The purpose of this study is to analyze the effectiveness of experience rating methods in Unemployment Insurance (UI) as a device to change layoff behavior and to find some implications for Korea.
It is widely observed that UI encourages unemployment through the compensation to the unemployed. American UI is adopting the experience rating system to reduce unemployment through a penalty on layoffs upon employers, rather than on the unemployed themselves. Experience rating system pressures employers to hold their workers at their working places longer than desired. There are many evidences that experience rating system itself reduces unemployment rate. It is a dominant feature of American system.
There are four methods in experience rating. reserve ratio method, benefit ratio method, benefit wage method, and declining wage method. The trends in experience rating systems of states are to show the convergence to a reserve ratio method and a benefit ratio method. However, the reserve ratio method is believed to lack in forcing firms to adjust employment to cyclical economic trends, as well as to change firms efforts to reduce unemployment.
This paper showed that Reserve Ratio method did not stabilize unemployment rate more than the other methods with annual U.S. state data.
In addition, this paper designed and calculated the experience rating index of the four methods by industry with Korean unemployment insurance database. According to the comparison between the rank orders of indexes and unemployment rating proxies, the rank order of Benefit Ratio index reflected the rank order of industrial unemployment rate proxy better than the other methods.
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