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BHI FaxSheet: Information and Updates on Current Issues

Reducing Unemployment Insurance would mean 13,080 new jobs

February 1997

Massachusetts would create 13,080 new jobs by adopting a proposal to reduce the state's unemployment insurance tax rate. The proposal, now before the Massachusetts legislature, has been offered by Governor Weld and Lieutenant Governor Cellucci. The Beacon Hill Institute at Suffolk University (BHI) estimated the employment effects of the proposal using STAMP, BHI's State Tax Analysis Modeling Program.1

BHI found that Massachusetts employment is significantly and negatively related to unemployment insurance tax rates. Reducing the unemployment insurance tax rate 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. Many factors contribute to this high cost including the following:

The limit for receiving maximum benefits, 30 weeks, is the most generous in the nation, and 15% 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.2

A Proposal to Cut the Cost of Providing Jobs

The proposed legislation, which would be the first net reduction since 1986, would save Massachusetts businesses $82 million in 1997. Analysis by the Massachusetts Department of Employment and Training shows that the proposal would reduce the average cost per employee in Massachusetts from $471 to $436, a reduction of 7.43%.3

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:

red the "labor endowment" (working-age population) of the state economy E;
red state after-tax unearned income Yu;
red state government transfer payments Gtr;
red the federal individual income tax rate tf;
red the state individual income tax rate ts;
red the U.S. unemployment rate u;
red the state unemployment insurance tax rate v unemployment insurance contributions divided by payroll;
red 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) r.
red the Massachusetts workers compensation tax rate wc.

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

 

lnL = 2.3577lnE - 0.0902lnGtr + 0.0698lnYu - 0.005tf - 0.033 ts - 0.011u - .043v + 0.003 d + 0.002c + 0.004i - 0.001r - 0.022wc
(10.472)* (-1.845) (2.61)* (-1.9) (-2.93)* (-4.83)* (2.36)* (-2.88)* (1.31)* (1.28) (-.87) (-1.81)


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% and indicates that a one-percentage point reduction in the unemployment insurance tax rate increases employment by 4.3%.

How Many More Jobs?

We apply this estimation to predict the increase in employment that would result from the implementation of the proposal before the legislature. A 7.43% reduction in the unemployment insurance tax rate would cause it to fall from 1.39% to 1.29% - a decrease of .10 percentage points. Using our estimated results, we find that this would increase employment by 0.43% (= 4.3% x 0.10). Nonagricultural employment in the state is 3,041,900 (based on data for December 1996 from the Massachusetts Department of Employment and Training). Based on this, we predict that the proposal would create 13,080 new jobs.

___________

Kathleen M. Lang, PhD, BHI research associate, and Howard R. Wright, BS, BHI research economist, prepared this BHI FaxSheet. Persons having questions should contact Ellen F. Foley, BHI director of communications.


1 For details about the model, see Massachusetts Econometric Tax Model, Beacon Hill Institute, February 1996.
2 Information was based on Fact Sheet on the Weld-Cellucci Proposal to Streamline the Massachusetts Unemployment Insurance Program, Massachusetts Department of Employment and Training, April 1995.
3 Information was based on Quarterly Trust Fund Report, Massachusetts Department of Employment and Training, January 1997.

 


Related Links:

Other BHI material on UI Rates

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