Question

Is unemployment insurance, worker’s compensation, or disability insurance likely to provide the greatest degree of consumption smoothing? Explain why your choice provides more consumption smoothing than the other two alternatives.  

Answer 1

Consumption smoothing is the desire of people to stabilize their consumption patterns throughout their lifetime.

Out of the given options, the greatest degree of Consumption smoothing is provided by unemployment insurance.

Under this scheme, workers who lose their jobs faultlessly and due to other reasons impromptu, then they will receive benefits from the unemployment insurance company. This is done so as to not disturb their consumption patterns and thus smoothen consumption.

This is better than the other two alternatives as it stabilizes consumption patterns when workers lose job unexpectedly.

Disability insurance and worker compensation provide additional income over and above base incomes.