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Unemployment Insurance reform would hasten economic gains

A proposed change in unemployment insurance rate schedules would make it possible for Massachusetts to achieve economic gains in the year 2000 that it would otherwise not achieve until 2003. It means creating thousands of new jobs and hundreds of millions of dollars in new factories, machines, office buildings and other productive capital next year, rather than four years from now.

Massachusetts imposes a tax on payrolls for the purpose of financing benefits for unemployed workers. Under current law, the unemployment insurance tax rate will drop from .83% to .65% of payrolls over the period 2000 to 2003. (See the table below). We estimate that this will lead to the creation of almost 11,000 new jobs by the time the lower rate is fully implemented in 2003. A reform proposed by the Cellucci-Swift Administration would accelerate this process, leading to the creation of approximately the same number of new jobs by the end of 2000. [1]

Table 1: Effects of Proposed Unemployment Insurance Rate Reforms

UI Contributions as % of Payroll
Changes from Current Projections Attributable to UI Contribution Cuts
Reform Employment Annual Wage ($) Capital Stock
($ million)
($ million)
Tax Revenue ($ million)
+ 11,358
+ 15
+ 362
+ 533
+ 32
+ 10,823
+ 15
+ 345
+ 535
+ 32
+ 8,466
+ 12
+ 270
+ 443
+ 26
+ 2,438
+ 4
+ 78
+ 134
+ 8

Note: The simulation baseline numbers for employment and the wage rate are based on data provided by the Department of Employment and Training. There is a 90% probability that effects of the UI cuts would be larger than the amounts shown in the table.

The proposed reform changes unemployment insurance rate schedules so that the rate would be lower than under current law for every year 2000-2003. The rate would be .64 rather than .83 in 2000, .59 rather than .77 in 2001, and so forth. As a result, there would be more jobs, more capital (plant, equipment, office buildings, etc.), higher payrolls and higher income tax collections than would otherwise be possible under Schedule C. In 2000, there would 11,358 additional jobs, $362 million more in capital, $533 million more in payrolls and $32 more in income tax revenues. (Gains that would take until 2003 to achieve under Schedule C.) In 2001, there would be 10,823 more jobs, and so forth. [2]

The proposal accelerates the reduction in unemployment insurance rates by reducing employers' unemployment contributions. Under current law, employer contributions for year 2000 will increase $91 million over 1999, reaching $847 million. The average cost per employee will be $317 in 1999 and $356 in 2000.

The proposal would trim the average cost per employee to around $270 in years 2000-2002, which is 15% below the 1999 level and 25% below the level that would otherwise pertain in the absence of reform. [3] Under this proposal, Massachusetts businesses would save $566 million over the next three years. By making it possible to reduce unemployment insurance rates more quickly than would be possible under current law, the proposal would reduce the cost of hiring workers, making the Commonwealth more competitive in attracting business, thus bringing about an expansion in employment, payrolls and capital stock.

The Beacon Hill Institute developed these estimates by using STAMP, its State Tax Analysis Modeling Program. STAMP shows how changes in tax law affect the cost of labor and capital on Massachusetts employers. In this instance, STAMP shows that a reduction in the unemployment insurance rate would reduce the cost of labor and lead to employers' hiring additional workers. This is consistent with economic theory, which shows that reductions in the cost of labor will result in an increase in the amount of labor being used. Additional hiring leads to an increase in demand for workers and a subsequent increase in their wages. As employment increases, firms will also increase their investment in capital stock, providing workers with new equipment on which to work and new office space to occupy.

The Beacon Hill Institute at Suffolk University is a nonprofit, nonpartisan research organization that applies state-of-the-art economic methods to the analysis of current public policy issues.


[1] Unemployment insurance rate schedules are set according to formulas based on the Massachusetts labor force, benefits payments and the unemployment insurance trust fund. The Cellucci-Swift proposal is embodied in two bills: House Bill 3958 and House Bill 3959. House Bill 3958 would overhaul the statutory mechanics for triggering the UI contribution rate schedules beginning in year 2001. House Bill 3959 would reduce the rate for year 2000 from the higher Schedule C rate to the lower Schedule A rate. Schedule B would go into effect in 2002.

[2] The changes are shown for each year and are independent of any change generated in the previous year by the rate cut. The largest benefit for the economy would be in year 2000, consistent with the largest change in UI rates. The absolute value of economic gains then would fall through year 2003 as the rate change decreased.

[3] Massachusetts Department of Employment and Training, Quarterly Trust Fund Report, April 1999.

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