Unemployment refers to an economic condition where individuals who are willing and actively looking for a job can’t find one.Unemployements is therefore, expressed as a percentage of the total available workforce. The level of unemployment varies with economic conditions and other circumstances (Vroman and Vera, p. 34). This discussion therefore focuses on whether unemployment compensation has any economic benefits.
Concepts of Unemployment Compensation
Unemployment compensation may be discussed based on the following two concepts. CONCEPT OF ADVERSE SELECTION. It occurs when, workers who have high likelihood of being unemployed have high demand for unemployment compensation (Rosenbloom, p. 64).Thisoncept causes profit maximizing private insurance entities, to set very high premiums. The aim for setting high premiums is to discourage high demand for the policy. Compulsory government compensation was initiated to remedy the above situation by providing unemployment insurance policy (Baumohl, p.104). One contrary, is the CONCEPT OF MORAL HAZARD. It occurs when it become difficult for the private insurance to determine whether an employee is unemployed through his or her own fault. This may lead to payment of substantial amount of money to fraudulent claims or even failure to pay legitimate claims.
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 meet his expenses as one look for another job (Dixon and Rachel, p.16). As elaborated in the Keynesian theory, unemployment insurance is good for the economy because it act as an automatic economy stabilizer. This means that, when the level of unemployment is high, unemployment compensation rises through increased tax revenue (Rosenbloom, p. 67). During recession, unemployment compensation tax revenue normally declines and hence unemployment insurance spending rises as more workers lose their 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 increase 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 retirementBaumohl, p. 35).
Cost of unemployment compensation to the economy
It normally affects the budget especially during recession, whereby unemployed people withdraw a lot to meet high cost of living making 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 incidents of unemployment this is according to the study by Political economy research institute at the University of Massachusetts Amherst.
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)
The above discussion has Cleary brought out the economic benefits of unemployment compensation which outweigh its cost. Therefore, I would recommend all countries to adopt unemployment compensation because it would help there people during the period that they wont be having a job. The government should also create more jobs for its people’s so that, people economic existence does not solely depend on the unemployment compensation.
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