The Finance of Unemployment Compensation and its Consequence

Abstract

A vast literature considers the influence of unemployment benefits on labor supply, but little has been done to understand the consequences of the unique tax that finances benefits in the United States. We present new evidence on the statutory incidence of the tax along the income distribution, across industries, by geography, and over the business cycle. This labor policy presents several fascinating questions for economists: Do the penalties produced by experience rating reduce layoffs amid recessions? What impact do tax increases have on hiring and recovery? We provide a handrail for analysts to understand the institutions and engage outstanding questions.