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Multilevel "General Policy Equilibria": Evidence from the American Unemployment Insurance Tax Ceiling

  • Daniel S. Hamermesh
  • David Scoones

In a large variety of multilevel political systems changes imposed by a higher authority alter the equilibrium panoply of lower- level policies. The new equilibrium depends on the type of change imposed and on the relative strengths of and differences among interested parties at the lower level. As an example we describe how the equilibrium parameters of American states' unemployment insurance (UI) systems are changed when the federal government raises the minimum annual earnings on which employers are taxed to finance UI benefits. Even though benefits determine total taxes at a point in time within state systems, bargaining among the interested parties alters the equilibrium level of benefits and taxes. We estimate a `difference-in-differences' model describing total system costs in those states where federal increases in 1972, 1978 and 1983 forced increases in the tax ceiling. Holding constant changes in interstate differences in unemployment, where the federal constraint was binding costs rose roughly 20 percent above where they would have been. The increase was larger in those states where unionism, a measure of workers' legislative power, was greater. The theoretical model and the implied empirical analysis suggest themselves as examples for future research on a variety of topics in labor economics, public finance and international trade.

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File URL: http://www.nber.org/papers/w5578.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5578.

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Date of creation: May 1996
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Publication status: published as "Policy Equilibria in a Federal System: The Effects of Higher Tax Ceilings for Unemployment Insurance" Hamermesh, D. S.; Scoones, W. D.; Journal of Public Economics, November 1999, v. 74, iss. 2, pp. 191-213
Handle: RePEc:nbr:nberwo:5578
Note: LS
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  1. Richard B. Freeman & James L. Medoff, 1979. "New estimates of private sector unionism in the United States," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 32(2), pages 143-174, January.
  2. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  3. David Card, 1990. "The impact of the Mariel boatlift on the Miami labor market," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(2), pages 245-257, January.
  4. Adams, James D., 1986. "Equilibrium taxation and experience rating in a federal system of unemployment insurance," Journal of Public Economics, Elsevier, vol. 29(1), pages 51-77, February.
  5. 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.
  6. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  7. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  8. FitzRoy, Felix R & Hart, Robert A, 1985. "Hours, Layoffs and Unemployment Insurance Funding: Theory and Practice in an International Perspective," Economic Journal, Royal Economic Society, vol. 95(379), pages 700-713, September.
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