Unemployment Insurance and Employer Layoffs

Abstract

The Unemployment Insurance (UI) system finances benefits to unemployed workers by taxing employer payroll in all states and employee earnings in a few states. Benefit payments to unemployed workers reduce their costs of unemployment, and these UI incentives on employment, unemployment and reemployment have been analyzed extensively. The UI financing mechanism also affects firm hire and layoff decisions. Some of these impacts also have been extensively analyzed, particularly including the effects of firm experience rating on both temporary and total layoff unemployment. However, a major limitation of prior analyses of firm behavior is their reliance on either data for individual workers or aggregated data for state-industry categories. The major contribution of this study is to construct and analyze a micro data set with detailed information for matched firm-worker records. This allows for the examination of several important issues about firm behavior never before analyzed, and to confront several issues that have not arisen in past research. In this report, the authors present the final impact estimates of the Washington and Massachusetts UI Self-Employment Demonstrations. These final results largely reinforce the earlier preliminary findings and underscore the conclusion that SEA is a viable policy tool to promote the rapid reemployment of unemployed workers. The cumulative evidence from the preliminary and final evaluations suggests that SEA should be permanently incorporated into the U.S. employment security and economic development system.