JEL Classification: J31

Key Words: unemployment insurance tax, wage, employment We develop a partial equilibrium model under a cost minimization problem to derive the effect of an unemployment insurance tax on average wage rates and employment. We assume perfect competition in the product market and perfect factor mobility in the factor market. Our model suggests that a portion of the tax is passed on to employees by means of reduced wages. The model also suggests that a lower level of employment will be realized as a result of the tax