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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.
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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well explained
Thanks!
Fantastic article and very well researched. But, as all economic theories, yours too is based on the assumption that when govt. provides unemployment benefits, people’s bargaining power will increase. That is not true. Time factor comes into play. If the benefits take time to trickle down to the required people, they will try to find employment earlier at lower wages.
true.. economists whole world rests on assumptions.
Yes i agree.. every economic analysis is made under certain assumptions
Well written!
Well written!
Thanks
Good one !
🙂
Well written
Thanks!
Fantastic article and very well explained.
Thanks 🙂
Nice article! Yeah,,it is true, providing unemployment benefit helps in no way to reduce unemployment, because when benefits are not delayed, bargaining power of people is gonna get a leap forward and so does unemployment!
Thanks!
Well Written article
Thank you!
Well explained.
🙂
Well written article.. Keep going..
Thank you Stephy!
Well Written Good Work 😀
Thanks 🙂
Well researched
Great one…..
No doubt…unemployment schemes result no benefits to unemployed workers.
thanks
well written article..
Thanks
Very well elaborated!
🙂
On top of that there is an uneven distribution of money to the unemployed across the states.
Well written! But it’s not bad if you see the other side of the situation, see,unemployment benefits are more seen as ‘ moral hazard’ to a situation but it’s a very smart way to protect jobless so that they don’t rush into unsuitable jobs.also, some people are ‘hand to mouth’ they don’t have much savings to overcome their situation so,if a father looses his job it makes a great difference to a family because all members are dependent on his income for their consumption.but at least it’s bringing food on table.yes, it can be argued that it’s not a complete replacement of actual earning.sometimes person has to start from lower wages all together because extended unemployment benefits become cause for their outdated skills which are no longer required in market.but the role of this scheme is to eradicate poverty caused by at and to bounce back immediately as soon the person gets job.also I will completely agree to this article on one side because their are people who don’t want to work on lower wages instead wants to avail the unemployment benefits.so lastly, unemployment benefits are for those who needs it the most and government should make best use of it because it’s a borrowed money and not a money raised from taxes.
Yes kanika.. I agree that socially it is a beneficial scheme.. but its consequences lead to increase in unemployment which is not good for any economy..!!
Great Job!!!
Well Written 😀
Good job, Megha!