    8. Glismann, Hans H. & Schrader, Klaus, 2001. "Alternative Systeme der Arbeitslosenversicherung: das Beispiel der Vereinigten Staaten und des Vereinigten Königreichs," Kiel Working Papers 1032, Kiel Institute for the World Economy (IfW).
    9. Bound, John & Cullen, Julie Berry & Nichols, Austin & Schmidt, Lucie, 2004. "The welfare implications of increasing disability insurance benefit generosity," Journal of Public Economics, Elsevier, vol. 88(12), pages 2487-2514, December.
    10. repec:eee:labchp:v:3:y:1999:i:pc:p:3417-3528 is not listed on IDEAS
    11. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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