America’s most ridiculous hiring hurdle

America’s young men aren’t working. Well, a smaller share of them are working, anyway. As of April, about 86% of prime-age men — meaning those between 25 and 54 — were employed, a significant drop from the 1950s and 1960s, when that number was often closer to 95%. And 52% of men 16 to 24 were working, compared with well above 60% decades ago.

There are plenty of explanations for what might be happening—perhaps it has to do with recessions, disabilities, or wages not being high enough to draw them in. There are an equally robust number of proposed solutions to this conundrum: upskilling and reskilling, convincing men to go into fields historically viewed as being for women, and getting employers to be more realistic about requiring college degrees.

Let’s consider another possible explanation: the unemployment insurance system. How firings are handled might affect whether guys get hired in the first place.

First, some basics. When a worker is laid off or fired, they’re generally eligible for unemployment insurance, a program designed to help people stay afloat financially while they look for their next gig. After applying and being approved, which can be a pain, unemployed workers collect a check each week. The checks don’t replace all their wages; they are generally less than half of what they were making. It’s something to tide them over so they can pay their bills, keep food on the table, etc., and that’s good for the economy because it’s a drag on everything when people suddenly can’t do those things.

It’s a straightforward enough idea, but how we pay for UI is pretty wonky. Every business pays a tax into the pool of money that goes to paying unemployment insurance; the tax bill is footed by the employer, not the employee, unlike Social Security, which gets paid for by both. (Employers pay a certain percentage into UI every paycheck, and those with more employees wind up kicking more in. It’s sort of like the employer’s part of Social Security.) But instead of being a flat tax (the business kicks in X percentage each month), the rate can go up through a system called “experience rating.” The experience in question is how much the employer has laid off workers in the past: More layoffs mean a higher tax rate. The thinking is that the more workers the company has let go, the more it pushes people to draw on the UI system, so it should pay more in unemployment taxes.

If you are going to get taxed on any laid-off employees, you’re going to be a lot more hesitant about hiring.

The idea behind this is understandable (though most countries don’t do UI this way). If you want to discourage businesses from firing people willy-nilly, you penalize those that do. But in practice, it has had some unintended consequences. A new paper from Matt Darling, a senior employment-policy analyst at the Niskanen Center, a center-right think tank, argues that the experience-rating system has made some employers reluctant to hire workers they’re worried won’t work out — and that young men, in particular, are the ones being harmed.

“If you are going to get taxed for any employees that get laid off, you’re going to be a lot more hesitant about hiring,” Darling told me. “It isn’t the sole driver, but I think it’s important.”

The experience-rating system wasn’t nationwide until the federal government in the mid-1980s mandated that states adopt the program. Darling looked at what happened when it was forced on the state of Washington, which held out on implementing the program until 1985. He compared it with Oregon, which already had an experience rating in place. The states’ unemployment rates for young, entry-level workers moved in sync before Washington’s experience rating was in place. When it was implemented, workers in Washington started to see higher unemployment. Darling found that after the experience rating was introduced in Washington, the unemployment rate for workers 15 to 25 — basically entry-level workers — increased by 2.5 percentage points. The effect was driven almost entirely by young men: Unemployment went up by 2.7 percentage points for young men but by only 0.1 percentage points for young women.

“It does sort of tie into a lot of things that people have been thinking about,” Darling said. “Why is the male employment rate declining in general?”

The prospect of higher unemployment taxes can prompt employers to steer clear of people they perceive as riskier workers or opt to hire contractors. In more-nefarious situations, they might try to discourage workers from applying for unemployment or make their employees so miserable that they quit and therefore aren’t eligible for UI benefits. So why would young men bear the brunt of this?

Men tend to outnumber women in economically vulnerable industries, such as manufacturing and construction. In recessions, those sectors are often hardest hit, meaning their jobs are among the first to go. (The pandemic recession was the exception.) Businesses in those sectors may also be extra sensitive to their experience ratings; they don’t want to add even more to their taxes.

Employers might also see young men as riskier to bring on board. Fairly or unfairly, there’s a stereotype that young men are more volatile, more immature, and less responsible than their female counterparts. Darling notes that men drop out of college at higher rates than women and argues that the same behavioral differences that drive that trend could also mean businesses see them as a higher layoff risk.

There are some ideas out there about policy solutions to fix the experience rating and UI. Darling’s preference is to ax the experience rating and just pick a simple tax rate.

Implementing any of these solutions would be complicated, as there’s rarely much political will to act on unemployment insurance. People realize how screwed up the system is when times are bad (see: the Great Recession, the pandemic), but once things get back to normal, everyone sort of forgets. Whatever appetite for action there might have been in Congress dies out — there’s no real constituency of people who consider themselves the “unemployed worker.” Lawmakers on Capitol Hill and in state legislatures do not love talking about taxes unless they’re cutting them.

As for why so many young men aren’t working, it’s a doozy. There’s no quick fix for recessions or incarceration rates or pay or any of the many other factors driving the shift. But maybe a step in the right direction here is to at least talk about it. And, hey, if you’re a business owner, maybe take a risk on that young guy who walks through your door instead of worrying about what it might cost you if you decide to fire him.