The US unemployment insurance system is financed by an experience-rated
payroll tax. The system imposes a layoff or firing cost on employers, leading
them to fire fewer workers in a downturn and hire fewer workers in an upturn.
Increases in the degree of experience rating are therefore predicted to reduce
the temporary layoff unemployment rate in a recession, and to lower employment
at the peak of the business cycle.
We combine Current Population Survey data for l979-1987 with a newly
assembled database of experience rating factors for individual states and
industries to measure the effects of imperfect experience rating on temporary
layoff unemployment rates over the cycle. We find a strong negative
correlation between the degree of experience rating and the rate of layoff
unemployment in recessionary years, but smaller and unsystematic correlations
in expansionary years. We also find that cyclical employment fluctuations are
dampened in states and industries with a greater degree of experience rating.