The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms

Abstract

In the US states administer their own unemployment insurance programs, and cross-state variation leads to significant differences in 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 likelihood of exit by 20% during the Great Recession. This suggests that decentralized administration of UI may contribute to jobless recoveries and additional misallocation.

State Unemployment Insurance Reserves Are Not Adequate

“…However, a later survey by Newman and Sullivan (1988) suggests that UI could have an effect because interstate differences were getting bigger in some markets straddling state borders. A recent study by Guo (2019) Table 3. SOURCE: USDOL (2019b) and authors' computations using estimates in Table 3.…”

The Finance of Unemployment Compensation and Its Consequences

“…In particular, do high-risk firms endogenously select into states that shield them from the full cost of their separations? 38 The most related work that has been done is that of Guo (2020) who exploits multiestablishment manufacturing firms that have locations across state lines. She finds that firms are more likely to shutter plants in states with relatively high UI tax exposure, implying that UI tax differences induce greater exit in high-tax states during economic downturns.…”

“…For each state, the table lists the type of formula used to determine employer tax rates, the taxable wage base, minimum and maximum rates, and the maximum weekly benefit claimants are eligible to collect. Importantly, cross-sectional comparisons of state maximum UI taxes with other business costs such as income tax rates and research and development tax credits do not indicate a strong correlation between UI taxes and other state-level policies (Guo 2020).…”

“…Johnston (2020) addresses selection leveraging a kink in the UI tax schedule to estimate how taxes affect hiring, layoffs, and exit. Guo (2020) exploits variation in locations of multistate firms to study how labor demand varies with tax costs. These three papers have found that higher tax rates depress hiring and employment in some contrast to other payroll taxes.…”

“…For competing firms facing different rates, however, the difference cannot be shifted onto workers through lower wages nor onto consumers through higher prices in a competitive market (Lester and Kidd 1939; Anderson and Meyer 1997; Johnston 2020). Instead, the incidence of rates differing among firms results in reduced hiring and employment (Johnston 2020; Guo 2020). 2 Similarly, the portion of rates that varies quickly over time seems to reduce employment and not wages, probably because wage and price rigidities prevent cost shifting in the short term.…”