BHI
FaxSheet: Information
and Updates on Current Issues
Creating
Jobs by Reducing Unemployment Insurance Costs
June
1996
Massachusetts would
create 15,000 new jobs by adopting a proposal to reduce the state’s
unemployment insurance tax. The proposal, now before the Massachusetts
legislature, has been offered by the Coalition for Unemployment Insurance
Reform, a group of Massachusetts business organizations. The Beacon
Hill Institute at Suffolk University (BHI) has estimated the job effects
of the proposal by using STAMP, the institute’s State Tax Analysis
Modeling Program.
One finding reached
by the institute is that Massachusetts employment is significantly and
negatively related to unemployment insurance rates. Reducing the tax
would induce Massachusetts employers to create more jobs by reducing
the cost of adding workers.
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. Many factors, including the following,
contribute to this high cost:
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 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.
A Proposal to Cut the Cost of Providing Jobs
The
proposed legislation attempts to align the Massachusetts program more
closely with those offered by other states. It includes raising the
prior work requirement to 20 weeks and reducing employer contributions
in 1997, the first net reduction since 1986. Analysis by the Massachusetts
Department of Employment and Training shows that the proposal would
reduce the average cost per employee in Massachusetts from $476 to $419,
a reduction of approximately 12 percent.
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. The proposed legislation
aims to make the state more competitive by reducing the cost of creating
jobs.
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 employers and
workers. The model assumes that prices eventually adjust in such a way
as to push the labor market toward "equilibrium" and that
the supply of capital to firms in the state is perfectly elastic.
In
determining the equilibrium level of Massachusetts employment, the model
estimates the behavioral responses 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 unearned income Yu;
state
government transfer payments Gtr;
the
federal individual income tax rate tf;
the
state individual income tax rate ts;
the
U.S. unemployment rate u;
the
state unemployment insurance tax rate v Ü unemployment insurance
contributions divided by payroll;
the components
of the cost of capital to firms, the discount (interest) rate i,
the capital replacement rate d, the present value of depreciation
allowed for tax return purposes for $1 of capital c, and the
total tax rate on corporations (including tax on dividends, capital
gains, and income) t .
The
results of the estimation of employment, with t-values in parentheses
and * indicating statistical significance at the 5 percent level, are
as follows:
The model shows a negative coefficient on the state unemployment insurance
tax rate, v, implying that as unemployment insurance costs are
reduced, employment in the state increases. The estimated coefficient
is significant at 5 percent, and indicates that a one-percentage point
reduction in the unemployment insurance tax rate increases employment
by 3.9 percent.
How Many More Jobs?
We
apply this estimation to forecast the increase in employment that would
result from the implementation of the proposal before the legislature.
It is projected that the proposed reform would reduce the annual cost
to employers from $476 to $419 per employee. This saving represents
a reduction in the unemployment insurance tax rate of 11.97 percent.
The current tax rate would therefore fall from 1.10331% to 0.9712% --
a decrease of 0.1321 percentage point. Using our estimated results,
this would increase the employment level by 0.51% (= 3.9% * 0.1321).
Nonagricultural employment in the state is 3,006,575 (based on data
for the first four months of 1996 from the Massachusetts Department
of Employment and Training). Based on this, we predict that the proposal
will create 15,334 new jobs.
Kathleen
M. Lang, PhD, BHI research associate, prepared this BHI FaxSheet.
Persons having further questions should contact Ellen F. Foley,
BHI director of communications at bhi@beaconhill.org, or
by calling (617) 573-8750.