Employment Effects of the Unemployment Insurance Tax Base

Abstract

I investigate the extent to which the low unemployment insurance (UI) tax base in the United States creates disincentives to hire low-wage workers. Using data from the Current Population Survey and state variation in the UI tax base over 30 years, I show that a 10% nominal increase in the base raises the teenage employment rate by 1.2%. It raises teen/adult and highschool/college grad employment. Indexing the tax base increases the teenage employment rate by 6%. The erosion of the UI tax base has thus reduced the employment of low-wage workers.