Layoffs and Unemployment Insurance

The starting point of this analysis was the Baily-Feldstein model according to which both layoffs and average hours worked increase with (1) increases in unemployment benefits and (2) decreases in the degree of experience rating of the unemployment insurance tax. This model has been extended by letting the layoff duration be endogenous and by parameterizing experience rating. The empirical examination of the relationship between layoffs, rehires, hours and unemployment duration as dependent variables and the parameters of the unemployment insurance system as explanatory variables has yielded very encouraging results. The strongest impact is that of NEGTAX, the tax rate which applies to firms with a negative balance in the unemployment insurance fund. A rise in NEGTAX reduces layoffs, rehires, hours and unemployment duration. Increases in NEGTAX tend to reduce strongly both layoffs and unemployment duration. The approximate elasticities of these two relationships are .55 and .21 respectively so that a rise in NEGTAX of 10% (from, say, 3.4 to 3.74) might reduce layoff unemployment by as much as 7%. Increases in NEGTAX would improve the financial viability of the unemployment insurance system since tax inflows would rise and benefit outflows would fall because of the reduced layoff unemployment.