Charged benefits arise from both temporary and permanent layoffs. Temporary layoffs are those leading only to relatively short-lived reductions in employment. These cutbacks are reversed by new hires or recalls after fairly brief periods of time. From the perspective of our current discussion, as introduced in chapter 1, the most important characteristic of temporary layoffs is that they of not lead to significant long-run reductions in the taxable payroll. Permanent layoffs, by contrast, are defined as lasting curtailments in the work force and do imply a decrease in the taxable payroll.
It should perhaps be pointed out that the distinction between temporary and permanent layoffs need not necessarily correspond to the unemployment experiences of individual workers. As an example, suppose that worker A is laid off and that worker B is hired as a replacement after a short time. If A remains unemployed for a long period, then the layoff is regarded as temporary by the employer but as permanent by the employee. In this study, layoffs are categorized as temporary or permanent according to the employer’s perception. To be sure, since the rate of recall is typically very high among temporary layoffs, the latter are likely to be perceived as temporary by both the employer and by most of the affected employees.
Our subsequent analysis is facilitated by specifying a temporary layoff rate. Which measures the proportion of the average stock of employees’ layoff in a calendar year? Thus, if the layoff rate is 10 percent and the average level of employment is 450 (as in the preceding example), then the hypothetical employer effects 45 temporary layoffs in the calendar year. Permanent layoffs are measured by the net reduction in the level of employment over the course of the calendar year. In the example, permanent layoffs amount to 100 (i.e., 500-400). Permanent layoffs are zero when the employer adds to employment over the course of the year.
Both temporary and permanent layoffs qualify for unemployment benefits. The weekly benefit payment is determined by state law, usually at about one-half of previous earnings, subject to a maximum. We shall use the concept of benefits per unemployment spell. This is simply the product of the weekly benefit payment and the number of weeks that the laid-off worker receives unemployment compensation. Thus, if the weekly benefit payment is $250 and the duration of the unemployment spell is 12 weeks, the benefit per unemployment spell is (12) ($250) =$3,000. This would be the amount of benefits charged to the employer’s account with respect to each layoff. In practice, the weekly benefit payment and the unemployment duration are likely to differ among employees. Hence, the $3,000 should be considered as an average for all layoffs.
The level of charged benefits can be expressed as the following equation:
The first term in the square brackets in equation represents temporary layoffs, and the second term represents permanent layoffs.
Time Lags
With both types of experience rating, there are substantial periods of time between the year when unemployment benefits are paid and charged to an employer and the year when the tax rate changes. Typically, the employer tax rate for 1994, for example, would have been determined between June and October of 1993, based on the layoff experience over the years 1990, 1991, 1992. These time lags prevent the immediate response of taxes to charged benefits and may cause inequality between a firm’s charged benefits and its tax payments in any particular year Furthermore, neither method allows for interest payments or discounting. Thus, even if the firm pays $100 in taxes for each $100 of charged benefits, the lag of the former behind the latter implies that in present value terms, tax payments fall short of charged benefits.
