Unemployment Insurance Taxes and the Cyclical and Seasonal Properties of Unemployment

We combine Current Population Survey microdata for 1979-1987 with a newly assembled database of tax rates for the Unemployment Insurance system to measure the effects of imperfect experience-rating on temporary layoffs and other types of unemployment. We find a strong negative association between the degree of experience-rating and the rate of temporary layoff unemployment, with the largest effect in recessionary years and the smallest effect in expansionary years. Increases in the degree of experience-rating are also associated with dampened seasonal fluctuations in temporary layoffs, particularly in construction and durable manufacturing. The correlation between the degree of experience-rating and the unemployment rate of permanent job losers is smaller but also negative, whereas the correlation with the unemployment Me of job quitters and re-entrants is negligible. Attempts to control for the endogeneity of unemployment insurance taxes are consistent with a causal interpretation of our findings.