Employment Effects of the Unemployment Insurance Tax Base

Abstract

This paper investigates whether and to what extent 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 estimate that a 10 percent nominal increase in the tax base raises the teenage employment rate by 1.4 percent, and indexing the tax base increases the teenage employment rate by 6 percent. These results offer evidence that the erosion of the UI tax base has reduced the employment of low-wage workers.