The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms

Abstract

This paper investigates whether and to what extent state-level differences in business taxes influence the location decisions and labor demand of multi-establishment firms. In the United States each state administers its own unemployment insurance (UI) program, and cross-state variation leads to significant differences in the potential UI tax costs faced by employers in different states. Leveraging the existing locations of multi-state manufacturing firms for identification, I find that high tax plants were more likely to exit during economic downturns, and less likely to hire during the recovery. Moving a plant's outside option from a high tax state to a low tax state would increase its likelihood of exit by 20% during the Great Recession. These findings suggest that decentralized administration of UI taxes may contribute to jobless recoveries and additional misallocation in the economy.

Keywords: Unemployment Insurance, Labor Demand, State Taxation, Manufacturing

JEL Classification: D22, H25, H71, J23, J65, J68