The business economist at work: an unemployment insurance actuary

Business Economics, April, 1994 by John R. Palumbi

Along with other telltale signs, the continuing high levels of the long-term unemployed since the beginning of the recovery have led some to assert that a structural shift has occurred in employment demand and abnormally large numbers of workers are being permanently displaced. Although the cause of the increase in long-term joblessness is debatable, research and pilot projects have shown that the timely provision of job search services targeted toward those at risk of long-term unemployment can accelerate their return to work. By targeting and aiding the potentially long-term unemployed as soon as possible after their separation from work, it has been demonstrated that they can gain new employment more quickly, avoiding the high monetary and social costs of extended unemployment.

This change in perspective toward unemployment also provides a golden opportunity to adjust the underlying UI tax structure to distribute more equitably the tax burden on employers and ensure the continued solvency of the UI system. I forecast the impacts on revenue of such structural changes and help decide the merits of various approaches, analyzing the consequences of scenarios on different states, industries and firm sizes.

FEDERAL REVENUE ESTIMATION

My association with the WSA involves efforts to forecast the revenues associated with changes in the federal UI tax structure. The present federal UI tax structure, with a tax of 0.8 percent levied upon the first $7,000 in wages, has become increasingly regressive and represents an ever-eroding tax base.

In 1940, when the first $3,000 in wages were subject to UI taxes, 93 percent of all wages were taxable. By 1992, with the federal wage base at $7,000, that ratio had fallen to 29 percent. The consequence of such drifting has been that the burden of financing the federal portion of the UI system (and the state portion to a lesser degree), has increasingly fallen on the lower wage employer. To make the federal UI tax system more progressive, it was proposed that the maximum level of taxable wages be raised and the overall federal tax rate lowered, shifting more of the tax burden to higher wage employers, but making the proportional burden more equal among differing wage levels.

Estimating the effects of such large changes and the revenue streams associated with them is a tricky proposition because there is little historical precedent. Aside from the usual pitfalls associated with making assumptions about the future, the two greatest obstacles to efficient forecasts under such uncertain situations are the need for accurate income distributions and estimates of how the revenue stream will shift under each proposal.

Due to the present generally low taxable wage base, the stream of revenues into the system is highly seasonal (employers pay most of their taxable wages in the first quarter of the year) and estimating changes in this pattern under different wage base structures is critical to the proper translation of calendar year estimates into the fiscal year estimates used for budgeting purposed.