Using a Natural Experiment to Estimate
the Effects
of the Unemployment Insurance Payroll Tax on
Layoffs, Employment, and Wages
Patricia
M. Anderson and Bruce D. Meyer
Abstract
The experience of Washington State provides a natural
setting to examine the effects of the unemployment insurance payroll
tax on layoffs, employment, and wages. During the 13-year period
from 1972 through 1984, all employers in Washington paid the same
unemployment insurance (UI) tax rate. Federal legislation then forced
Washington to adopt an experience-rated system in 1985. Thus, a
comparison of wages, employment, and layoffs before and after the
change has the potential to provide good evidence on both tax incidence
and the effects of experience rating. This paper reports our early
results from this ³natural experiment.² In our preferred specifications,
we find that industry average tax rates are completely passed on
to workers in the form of lower earnings. However, our estimates
imply that a firm can shift very little of the difference between
its tax rate and the industry average rate. Our analysis of layoffs
is complicated by business cycle effects. Therefore, our study focuses
on seasonal variation in employment. Our estimates are somewhat
mixed, but generally supportive of the prediction that experience
rating reduces turnover, layoffs, and UI claims.
Patricia M. Anderson, Department
of Economics, Dartmouth College Bruce D. Meyer, Department of Economics, Northwestern
University
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