Unemployment insurance and bankruptcy

The primary purpose of unemployment insurance is to insure individuals against unpredictable employment shocks but unemployment insurance will affect the layoff decision of firm. The experience rating tax, which requires firms to pay some portion of the unemployment insurance benefit that firms create, reduces the amount of excessive layoffs from firms. This paper explores the effect of experience rating taxes on firms. We show that experience rating taxes can lead to an increase in the number of bankruptcies within the economy. Welfare implications are examined.