IDEAS home Printed from https://ideas.repec.org/a/ntj/journl/v73y2020i3p673-698.html
   My bibliography  Save this article

Experience Rating and the Dynamics of Financing Unemployment Insurance

Author

Listed:
  • Marta Lachowska
  • Wayne Vroman
  • Stephen A. Woodbury

Abstract

The surge of new claims for unemployment insurance (UI) following the COVID-19 pandemic is rapidly depleting states’ UI trust fund reserves. By early July, the trust funds of three of the four largest states (California, New York, and Texas) were already insolvent, requiring them to borrow to cover benefits. We first describe the condition of the states’ trust funds before the start of the pandemic-related recession and examine how the states’ different methods of financing UI were related to those conditions. States that indexed their UI payroll tax base to state average wages had reserves roughly twice those of states that did not index. We then analyze the dynamics of UI trust funds using vector autoregression. Our main finding is that, following a shock to benefit payments and the consequent drop in UI reserves, states’ reserves recover at different rates depending on their method of experience rating tax rates and whether they index their tax base. The trust funds of states using the most common type of UI financing — reserve-ratio experience rating and a fixed tax base — tend to require more than a decade to recover, whereas the trust funds of states using the benefit-ratio method tend to recover within five years whether or not they index. Federal legislation passed in March in response to the pandemic has implications for financing UI that we discuss in light of our findings.

Suggested Citation

  • Marta Lachowska & Wayne Vroman & Stephen A. Woodbury, 2020. "Experience Rating and the Dynamics of Financing Unemployment Insurance," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(3), pages 673-698, September.
  • Handle: RePEc:ntj:journl:v:73:y:2020:i:3:p:673-698
    DOI: 10.17310/ntj.2020.3.03
    as

    Download full text from publisher

    File URL: https://doi.org/10.17310/ntj.2020.3.03
    Download Restriction: Access is restricted to subscribers and members of the National Tax Association.

