Experience Rating as an Automatic Stabilizer
Unemployment insurance taxes are experience-rated to penalize firms that dismiss workers. We examine whether experience rating acts as an automatic stabilizer in the labor market. We exploit the fact that penalties for layoffs vary by state using detailed data on state tax schedules, and we measure whether firms react less to labor-demand shocks in the presence of greater layoff penalties. The average penalty for layoffs reduces firm adjustment to negative shocks by 11 percent. The results imply experience rating has a stabilizing influence on labor markets. Experience rating saved, for instance, nearly a million jobs in the Great Recession.
We are grateful to participants at the Tax Policy and the Economy Conference, and Robert Moffitt for helpful comments and conversations about the paper. We are grateful for support from the National Bureau of Economic Research. Views expressed here are those of the author and should not be attributed to our employers or to NBER. Mistakes are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.