Do unemployment schemes really benefit?

Do unemployment schemes really benefit

Suppose a government announces unemployment benefits to all the unemployed workforce of the country. What will be the reaction of any randomly chosen person? She/he will probably applaud the government’s measures to help the society (excluding the opposition party… :)). But from an economist’s point of view the government has worsen the situation further more.

Let’s assume a situation when there is no unemployment benefit proposed by the government. In such a condition workers would have very less resources to live upon and will accept even the lower wages. Unemployment rates will be less in this case. But if people know that even if they are unemployed the government will provide a fixed amount as unemployment benefit. Hence the bargaining power of the workforce will increase and thus the wage will increase. Hence the unemployed people will hold out for higher wages and unemployment will increase.

To be more specific, it can be shown that how wages are set in the labor market and unemployment is determined.

The x-axis represents unemployment. Y- axis represents real wage

At equilibrium in the labor market, the wages set by the firms (real wage chosen by price setters) is equal to the wage chosen by the laborers (real wage chosen by wage setters). The equilibrium is given by the point where WS’ and PS intersect. Therefore, if there is increase in the unemployment benefits the wage chosen by the wage setters or the workforce will increase. Hence there would be an outward shift in the wage setting curve. Because the wage set by the price setters remains constant, the new equilibrium changes only the unemployment rate. There is increase in the unemployment rate at the prevailing real wage. The new equilibrium is at point where WS and PS intersect. The unemployment rate has increased from E’ to E.

Economists are not against any level of unemployment benefits, they just oppose too much support by the government which highly influences the workforce. This may result in the aggravation of the situation. A country’s growth is driven by the growth of its workforce and by efficient employment of resources, all resources, human resources too.

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