Hours, Layoffs and Unemployment Insurance Funding: Theory and Practice in an International Perspective

Abstract

The strikingly different behaviour of important economic aggregates in the United States and other industrial countries has received surprisingly little attention from economists. Among recent exceptions, however, Gordon (1982) has shown that wages and hours of work are much more flexible in the United Kingdom and Japan than in the United States. This paper offers an explanation for the contrasting layoff and hours of work experience between the United States and elsewhere, which moves away from the standard, somewhat institutional, reasons. We argue that differences in the application of the payroll tax system for funding unemployment insurance provide a new, and potentially important, approach to explaining these phenomena. In general terms, we have chosen to emphasise the important distinction between employment and hours adjustment because we believe that this has not been given sufficient attention in the related literature.