Some people argue that unemployment benefits (i.e., cash payments by the governm

Question

Some people argue that unemployment benefits (i.e., cash payments by the government to people who are unemployed) help stimulate the economy. The reasoning is that without the benefits, the incomes of unemployed people would be lower, and thus their spending on goods and services would be lower. Keeping in mind that (i) to collect unemployment benefits one must be unemployed, and (ii) the benefits are generally no more than 40 to 50 percent as large as the typical earnings of people when working, answer these questions: A) How do unemployment benefits change the incentive to be employed? Explain. B) Is it possible that a system of unemployment benefits could actually cause total spending in the economy to fall? Explain. C) Please explain how changing the duration of eligibility and the amount of compensation will affect GDP and economic growth. Some people argue that unemployment benefits (i.e., cash payments by the government to people who are unemployed) help stimulate the economy. The reasoning is that without the benefits, the incomes of unemployed people would be lower, and thus their spending on goods and services would be lower. Keeping in mind that (i) to collect unemployment benefits one must be unemployed, and (ii) the benefits are generally no more than 40 to 50 percent as large as the typical earnings of people when working, answer these questions: A) How do unemployment benefits change the incentive to be employed? Explain. B) Is it possible that a system of unemployment benefits could actually cause total spending in the economy to fall? Explain. C) Please explain how changing the duration of eligibility and the amount of compensation will affect GDP and economic growth. Some people argue that unemployment benefits (i.e., cash payments by the government to people who are unemployed) help stimulate the economy. The reasoning is that without the benefits, the incomes of unemployed people would be lower, and thus their spending on goods and services would be lower. Keeping in mind that (i) to collect unemployment benefits one must be unemployed, and (ii) the benefits are generally no more than 40 to 50 percent as large as the typical earnings of people when working, answer these questions: A) How do unemployment benefits change the incentive to be employed? Explain. B) Is it possible that a system of unemployment benefits could actually cause total spending in the economy to fall? Explain. C) Please explain how changing the duration of eligibility and the amount of compensation will affect GDP and economic growth.

Explanation / Answer

The unemployment benefits refers to an insurance in the form of compensation provided by the government to those individuals who are unemployed without their fault. The compensations are made in the form of monetary payments until they find a new job.

A) The unemployment benefits offer a source of income to the individuals even when they are unemployed. If these benefits are too generous, it might discourage the people to search for jobs. Moreover, if the benefits continue for a longer period of time, these people will lose the incentive to get a new job. Thus, with unemployment benefits, the incentive to be employed will reduce. It will only increase when the unemployment benefit poriod is about to get over.

B) Yes, the unemployment benefits cuase a fall in the consumption habits of the consumer. But, this happens for a short period only (period of unemployment and immediate after). After immediately getting a job or being re-employed, the consumption, however, stays in the same manner for some time, but then, it comes back to the previous normal level. Since, the consumption is a part of the total spending of the economy, the effects of the benfits are the same for total spending also. The unemployment benefits help people to sustain a desirable level of consumption and avoids a worse situation than this, like starvation due to lack of income. Thus, the total spending falls temporarily (for the period of unemployment) because of the shortage of resources, after which it resumes its level in the re-employment period.

C) By changing the duration of the unemployment benefits, say, increase the duration will provide no benefit to the economy, rather, it harms the economy. The same is true for increasing the compensation amount for unemployment. The benefits like these will harm economy's GDP and economic growth. Somehow, the workers will not prefer to work if the government will provide them extra payments for their leisure or provide them for a longer duration of time. They could search for work but would prefer not to do so. This would mean that the unemployment rate of the economy would increase and would remain for a longer period of time. The incentive to find a new job will reduce amongst the unemployed. These consequences, will in turn lead to a lower GDP and will dampen the growth of an economy.

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