Question

Is the following assertion true, false, or uncertain? “Increasing the level of unemployment bene ts will prolong the average length of unemployment spells. Hence, a policy of raising UI benefits is not socially desirable." Explain.

Answer 1

There are three main types of unemployment:

1) Structural unemployment: category of involuntary unemployment when there is a mismatch in skills between labor demanded by firms and labor supplied by the workers.

2) Frictional unemployment: category of involuntary unemployment which occurs due to duration lag for finding a job between separating from a new job and finding a new job,This type of unemployment always exist in the economy due to transition of both employees and employers within economy.

3) Cyclical unemployment: caused due to fluctuation in business cycle. For example: during recession, many workers are laid off while during economy boom, employment rate is high.

Now, if level of unemployment benefits are increased, this increases the reservation wage of workers at which they will be willing to take up a new job. They will indeed prefer to stay out of job rather than accepting a lower wage offer. This increases the separation time for finding a new job (or possibly can even be reason for quitting job in the first place). Thus average duration of unemployed spells increase. Hence, a policy of raising unemployment insurance benefits is not socially desirable.

TRUE