Question

11. "When employees are dismissed from employment for reasons other than poor performance, unemployment benefits should replace 100 percent of their prior earnings while they are searching for a new job." Do you think this proposal is a good one? Why or why not? If instituted, would the policy influence how quickly laid-off workers would find new jobs? What im- pact would the policy have on the unemployment rate?

Answer 1

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Answer-

Employees are normally dismissed when their performances are poor or they have violated discipline of the organization. Here employer is punishing employees by taking appropriate action including their dismissal. Sometimes employees are found to have been dismissed for reasons that are beyond their control. If such dismissal happens, it is expected that employer should compensate employees properly otherwise they will suffer a lot.

Extent of compensation allowable to them will depend upon the government policy. In controlled labor market government frames very strict guidelines for ensuring adequate compensation to labor force so that employers cannot exploit them. In such countries government by passing appropriate regulations will fix up minimum wage rate and extent of compensation to be provided on the event of such dismissal. But in less regulated labor market public policy is very open and less restrictive in nature.

Extreme form of regulated labor market may require 100 per cent compensation to dismissed worker, until they get another job. If it happens then following consequences will happen- 1. Impact on laid off worker: Dismissed worker will not feel the pressure of getting a new job as early as possible. He knows that previous employer will compensate him until he gets a suitable job. He will slow down his job searching process. Period of temporary unemployment will rise. Thus natural rate of unemployment of the economy will move up.

2. Improper use of scarce resources: Dismissed worker is getting compensation without doing any production work. It is harmful for the economy. Scarce factors are not effectively utilized. Under this situation welfare of the economy will not be maximized.

3. Instability in the labor market: Employers suffering will also rise. Due to such compensation, cost of employment will be very high. Employers will try to employ minimum laborers on permanent basis. Most of them will be temporarily employed and will be laid of frequently to avoid the legal compulsions. Thus labor market will be unstable. Uncertainty will increase.

4. Actual unemployment will rise: Due to high employment cost, demand of labor will decrease. Many existing laborers will lost their job. New entrants in the labor force will find it very difficult to get a new employment opportunity. Thus actual unemployment will rise and will prevail much above the normal sustainable rate of unemployment.

5. Flexibility is lost: Flexibility in the labor market will be lost. An employed worker will hardly look for changing his job. Also they will feel dearth of good employment opportunities. Flexibility in the labor market is essential for better utilization of scarce resources. A high skilled worker can leave the current and job and get employed in a job where their skill can be used in a better. It enables efficient allocation of resources in the economy. Productivity will improve and economy will grow. This opportunity will get restricted by such policies of the government.

Thus it appears that adequate protection is needed for preventing exploitation and ensuring job security, but extreme protection is not desirable. It will make laid off worker slow in searching for a new job. Employment cost will rise, unemployment will be high. Labor market will be less flexible and uncertain. Ultimately economic growth will get affected.