Unemployment Insurance Taxes and Labor Demand: Quasi-Experimental Evidence from Administrative Data
73 Pages Posted: 1 Nov 2017 Last revised: 9 Nov 2018
Date Written: July 1, 2018
To finance unemployment insurance benefits, states raise payroll taxes on employers who engage in layoffs. Since tax rates increase in response to layoffs, taxes are highest for troubled firms after downturns, potentially hampering labor demand and employment during recoveries. Using full-population administrative records from Florida, I estimate the causal effect of these targeted tax increases on firm behavior leveraging a regression kink design in the tax schedule. UI tax hikes reduce firm hiring and employment substantially, with no effect on layoffs or worker earnings. Analysis of heterogeneity and timing suggests the role of cash constraints in explaining the magnitude of the estimates. The results imply unanticipated costs of the financing regime which, once accounted for, reduce the optimal benefit calculation by a quarter.
Keywords: Unemployment, Taxation, Labor Demand
JEL Classification: D22, H22, H25, H71, J23, J32, J38, J65
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