Unemployment Insurance Financing as a Uniform Payroll Tax

Abstract

In the United States, unemployment insurance (UI) is financed by taxes levied on employers. We develop a model to decompose UI taxes into a firing tax component levied on firms that lay off workers, and a uniform payroll tax component levied on all firms regardless of their layoffs. We develop a novel methodology to measure the two components and document a number of facts about the uniform payroll tax component: it is large, accounting for just under half of UI taxes; it rises significantly after recessions; and it is more cyclical in states with poorly funded UI systems.