The business economist at work: an unemployment insurance actuary

Business Economics, April, 1994 by John R. Palumbi

I accomplished this by using IRS W-2 wage distributions to develop a regression for estimating the proportion of taxable income paid in a quarter for any given tax base, adjusted for the fact that not everyone begins a particular job on January first. Added to the revenue forecasting model, this equation automatically adjusted the flow of revenues according to the assumed wage base. This had never been needed before because the model had previously been used primarily for current law estimates. We had discussed such an addition in the past and had even laid the groundwork, our immediate need providing the impetus to finally act.

Given three options for increasing the federal taxable wage base, I used the revenue model to solve for the decreased federal tax rate that would not only generate revenues sufficient for regular outlays but would also cover the costs of the WSA. After I tested the three combinations and was confident that each met the necessary revenue goals of the WSA, two independent studies by outside contractors were conducted to estimate the interindustry impact of each option.

Changing the federal UI tax structure so radically would benefit some firms at the expense of others. Low wage firms, in particular, would benefit at the expense of higher wage firms. In preparing the legislation to change the UI tax structure, the empirical estimation of the consequences of that proposition would allow the recruitment of potential allies and the preparation of defenses against those opposed to system change. My role was to analyze the results of the two studies, reconcile or explain differences, and present and defend that analysis on any number of levels.

It was necessary that I work closely with the two research organizations selected to perform the studies, keeping them abreast of any needed changes and converting and interpreting the results for internal use by the Director of UI and the staff of the Secretary of Labor. I was also responsible for methodological oversight, ensuring that statistically appropriate assumptions and procedures were followed. The analysis complete, reports, bullet charts and graphics were designed for use within UI and to convey the results to a diverse audience.

Some of the reports concentrated on the broad results of the project and were meant as talking points for presentation to the general public. Others were written with economists in mind and concentrated on generating support for the underlying assumptions and methods. The goal was the presentation of objective evidence that relied upon sound economic principles and modeling techniques to enable those so charged to make well-informed decisions.

Aside for revenue estimation, other work in which I am involved includes:

1. developing and implementing practical and effective statistical processes to help states identify the dislocated workers targeted under the WSA;

2. technical training of state employees in the development and use of individual state trust fund models. These models allow state staff to perform legislative analysis and economic simulations at the state level;