    File URL: https://libkey.io/10.17310/ntj.2020.3.03?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wayne Vroman & Stephen A. Woodbury, 2014. "Financing Unemployment Insurance," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(1), pages 253-268, March.
    2. Rosen, Sherwin, 2007. "Studies in Labor Markets," National Bureau of Economic Research Books, University of Chicago Press, number 9780226726304, June.
    3. repec:ucp:bknber:9780226726281 is not listed on IDEAS
    4. Burt S. Barnow & Richard A. Hobbie, 2013. "The American Recovery and Reinvestment Act: The Role of Workforce Programs," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number arra.
    5. repec:aei:rpaper:1008570714 is not listed on IDEAS
    6. Robert B. Barsky & Eric R. Sims, 2012. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," American Economic Review, American Economic Association, vol. 102(4), pages 1343-1377, June.
    7. Marta Lachowska, 2016. "Expenditure and confidence: using daily data to identify shocks to consumer confidence," Oxford Economic Papers, Oxford University Press, vol. 68(4), pages 920-944.
    8. Frank Brechling, 1981. "Layoffs and Unemployment Insurance," NBER Chapters, in: Studies in Labor Markets, pages 187-208, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marta Lachowska & Isaac Sorkin & Stephen A. Woodbury, 2022. "Firms and Unemployment Insurance Take-up," NBER Working Papers 30266, National Bureau of Economic Research, Inc.
    2. Tracy Gordon & Lucy Dadayan & Kim Rueben, 2020. "State and Local Government Finances in the COVID-19 Era," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(3), pages 733-758, September.
    3. Marta Lachowska & Alexandre Mas & Stephen A. Woodbury, 2022. "Poor Performance as a Predictable Outcome: Financing the Administration of Unemployment Insurance," AEA Papers and Proceedings, American Economic Association, vol. 112, pages 102-106, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karoly Fazekas & Jeno Koltay (ed.), 2002. "The Hungarian Labour Market 2002," The Hungarian Labour Market Yearbooks, Institute of Economics, Centre for Economic and Regional Studies, number 2002, June.
    2. Michael Baker & Samuel A. Rea, 1998. "Employment Spells And Unemployment Insurance Eligibility Requirements," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 80-94, February.
    3. Daniel S. Hamermesh, 1980. "Transfers, Taxes, and the NAIRU," NBER Working Papers 0548, National Bureau of Economic Research, Inc.
    4. Carol Taylor West, 1993. "The Problem of Unemployment in the United States: A Survey of 60 Years of National and State Policy Initiatives," International Regional Science Review, , vol. 16(1-2), pages 17-47, April.
    5. Bruce D. Meyer, 1988. "Implications of the Illinois Reemployment Bonus Experiments For Theories of Unemployment and Policy Design," NBER Working Papers 2783, National Bureau of Economic Research, Inc.
    6. Christopher J. O'Leary & Kenneth J. Kline, 2016. "Are State Unemployment Insurance Reserves Sufficient for the Next Recession?," Upjohn Working Papers 16-257, W.E. Upjohn Institute for Employment Research.
    7. Bruce D. Meyer, 1992. "Policy Lessons from the U.S. Unemployment Experiments," NBER Working Papers 4197, National Bureau of Economic Research, Inc.
    8. Jean-Paul L’Huillier & Robert Waldmann & Donghoon Yoo, 2021. "Confidence, Fundamentals, and Consumption," ISER Discussion Paper 1135, Institute of Social and Economic Research, The University of Osaka.
    9. Vijlbrief, J.A., 1990. "The effects of unemployment insurance on the labour market," Serie Research Memoranda 0031, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    10. Daniel S. Hamermesh, 1983. "New Measures of Labor Cost: Implications for Demand Elasticities and Nominal Wage Growth," NBER Chapters, in: The Measurement of Labor Cost, pages 287-308, National Bureau of Economic Research, Inc.
    11. Hogan, Seamus & Ragan, Christopher, 1998. "Job security with equilibrium unemployment," Labour Economics, Elsevier, vol. 5(2), pages 185-185, June.
    12. Christopher J. O'Leary & Kenneth J. Kline, 2020. "State Unemployment Insurance Reserves Are Not Adequate," Upjohn Working Papers 20-321, W.E. Upjohn Institute for Employment Research.
    13. Bruce D. Meyer, 1989. "A Quasi-Experimental Approach to the Effects of Unemployment Insurance," NBER Working Papers 3159, National Bureau of Economic Research, Inc.
    14. Katherine Baicker & Claudia Goldin & Lawrence F. Katz, 1998. "A Distinctive System: Origins and Impact of U.S. Unemployment Compensation," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 227-264, National Bureau of Economic Research, Inc.
    15. Anderson, Patricia M. & Meyer, Bruce D., 1997. "The effects of firm specific taxes and government mandates with an application to the U.S. unemployment insurance program," Journal of Public Economics, Elsevier, vol. 65(2), pages 119-145, August.
    16. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
    17. Ghosh, Suman, 2007. "Job mobility and careers in firms," Labour Economics, Elsevier, vol. 14(3), pages 603-621, June.
    18. Jang, Tae-Seok & Sacht, Stephen, 2017. "Modeling consumer confidence and its role for expectation formation: A horse race," Economics Working Papers 2017-04, Christian-Albrechts-University of Kiel, Department of Economics.
    19. Patricia Apps & Ray Rees, 2007. "Population Ageing, Taxation, pensions and Health Costs," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 10(2), pages 79-97.
    20. Zhen Li & Zai Liang, 2016. "Gender and job mobility among rural to urban temporary migrants in the Pearl River Delta in China," Urban Studies, Urban Studies Journal Limited, vol. 53(16), pages 3455-3471, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ntj:journl:v:73:y:2020:i:3:p:673-698. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The University of Chicago Press (email available below). General contact details of provider: https://www.ntanet.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.