published in: Journal of Public Economics, 2004, 88 (3-4), 481-501
The systematic use of experience rating is an original feature of the U.S. unemployment
benefit system. In most states, unemployment benefits are financed by taxing firms in
proportion to their separations. Experience rating is a way to require employers to contribute
to the payment of unemployment benefits they create through their firing decisions. It is
striking that experience rating is absent from the unemployment compensation systems of
other OECD countries, where benefits are usually financed by taxes on payrolls, paid by
employers or employees, and by government contributions (Holmlund, 1998). Is experience
rating only adapted to the U.S. labor market? Would it be suitable in other countries? At first
glance, it is likely that experience rating is not desirable in many European labor markets
characterized by high firing costs. We provide a simple matching model of a rigid labor
market including firing costs, temporary jobs and a minimum wage in order to analyze the
issue. Our analysis leads us to argue that experience rating is likely to reduce unemployment
and to improve the welfare of low skilled workers in France, and more generally for low
skilled workers in a typical rigid Continental European labor market.
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