by Robert Tannenwald and Christopher O'Leary
May/June 1997

Almost two-thirds of the states, and all the New England states except New Hampshire, have exhausted their unemployment insurance 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 unemployment insurance taxes in order to replenish their trust funds and to pay off their debts to the federal government. Since higher unemployment insurance taxes increase employer costs, replenishment forces states into a trade-off between economic competitiveness and trust fund adequacy. In recent years, intensifying competitive pressures have caused many policymakers to question prevailing standards of adequacy and the speed at which they should be attained. Consequently, several states, including some still in the process of rebuilding reserves depleted by the last recession, are contemplating tax reductions.

This article provides background information and analysis intended to clarify issues underlying the unemployment insurance policies of New England in general and a tax reduction under consideration in Massachusetts in particular. The author's main point is that alternative unemployment insurance 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.

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