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  2. ASSA Annual Meeting
  3. 2022
  4. Preliminary Program
  5. The Impact of Unemployment Insurance Financing on Inequality and the Labor Market
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The Impact of Unemployment Insurance Financing on Inequality and the Labor Market

Paper Session

Sunday, Jan. 9, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Bruce D. Meyer, University of Chicago

UI Financing as a Uniform Payroll Tax

Sebastian Graves
,
Federal Reserve Board
Jonathon Hazell
,
London School of Economics
Christina Patterson
,
University of Chicago and NBER

Abstract

In the United States, unemployment insurance is financed by taxes on firms. We use a simple model to argue that UI taxes have two components: a firing tax, levied on firms that layoff workers; and a uniform payroll tax, levied on all firms regardless of their layoffs. We provide descriptive statistics about the uniform payroll tax. The uniform tax is large, similarly sized to the firing tax. The uniform tax rises substantially during recessions, though the size of the increase has fallen over time as the wage base for UI has fallen. There is much heterogeneity across states. Our results suggest that UI financing exacerbates recessions, by increasing payroll taxes for all firms, regardless of whether they fire workers. 

Poor Performance as a Predictable Outcome: Financing the Administration of Unemployment Insurance

Marta Lachowska
,
W.E. Upjohn Institute for Employment Research
Alexandre Mas
,
Princeton University and NBER
Stephen A. Woodbury
,
Michigan State University

Abstract

Effective administration of unemployment insurance (UI) is central to its ability to smooth consumption and act as an automatic stabilizer. The federal government allocates funds to administer UI to the states using a “resource justification model” that gives the states no incentive to provide high-quality service at reasonable cost. We first document the weak performance of the UI system in recent recessions (including the Covid recession) and present estimates of a descriptive model relating state workloads to performance. We then characterize the problem of administering UI in light of a standard principal-agent model, which leads to a method of allocating funds that would motivate states to adopt new technologies and improve performance.

Would Broadening the UI Tax Base Benefit Low-Income Workers?

Mark Duggan
,
Stanford University and NBER
Audrey Guo
,
Santa Clara University
Andrew Johnston
,
University of California-Merced

Abstract

The tax base for state unemployment insurance (UI) programs varies significantly in the U.S., from a low of $7,000 annually in California to a high of $52,700 in Washington. Previous research has provided surprisingly little guidance to policy makers regarding the consequences of this variation for either workers or for employers. In this paper we use 37 years of data for all 50 states and Washington, D.C. to estimate the impact of the UI tax base on labor-market outcomes. We find that the low tax base that exists in California and many other states (and the necessarily higher tax rates that accompany these) negatively affects labor market outcomes for part-time and other low-earning workers.

Simulating Comprehensive Unemployment Insurance Reform

Gabriel Chodorow-Reich
,
Harvard University and NBER
Peter Ganong
,
University of Chicago and NBER
Jonathon Gruber
,
Massachusetts Institute of Technology and NBER
Pascal Noel
,
University of Chicago and NBER

Abstract

We examine the distribution of unemployment benefits and taxes in the US. State taxes and benefits can be roughly summarized as “pay for what you use” by race/ethnicity and education.  The regressivity of state taxes is driven by low taxable maximums and is new; at the program’s inception nearly all earnings were taxed. In contrast to state benefits, federally-funded benefits are highly progressive. Finally, we evaluate how various policy proposals affect the distribution of taxes and benefits. 

Discussant(s)
Arindrajit Dube
,
University of Massachusetts-Amherst and NBER
Chloe East
,
University of Colorado-Denver
Till M. von Wachter
,
University of California-Los Angeles and NBER
Pauline Leung
,
Cornell University
JEL Classifications
  • J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers