Benefits from Unemployment - Essay Example

Unemployment benefits and unemployment Name: Tutor: Course: Date: Introduction The aim of this paper is to establish the effect of unemployment benefits on unemployment. Generally, unemployment benefits are given to people who are registered as unemployed (Friedman, 2002). The prevailing condition is that they are seeking jobs and currently do not have one. Searching for work becomes more attractive for consumers when there is a higher market wage. Consequently, labor market tightness increases with increased unemployment insurance benefits (ibid). Unemployment benefits and employment White (2004) defines unemployment benefits or unemployment insurance as monetary provisions for the unemployed in order to reduce their pressure while seeking working or to accept any kind of work available. The broad intent of unemployment insurance schemes is to cushion workers or provide a safety net during the job loss. Workers will still maintain their lifestyle while searching for replacement jobs (Friedman, 2002). By maintaining purchasing power, the expectations are that unemployment benefits will lower the adverse effects of unemployment for communities and individuals. Workers will have a good time intervals to search for jobs that match their competencies and skills or simply those that are available (Fleurbaey & Maniquet, 2011). Therefore, unemployment benefits or unemployment insurance are short-term bridges between longer intervals of regular work. However, unemployment insurance can change the incentives for work (Friedman, 2002). If benefits are available and high percentage of income is replaced for an extended interval, individuals who strongly prefer leisure who use this opportunity to maximize on leisure and minimize work. Consequently, many governments such as US and Canada will opt to keep the benefits qualification duration long and income replacement rates very low to encourage people to seek meaningful employment (Sharpe & Smith, 2005). It must be understood that in times and places where unemployment is high, pressure mounts of governments to reduce qualification intervals and enhance benefits. This situation occurs during cyclical downturns when job creation rates drop and unemployment rates spike. Depending on the status of the person and the jurisdiction, unemployment benefits may be small sums of money covering only basic needs (Carroll, 2007). Basically, it compensates proportionally to the previous earned salary for the lost time. Friedman (2002) argues that employment insurance or unemployment benefits lowers the opportunity cost to a worker from finding work, hence, it increases unemployment rate and the duration of unemployment. However, Callan et al. (2011) disagrees with this point of view in that generous unemployment benefits increases the utility of a worker while unemployed thus decreasing the penalties related with unemployment. To increase the costs of unemployment, firms must pay higher wages. This assumption is associated with the view that high unemployment benefits corrode work incentives. According to Friedman (2002:263), for a fixed unemployment rate, protracted unemployment duration will, ceteris paribus, result in increased penalties linked to being fired. The average length of unemployment cannot be directly controlled by capital, but biased technological changes implemented would render obsolete the skills of unemployed labor. This makes it difficult for the unemployed workers to be rehired. Indirectly, it affects the mean unemployment duration owing to increased friction among unemployed workers as they search for new opportunities of employment (Fleurbaey & Maniquet, 2011). To decrease the level of social welfare programs, capital marshals its political resources. For a given level of unemployment, increasing benefits to unemployed workers will, ceteris paribus, reduce the cost linked with becoming unemployed (Friedman, 2002). This encourages the unemployed to remain outside employment. On the contrary, Carroll (2007) observes that reducing unemployment benefits extracts greater levels of employee effort, and allows capital to pay lower wages as well as reduced monitoring inputs. The utility of a worker while unemployed is increased if the levels of unemployment benefits are high. Therefore, it encourages on-the-job shirking and decreases the penalty linked with unemployment. Firms must pay a higher wage to prevent shirking by increasing unemployment penalty (ibid). For the probability of efficiency wage to be negatively related job loss, then the wage paid by employers should exceed the income expected by a worker during unemployment. Regarding these welfare benefits, the orthodox or classical view is straight forward. People diminish the incentive to get a job when unemployment benefits are too high. According to Siebert (1997:52) higher replacement rates and benefit duration tend to raise unemployment. This view is also supported by Friedman (2002) who asserts that, “…high unemployment is linked with generous unemployment benefits which gives little or no pressure among the unemployed to find work” Friedman (2002:261). Howell and Azizgolu (2011:14) have criticized this perspective as narrow and rely on old data. Similarly, the authors also deride the classical theory as a naive and inappropriate model for the real world assessment of labor market policies on the incentive effects. Howell and Rehm (2009:68) also counter the classical view “unemployment insurance essentially increases the incentive to work”. The authors argue that unemployment insurance demands that somebody must have worked for a given duration before claiming benefits. Therefore, unemployment insurance may have negative and also positive on the shift from unemployment to employment. No explanatory value of the long-term unemployed can be obtained on labor market behavior regarding level of unemployment benefits (Layate & Callan, 2001). At the levels of benefits considered, it is false to make the assumption that decreasing withholding benefit (or the levels of benefits) increases off the unemployment register, in-flows (Friedman, 2002). The case could likely be the opposite as this may exacerbate, through informal networking, the process of social exclusion. Consequently, it decreases the effectiveness of the best route for this group of workers to get back into employment. For those at risk of unemployment and the unemployed people themselves, reduction in benefits or relative levels of benefits inevitably increases anxiety, poverty, and hardship (Layate & Callan, 2001).. This implies that misguided policies on levels of benefits contribute to rigidity instead of flexibility. When the number of people who are officially unemployed is divided by the labor force it yields unemployment rate (Friedman, 2002). Therefore, as the number of unemployed people increases, the unemployment rate rises and when the labour force grows, it falls, ceteris paribus. A survey by Kinicki et al. (2005) on the effect unemployment insurance on employment found that unemployed people collecting benefits got into employment quicker that those who could not access unemployment benefits. Once their benefits ran out, unemployed workers did not reduce their wage expectations or search for work (ibid). One concern, which can sometimes be imperfect, over is increasing unemployment based on experience rating benefit regarding unemployment insurance (Wisman, 2010). That is, benefits paid to the employee upon layoff are less than the cost an employer incurs due to increase in taxes. In this instance, the firm finds it cost effective under perfect experience rating, to lay off the employee and cause more unemployment (Kinicki et al. 2005). Economically, if simultaneously, all social welfare programs become more generous, and supposing a representation of payment is p (Pearson Canada Inc. 2013). First, each person not in employment is entitled to the payment, p, in the employment insurance benefit. Consequently, the equation of the supply side of the labor market behavior on the becomes; v(Q) + p = b + p + em(1,j)a(z-b-p), or, simply, v(Q) = b + em(1,j)a(z-b-p)……………………………………………….(i) On the other hand, the equation of the demand side of the labor market behavior on the becomes; em(1/j,1) = k/(1-a)(z-b-p)………………………………………………...(ii) Therefore, in Figure 1 below, labor market tightness drops to j2 from j1, while labor force drops to Q2from Q1. As a result, the vacancy rate decreases and the unemployment rate increases. Assuming the number of firms is given by A=jQ, so A will decrease. In addition, given that output is Y=zQem(1,j), it means that output will also fall. Two unemployment benefits programs affects consumers; one paying benefit to people not in employment, and one paying employment benefit insurance to the unemployed. Since in the event that search for work is unsuccessful the consumer receives the employment insurance benefit only, on net, increased social programs generosity will discourage people from looking for work (Pearson Canada Inc. 2013).. Furthermore, the total surplus from a successful match is reduced by more generous social programs, and firms get discouraged from posting vacancies (Pearson Canada Inc. 2013). On net, the labor force contracts and labor market tightness goes down (as shown in figure 1 (b)) below. It also means that with the vacancy rate decreasing and the unemployment rate increasing, the aggregate output decreases. Source: Pearson Canada Inc. (2013: 71) Figure 1: Unemployment insurance and labor market tightness It can be learned from the figure 1 above, that when labor income is held constant, the recipients of other transfer payments from the government and unemployment insurance, rather than purchase or invest on liquid assets, tend to use those resources to consume. Spending their benefits when they receive is an important aspect among unemployed people as it explains why the benefits are essential for maintaining their living standards. Even if unemployment benefits increases unemployment as a result of compensating people not to work, the living standards of beneficiaries is dependent on them to a point that the benefits of the program outweigh their cost. Unemployment becomes embedded in the economy when it exists (Riley, 2012). For example, those made temporarily unemployed because their employer went out of business, find it hard to return to the labor market. It even becomes harder to gain work if they remain longer in unemployment. The reason could be lose the habit of working or because they lose skills.  Over time, say unemployed over 1 year, workers will have little prospects of work since they will join the ranks of the long term unemployed and be permanently excluded from employment. Unemployment benefits include only payments for full-time unemployment. Special features of unemployment support include seasonal unemployment, part-time unemployment, and early retirements are not considered. For example, an unemployed person in Spain receives €10,778 annually on average of unemployment benefits, while €242 per unemployed on average goes to guidance policies (Howell & Rehm, 2009). On the contrary, in Sweden, an unemployed receives €7,474 on average of unemployment benefits, while €3,018 on average goes to guidance policies for the unemployed (ibid). For the other countries, such significant differences can also be observed. In addition, the characteristics or level of the public intervention represents a large part of the cost of unemployment for the unemployed (Henchman, 2011). Higher cost of unemployment emanate from intensive guidance policies and generous social welfare programs (Pacitti, 2011). The income effects from a transfer payment, in an economy, always sum to zero. It simply means that for higher unemployment benefits, there is no stimulus. To clearly see these effects, suppose there are two person economies where one is paid for being unemployed while another is working (ibid). Obviously, the unemployment benefits will be taken from the one working and given to the unemployed. There is no stimulus for the economy because the one person who is unemployed ‘buys’ more from unemployment benefits, the other person ‘buys’ less. The substitution will affect the aggregate as the income effects sum to zero. In this case, person from whom the unemployment funds are taken will, ceteris paribus, will work less and find work less rewarding (White, 2004). Consequently, both people will be incentivized to work less in this two-person economy. There will be more unemployment and less work (Sharpe& Smith, 2005). When business is beginning to slacken, unemployment compensation sustains the buying power of the consuming public and cushions the downswing of the business cycle (Keynes, 1964). Today, Keynesian economists refer such policies as countercyclical in that it stimulates an economy in a downswing and cools down the economy in an upswing. Commentators in this discourse assert that Unemployment Insurance benefits are effective at retaining and creating jobs, hence countercyclical (Wisman, 2010). Conclusion In conclusion, unemployment benefits focus on boosting aggregate demand or overall spending in the economy, and rely on Keynesian economic models. Extending unemployment benefits, from economic evidence, is encouraging ‘excessive search’ hence increasing unemployment (Fleurbaey & Maniquet, 2011). Higher unemployment benefits make the unemployed to spend more, while the people who will spend less are those whom the resources are taken. On the contrary, Unemployment Insurance benefit recipients by making them spend instead of saving their benefits. References Callan, T., (ed) Crilly, N., Keane, C., Walsh, J., (2011). Tax, Welfare and Work Incentives, Budget Perspectives 2012, ESRI, Dublin. Carroll, N. (2007). Unemployment and Psychological Well-Being, in The Economic Record, Vol.83, No.262, 287-302. Fleurbaey, M. & Maniquet, F. (2011). A Theory of Fairness and Social Welfare. Cambridge University Press. Econometric Society Monographs. Vol. 48 (2): 16-23. Friedman, L. S. (2002). The Microeconomics of Public Policy Analysis. Princeton University Press. Henchman, J. (2011). Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds, Tax Foundation, http://taxfoundation.org/article/unemployment- insurance-taxes-options-program-design-and-insolvent-trust-funds Howell, D. & Azizoglu, B. (2011). Unemployment Benefits and Work Incentives: The US Labor Market in the Great Recession. Political Economy Research Institute, Working Paper No.257. Howell, D. & Rehm, M. (2009). Unemployment Compensation and High European Unemployment: A Reassessment with New Benefit Indicators, Oxford Review of Economic Policy, Vol.25, No.1, 60-93. Keynes, J. M. (1964). The General Theory of Employment, Interest, and Money. San Diego: Harcourt Brace. Kinicki, A., McKee-Ryan, F., Song, Z., Wanberg, C., (2005). Psychological and Physical Well- Being During Unemployment: A Meta-Analytic Study, in Journal of Applied Psychology, Vol. 90, No.1, 53-76. Layate, R. & Callan, T. (2001). Unemployment, Welfare Benefits and the Financial Incentive to Work, in Economic and Social Review, Vol. 32, No.2, 103-129. Nickell, S. (1997). Unemployment and Labor Market Rigidities: Europe versus North America, in Journal of Economic Perspectives, Vol. 11, No.3, 55-74. Pacitti, A. (2011). Efficiency Wages, Unemployment, And Labor Discipline, Journal of Business & Economics Research, Vol. 9, no. 3, 1-10. Pearson Canada Inc. (2013). Search and Employment. Pp. 62-71. Riley, G. (2012). Unemployment-Introduction, http://tutor2u.net/economics/revision-notes/a2- macro-unemployment.html Sharpe,
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