Posted: April 1st, 2015

Unemployment Compensation

Unemployment Compensation

Introduction

Unemployment refers to an economic condition where individuals who are willing and actively searching jobs cannot find one. Unemployment is determined by the performance of an economy, availability of educational and training institutions and other factors (Vroman and Vera, p. 34). This discussion focuses on whether unemployment compensation has any economic benefits.

Concepts of Unemployment Compensation

Unemployment compensation may be discussed based on the following two concepts. The concept of adverse selection: It occurs when workers, with high likelihood of being unemployed, have high demand for unemployment compensation (Rosenbloom, p. 64). This concept causes profit maximizing private insurance entities to set unusually high premiums. The aim of setting high premiums is to discourage high demand for the policy. Compulsory government compensation is initiated as a remedy to the above situation by providing unemployment insurance policy (Baumohl, p.104). On the contrary, there exists the concept of moral hazard. The concept occurs when it becomes difficult for private insurance to determine whether an employee is unemployed through his or her own fault.

Benefit of Unemployment compensation to the economy

Unemployment compensation is a temporary income that a person receives if a person loses a job without his or her own fault. A person is given money for a limited time to help him/her to meet expenses as they look for other jobs (Dixon and Rachel, p.16). During recession, unemployment compensation tax revenue normally declines. Expenditure on unemployment insurance increase when many workers lack jobs. The rise in spending is attributed to the increase in number of people who are to be compensated. Another advantage is that, unemployment compensation increases economic efficiency. This is because it acts as an economic stimulus. In connection to the above, unemployment compensation also reduces the moral hazard cost as it encourages individuals to save and receive benefits upon retirement (Baumohl, p. 35).

Cost of unemployment compensation to the economy

It normally affects the budget especially during recession, whereby unemployed people withdraw a lot of money to meet the high cost of living. This makes the government to borrow, hence putting the economy at debts (Vroman and Vera, p. 66). The program further discourages people to look for employment leading to increase in the incidents of unemployment. This is according to the study done by Political Economy Research Institute at the University of Massachusetts Amherst. According to Murray (2010, para. 6), the unemployment benefits have made the unemployed people not to actively seek jobs. High rates of unemployment have been reported after the implementation of the policy to increase unemployment benefits.

Ways in Which employees respond to the incentives.

Evidence reveals that workers eligible for unemployment insurance benefit remain unemployed for a longer period time than those who are eligible. Additionally, workers who are offered bonuses for rapid reemployment find work faster than those who are not. Evidence reveals that, the likelihood of an unemployed person finding a job increases drastically after becoming eligible for unemployment compensation (Dixon and Rachel p. 36). For example, Sacramento, Calif., has experienced a situation where people seeking jobs decline jobs which do not pay well. They seek jobs with better wages. Murray (2010, para. 1) explains that the economy has experienced an increase in the number of unemployed people after the increase in the unemployment benefits.

Conclusion

The above discussion has clearly explained the economic benefits of unemployment compensation, which outweigh its cost. Therefore, I would recommend all countries to adopt unemployment compensation because it would help the unemployed people. The government should also create more jobs for its people so that, economic existence does not solely depend on the unemployment compensation.