Since the inception of the federal-state UI system in the mid-1930s, the experience-rating provisions have been vigorously debated among politicians, trade unionists, business people, and academic economists. The last comprehensive treatment of all aspects of experience rating was undertaken by Joseph M. Becker, whose seminal book on this topic was published in 1972. His views were restated, with minor modifications, in his 1981 monograph. Becker’s work was followed by the contributions of Feldstein (1976), Brechling (1977), and Baily (1978). The early literature was surveyed by Hamermesh (1977, 1978), Gustman (1982), and Topel and Welch (1980).
The Need for Research
In the research underlying this book.We havereexam-ined the role of experience rating in the UI system. Such reconsideration is needed because of recent changes in labor market conditions, including the growth in permanent employment reductions due to major downsizing by some large employers, increased numbers of plant closures, and bankruptcies. Large structural shifts in economic activity and employment took place in the 1980s, and they are likely to continue. Thus, the question arises as to whether the present UI system and, in particular, its experience-rating provisions are capable of coping adequately with the consequences of the substantial reallocation of labor. Our research is aimed at providing some answers to this important economic and political question.
Current systems of experience rating seem to be well designed to allocate the costs of unemployment caused by temporary, easily predictable, and recurrent layoffs. Such layoffs do not lead to significant permanent employment changes. There are valid arguments for allocating the costs of temporary layoffs to the firms that caused them. Further, in most states, it seems that the existing experience-rating systems can be modified to allocate these costs to the appropriate firms.
Most theoretical and empirical investigations of the UI system have been based on models of temporary layoffs. For instance, the influential article by Feldstein (1976) and later contributions by Wolcowitz (1984) and Cook (1992), all employ an approach, similar to that of early implicit contract theories, in which employees have a lasting attachment to a particular firm, but are laid off periodically and later recalled in a fairly predictable manner. In these models, UI benefits are a means of raising workers’ incomes during periods of temporary unemployment, and, so the argument goes, these benefits ought to be regarded as part of the firm’s labor costs. If, by contrast, UI benefits were financed by a general payroll (or other) tax not based on an experience rating, there might be more layoffs, and high-layoff firms would receive a permanent subsidy from low-layoff firms. As a result, high layoff activities would be expanded. Experience rating clearly leads to increased efficiency and social well-being, at least from a long-run perspective.
In much of the UI research, experience rating is modeled in a fairly abstract manner. For example, following Feldstein’s original contribution, many researchers have described experience rating simply by the ratio of total benefits charged to the tax payments of employers. The reserve ratio method of experience rating, which is the most commonly used approach, has been modeled by Brechling (1997) and, more recently, by Wolcowitz (1984) and Cook (1992). Cook has extended the work to the benefit ratio method, the other important technique of experience rating. Both approaches imply that experience rating is imperfect in the sense that (1) there are substantial lags between the payments of benefits to workers and the corresponding receipt of UI taxes, and (2) there are maximum and minimum tax rates that curtail or even suspend the relationship between benefits and taxes. Although these features of the UI tax systems have been modeled in an insightful manner by both Wolcowitz and Cook, neither examines the effects of permanent employment reductions.
Suppose now that a substantial proportion of total layoffs is permanent, necessitated by some structural development, such as changes in tasted, new technologies, or competition from imports. Some plants may have to close completely, some may go into bankruptcy, and others may experience substantial downsizing. In any case, employment in the industry must contract substantially. From a social point of view, who should bear the unemployment costs of these layoffs? Is experience rating a desirable property of the UI system? So present experience-rating methods allocate these costs appropriately? These types of questions have not been considered in the previous literature on experience rating. Consequently, we have addressed these issues in our research for this book.
