Karl Pribram, Employment Stabilization through Pay Roll Taxation (1942)

Karl Pribram’s discussion article in The Quarterly Journal of Economics examines Charles E. Lindblom’s proposal to separate unemployment compensation from a graduated employers’ pay roll tax designed specifically to stabilize employment. Pribram questions both the conceptual justification and the likely economic effects of this arrangement. His central claim is that financing compensation, distributing economic responsibility, and encouraging employment stability are distinct problems: a tax cannot resolve them merely by assigning different rates to employers with different employment records. The article moves from the purposes of social insurance and the changing rationale of “merit rating” to three problems requiring clarification: tax incidence, the meaning of stability, and the particular fluctuations taxation should address.

Lindblom associates government contributions with income redistribution, employee contributions with risk-sharing, and employer contributions with stabilization. Pribram disputes this exclusive correspondence between funding sources and objectives. Redistribution occurs through contributions from any source, while risk-pooling is a method of redistribution rather than a separate ultimate aim. More fundamentally, social insurance determines who should bear the economic consequences of risks:

Social insurance differs from private insurance, not only by its compulsory features, but also by the fact that it reallocates economic responsibilities: the financial burden resulting from the task of meeting a social risk is shifted wholly or partly to factors other than the individuals exposed to the risk.

Employer contributions can therefore be justified without demonstrating a stabilizing effect. Pribram draws on accident, old-age, health, and unemployment insurance to show how social risks become costs of production. When unemployment arises from industrial conditions beyond workers’ control, making employers bear part of its cost expresses a normative allocation of responsibility. The American emphasis on employer contributions as incentives to stabilize employment represents a distinctive departure from this rationale.

That departure produces different institutional tensions. Individual employer reserve plans, exemplified by Wisconsin, prioritize stabilization and require differentiated contributions because each employer’s reserve bears its own benefit obligations. Pooled funds instead make compensation primary and share unemployment risk across establishments. Within these funds, merit rating creates exceptions to pooling whose justification depends on whether reduced rates actually encourage stabilization. Pribram argues that experience has weakened this claim:

The incentive of rate reductions, it was shown, is too weak to counterbalance the influence of the factors which determine an employer’s employment record and over which he has no control.

The subsequent shift from “merit rating” to “experience rating” is therefore substantive, not merely terminological. Differentiation becomes a way to allocate costs according to employment experience, regardless of deliberate stabilizing effort. Accumulated reserves give it a further role as a vehicle for tax reduction. These purposes require different assessment methods, yet their conflation obscures whether lower contributions reward conduct, distribute costs fairly, or simply reduce revenue. Pribram stresses the resulting pressures on benefit standards, fund solvency, and interstate competition.

Lindblom’s response is to finance compensation independently and assess a stabilization tax on its own merits. Pribram examines this proposal without attempting to settle whether pay roll taxation is the best instrument available. His first objection concerns incidence: employers do not necessarily bear the tax, and their capacity to shift it to consumers or workers varies. Nor does a favorable employment record establish managerial effort. Measuring effort would require comparisons with normal industry experience rather than treating unlike industries as equivalent. Lindblom also envisages resources moving from unstable to stable enterprises. Pribram distinguishes this long-run reallocative mechanism from incentives governing individual firms’ short-run behavior; each may require a different rating method.

The second problem is defining the intended stability. Continuous employment for the same workers differs from maintaining a constant workforce whose membership changes. Protecting an established group can make temporary employment harder to obtain for outsiders, especially where employment is already low. Stability measures must also recognize that expansion, not just contraction, can create subsequent fluctuations. Existing compensation arrangements may grant reductions during prosperity and impose increases during depression, precisely when firms face falling prices and pressure to reduce costs.

The third problem is specifying which sources of instability the tax should restrain. Pribram considers business expansion, technological change, and seasonal production separately. A tax intended to discourage unstable employment might itself encourage labor-saving machinery, lowering employment without making it steadier. In seasonal industries, charging previously unpriced social costs might displace resources, but displacement does not guarantee productive reallocation when resources are already underused:

In an economy in which the available resources are not fully utilized, no reallocation of resources might be brought about by such a policy, but only increasing unemployment.

This qualification exposes the central weakness of treating stabilization as an unambiguously beneficial objective. Tax effects depend on demand, wages, competitive conditions, and opportunities for alternative employment, not merely on the accuracy of an employer’s rating.

Quite generally it may be emphasized that the issue is not simply between a higher and lower degree of stabilization, but also between an economy with a higher and an economy with a lower level of employment.

Pribram ends by calling for clarification and investigation rather than rejecting further discussion. The article’s enduring relevance lies in its distinction between employment regularity and employment volume, and between responsibility for financing social protection and responsiveness to fiscal incentives. A well-considered policy must explain who ultimately bears its costs, what behavior it can change, and whether greater security for some workers comes at the expense of employment opportunities for others.