An Unemployment Compensation system based on the "experience rating". An analysis of the temporary layoffs and the subsidies crossed in Spain

An Unemployment Compensation system based on the "experience rating" principle draws its funds from a payroll tax on employers and establishes different tax rates according to the individual employer's layoff history. This paper shows how it works and examines some of its advantages and disadvantages, bearing in mind the more general issue of the distribution of the costs associated with labour turnover. It also analyses two problems associated with incomplete or partial "experience rating": the excessive number of temporary layoffs and the existence of cross-subsidization among regions, sectors and firms. Using tax data from the Continuous sample of Working life (MCVL, Muestra Continua de Vidas Laborales), we measure these effects for the spanish case. Our results provide some hints on the potential gains of implementing a system containing some "experience rating" elements in the financing and design.