Alternative Methods of Experience Rating Unemployment Insurance Employer Taxes

Abstract

For most states the methodology used for assigning Unemployment Insurance tax rates to employers arose when the program was first established in 1935. More than 80 years later, with evolving employment relationships, state systems have become outmoded. This paper critiques current experience rating methods and presents new methodologies that are much easier to operate and that improve the incentives for employers to increase employment. The proposed methods would assess taxes based on employment or payroll variation such that growing firms would have lower taxes. A simulation analysis illustrates the impact of the new methods on employer groups.

The Finance of Unemployment Compensation and Its Consequences

“…In disputes, courts typically side with the claimant, even when employers have clear evidence available that the separation was not the result of a layoff. Miller and Pavosevich (2019) propose a new mechanism for experience rating that avoids these implicit penalties for employment growth. 17.…”

“…Most countries, including Canada, France, Germany, Japan, and the United Kingdom, impose a uniform payroll tax on workers, employers, or both to finance benefits. While some European countries have experience-rated components of their UI systems (primarily in the form of differentiated rates by sector), none are employer-specific like the United States (Baicker, Goldin, and Katz 1998; Fath and Fuest 2005; Simonetta 2017; Miller and Pavosevich 2019). Some countries in Scandinavia and the Netherlands have implemented industry-specific rates set by trade unions.…”

“…Although experience rating was eventually instituted by each of the 50 states, no other country has adopted the practice. The remainder of the world employs largely uniform payroll taxes to finance unemployment payments (Fath and Fuest 2005; Miller and Pavosevich 2019). Tracing the costs and benefits of our unique system will bring clarity to makers of labor, industrial, and macroeconomic policy as they evaluate the role of experience rating in the coming decades.…”

“… 16. Miller and Pavosevich (2019) propose a new mechanism for experience rating that avoids these implicit penalties for employment growth. …”

The Finance of Unemployment Compensation and its Consequence for the Labor Market

“…Miller and Pavosevich (2019) propose a new mechanism for experience rating that avoids these implicit penalties for employment growth.16 The remaining alternatives are Benefit-Wage Ratios, used in Delaware and Oklahoma, and a Payroll Variation plan used in Alaska. Alaska measures the stability of payrolls over a 3-year period, and ranks employers according to their average quarterly decline.…”