Explain how the benefits and costs of unemployment insurance are related to the duration of unemployment....

Explain how the benefits and costs of unemployment insurance are related to the duration of unemployment. (Hint: your answer should rely on the ideas of consumption smoothing and moral hazard.)

Expert Solution

Benefits of unemployment insurance is that it helps in sustainance of workers . Stability in consumption path is achieved to some extent by this insurance which gives a worker an incentive to be actively searching for jobs in the labour force . This temporary financial assistance also helps to maintain the human capital level in the economy . So in this case duration of unemployment is decreased . A worker can maintain his potential by this financial assistamce and continually search for new jobs .

On the other hand it also causes a moral hazard problem . Knowing that an unemployment insurance is present to guard them , workers lose their incentive to work . Specially for jobs which have a wage rate almost equal to the financial assistance . People find it more lucrative to spend time in leisure . Such insurances decreases the risks and negative effects of unemployment , causing the duration of unemployment to increase .

Rahul Sunny answered 2 years ago

4. Explain how the benefits and costs of unemployment insurance are related to the duration of...

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