Question

Required: (100 pts): During the most recent recession—the so-called Great Recession—the United States government increased the amount of time an individual was eligible for unemployment benefits from a maximum of 26 weeks to a maximum of 99 weeks. How is this likely to change the incentives facing the unemployed? (To be eligible for unemployment benefits, one must be "looking for work" and not have refused "suitable work") What might this do to the unemployment rate measured in the economy in general?

Answer 1

Government offers unemployment allowances so that an individual does not suffer due to loss of job. But such incentive might have negative repercussions. When workers are provided unemployment allowances, they tend to reduce their efforts to find out new job. Here government has increased number of weeks for which an individual can enjoy unemployment allowance.

it would lead to fall in number of active job seekers. Thus, discouraged workers might rise. Further, frictional unemployment also rises. So eventually, there shall be rise in natural rate of unemployment. Now, government would need to generate few jobs or since applicants for jobs have declined. Such outcomes are not favorable for any economy.