Using a Natural Experiment to Estimate the Effects of the Unemployment Insurance Payroll Tax on Wages, Employment, Claims, and Denials

The recent experience of Washington State provides a natural setting to examine the effects of the unemployment insurance payroll tax on wages, employment, claims and denials. During the 13 year period from 1972 through 1984, all employers in Washington paid the same unemployment insurance (UI) tax rate. As a by-product of Federal legislation, Washington was forced to adopt an experience-rated system in 1985. This paper takes advantage of this incidence and the effects of experience rating. Results based on individual-level quarterly earnings are supportive of the idea that industry average tax rates are largely passed on to workers in the form of lower earnings. However, our estimates imply that a firm can shift much less of the difference between its tax rate and the industry average rate. We then analyze the effect of experience rating on employment, UI claims, and UI denials by comparing the experience of Washington State before and after the 1985 change with that of other states. Our results are generally supportive of the prediction that experience rating reduces turnover and UI claims, and increases claim denials.