Experience Rating as an Automatic Stabilizer

Mark Duggan, Audrey Guo and Andrew Johnston

Tax Policy and the Economy, 2023, vol. 37, issue 1, 109 - 133

Abstract: Unemployment-insurance taxes are experience rated, penalizing firms that dismiss workers. We examine whether experience rating serves as an automatic stabilizer in the labor market. Taking advantage of the variation in layoff penalties across states, we utilize detailed data on state tax schedules and assess whether firms are less responsive to labor-demand shocks when facing higher layoff penalties. Our findings show that average layoff penalties from UI reduce firm adjustments to negative shocks by 11%. This indicates that experience rating contributes to labor market stabilization. For example, during the Great Recession, experience rating preserved nearly a million jobs.

Date: 2023
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Chapter: Experience Rating as an Automatic Stabilizer (2022)
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