Question

“When employees are dismissed from employment for reasons other than poor performance, unemployment benefits should replace 100 percent of their prior earnings while they are searching for a new job.” Do you think this proposal is a good one? Why or why not? If instituted, would the policy influence how quickly laid-off workers would find new jobs? What im-pact would the policy have on the unemployment rate?

• There are three types of unemployment: (1) frictional unemploy-ment, (2) structural unemployment, and (3) cyclical unemployment.

In a world of imperfect information and dynamic change, some unemployment is inevitable.• Full employment is the employment level consistent with the economy’s natural rate of unemployment. Both full employment and the natural rate of unemployment are associated with the economy’s maximum sustainable rate of output.• Potential output is the maximum sustainable output level consistent with the economy’s resource base and current institutional arrangements.• Inflation is an increase in the general level of prices. It is impor-tant to distinguish between anticipated and unanticipated infla-tion. Unanticipated changes in the rate of inflation often alter the intended terms of long-term agreements and cause people to regret choices they have previously made.• Inflation, particularly unanticipated inflation, has harmful ef-fects. These include (1) adverse impact on investment and other time-dimension contracts, (2) distortion of relative prices, and (3) the shift of productive resources into activities designed to prevent inflation from eroding one’s wealth.

Answer 1

• Do you think this proposal is a good one? Why or why not ? - No, this is not a reasonable proposal as unemployed people would stop actively searching for another job, because he or she has the financial security of even being unemployed.

• If instituted, would the policy influence how quickly laid-off workers would find new jobs? - Yes, the policy would definitely influence the amount of time that laid-off workers would take to find new jobs. Since the unemployed person has a lower opportunity cost of having to remain unemployed, when he or she is getting 100% benefits of prior earnings , they would stop seeking for a new job and rather let things take its course naturally. There would be lack of zeal to get employed again.
• What impact would the policy have on the unemployment rate? - It is due to this lack of interest to get a new job , that frictional unemployment(unemployment due to a person changing jobs)would tend to be on the higher side due to the unemployed person's circumstances of getting paid his full earnings from the lady job. This would naturally increase the rate of overall unemploymentunemployment.