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Ensuring More Jobs for Massachusetts

May 1995

Massachusetts would create 12,000 new jobs by adopting a measure that would reduce unemployment insurance contributions. This is the finding of the Beacon Hill Institute at Suffolk University (BHI).

Concerns about Massachusetts' ability to compete for business, as dramatized by Raytheon's threatened departure from the state, have led Governor Weld and Lt. Governor Cellucci to propose a number of measures aimed at increasing the state's competitiveness. One such measure, House No. 4881, would reduce employer contributions to the unemployment insurance system.

Using its dynamic econometric state tax-analysis model, BHI examined the proposal for its effects on the Massachusetts economy. One finding of this analysis is that, because the unemployment insurance tax exerts a significant negative effect on the ability of Massachusetts employers to create jobs, reduction of the tax would exert a substantial job-creating effect. By reducing worker insurance against earnings losses, it would ensure that there would be more jobs for Massachusetts workers to fill.

Unemployment Insurance: A Costly Proposition for Massachusetts Business
Massachusetts employers face the second highest unemployment insurance cost per employee in the nation as the result of an exceptionally generous unemployment insurance program. Under current Massachusetts state law:

The limit for receiving maximum benefits is 30 weeks -- the most generous in the nation and 15 percent higher than the 26 weeks at or below which almost all other states limit benefits.

The prior work requirement is 15 weeks of employment. Only ten other states have the same requirement, while 28 others require at least 20 weeks of prior work.

Workers with dependents receive extra benefits under a supplemental payment scheme that is by far the most generous in the country. Only 12 other states offer dependent benefits.

Proposed Legislation Reduces the Cost of Doing Business in Massachusetts
The proposed legislation attempts to align the Massachusetts program more closely with that offered by other states. It includes a 26-week limit on the maximum length of benefits, raises the prior work requirement to 20 weeks and restructures the supplemental-payment scheme for dependents. It provides Massachusetts businesses with an estimated net saving of $90 million per year and reduces insurance cost per employee by approximately 9 percent.

Lower Costs to Business Result in More Jobs
Massachusetts faces an increasingly competitive economic environment in which businesses have greater mobility than ever and are more sensitive than ever to interstate differences in the costs of production. House No. 4881 aims to make the state more competitive by reducing the cost of creating jobs.

Using data generated by the Massachusetts economy between 1970 and 1992, BHI has estimated the impact of the proposed legislation on job creation. Its analysis shows:

The unemployment insurance tax rate, measured by computing unemployment insurance contributions as a percentage of total payroll, significantly and negatively affects the employment level in the state.
The proposed reform would reduce the unemployment-insurance tax rate by 8.53 percent and would, in the process, generate approximately 12,000 new jobs for the state.

How the BHI Model Works
The BHI model is a dynamic, market-clearing model designed specifically to show how changes in tax law affect the behavior of tax-paying economic "agents" (employers and workers). The model assumes that prices eventually adjust in such a way as to push markets toward "equilibrium."

In determining the equilibrium level of Massachusetts employment, the model estimates the behavioral response of workers and employers to changes in various "exogenous" variables, including tax rates, that are determined outside the model. The exogenous variables that drive the BHI model are:

the "labor endowment" (working-age population) of the state economy E;
state after-tax nonlabor income Yn;
federal income tax rate tf;
state income tax rate ts;
capital stock employed by Massachusetts firms K;
the U.S. unemployment rate u and
the state unemployment insurance tax rate v.

The results of the estimation of employment L, with t-values in parentheses and * indicating statistical significance at the 5% level, show:

lnL = -11.596 + 2.486lnE - 0.102lnYn + 0.003tf - 0.061ts - 0.0028lnK - 0.0414v - 0.009u (-7.954) (10.673)* (-2.664)* (1.208) (-5.334)* (-0.051) (-1.997)* (-4.639)*.

The estimation results in a negative sign on v, as expected, implying that, as the unemployment insurance tax rate is reduced, employment increases. The estimated parameter is statistically significant (significant at the 5% level). The results indicate that a one-percentage-point decrease in the unemployment insurance tax rate would increase employment by 4.14%

How Many More Jobs
We apply this estimation to forecast the increase in the number of jobs that would result from the implementation of the proposal. The Massachusetts Department of Employment and Training has projected that the proposed reform would generate an annual net savings to employers of $90 million. The saving represents a reduction of the unemployment insurance tax rate from the 1994 rate of 1.1303% to 1.0339% -- a decrease of 0.0964 percentage point. This would increase the employment level by 0.4% (= 4.14% * 0.0964). Since the current level of employment is 3,031,000 (the average of the first quarter of 1995), we predict that the proposal will create 12,124 new jobs.

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In-Mee Baek, PhD, resident scholar, Beacon Hill Institute and visiting assistant professor of economics, Suffolk University, conducted the econometric work summarized above.

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