Unemployment Insurance Policy in New England: Background and Issues
Upjohn Institute Staff Working Paper 97-49
Robert Tannenwald and Christopher J. O'Leary
April 1997
NOTE: A revised version of this paper was published in New England Economic Review, May/June 1997: 1-20.
Abstract
Most states have exhausted their unemployment insurance (UI) trust fund and borrowed from the
federal government at least once during the past 35 years. Under such circumstances, states are
required by law to raise UI taxes to replenish their trust funds and to pay off their debts to the
federal government. Since higher UI taxes increase employer costs, replenishment forces states
into a trade-off between economic competitiveness and trust fund adequacy. Competitive
pressures have raised questions about prevailing standards of adequacy and the speed at which
they should be attained. Consequently, several states are contemplating tax reductions despite low
reserves. This article provides background information and analysis intended to clarify issues
underlying the UI policies of New England in general and a tax reduction under consideration in
Massachusetts in particular. The main point is that alternative UI policies should not be judged
solely by the yardsticks of economic competitiveness and trust fund adequacy. Allocative
neutrality and economic stabilization are also relevant concerns. UI systems necessarily force
some industries to subsidize others, thereby distorting the allocation of resources in favor of
subsidized firms. Yet, many of the same features responsible for these allocative distortions affect
economic stability. Every UI alternative entails trade-offs among these rival concerns.
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