Question

Why EI (Employment Isurance) increase a frictional unemployment?

Why not cyclical unemployment, the number of discouraged workers and structural unemployment?

Answer 1

Unemployment insurance increases frictional unemployment and raises natural rate. The unemployed who receive unemployment insurance benefits are less pressured to search for a new employment and are more likely to turn down unattractive job offers. Both of these reduce the rate of job finding. Also because workers know that their incomes are protected, they are less likely to seek jobs with stable employment prospects or to bargain for guarantees of job security. This increases the rate of job separation.

However, benefit of unemployment insurance is that it reduces workers' uncertainty about their incomes and induces workers to reject unattractive offers leading to a better job matching between workers and jobs.

Cyclical unemployment is unemployment that results when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction. A person looses job due to recession or contraction and not because he is searching for a high paid or perfect job suited to his requirements. Such a person is willing to work again once recession ends or is ready to take any job available.

The BLS defines discouraged workers as those who want a job but are not actively searching for one because they believe there are no jobs available for them. Since discouraged workers are not actively searching for a job, they are considered nonparticipants in the labor market—that is, they are neither counted as unemployed nor included in the labor force. They are not actively searching for job and are not considered unemployed.

Structural unemployment is a form of involuntary unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers. Structural unemployment is often brought about by technological changes that make the job skills of many workers obsolete. Once these people update their skills they can get new job. They became jobless due to lack of required skills and not because they willingly left job due to dissatisfaction because salary, or other issues.