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How might unemployment or welfare benefits cause unintended consequences?

How might unemployment or welfare benefits cause unintended consequences?

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Answer #1

Unemployment benefits are transfer payments by government to unemployed people so that they can have a basic minimum income to sustain life. But once an unemployed person starts getting unemployment benefit, they may slow down and lose speed on job search activity, leading to higher period of unemployment and increased frictional unemployment which leads to a rise in overall unemployment rate. The longer the unemployment period, the higher the government's total transfer payment in the form of unemployment benefit and the higher the government budget deficit which will lead to adverse economic consequences.

Therefore, unemployment or welfare benefits that are paid with positive intentions may lead to unintentional negative externalities.

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