Meister Blog 2 Unemployment Insurance

            Unemployment insurance provides workers who have been terminated through no fault of their own with monetary benefits for a given period of time or until they become employed. One of the first economic justifications for unemployment insurance relates to the types of jobs that a recently fired person may seek. Given that people are risk-averse, we might expect a fired person to take a job for which he/she is less qualified. The overall economy and individuals are best off when people are employed in positions for which they are most qualified. Unemployment insurance has the opportunity to significantly help this issue by providing individuals with income during the unemployment period to give them more time and security to seek the best job, as well as help with consumption smoothing.

There are also some consequences with unemployment insurance. When companies are forced to pay these taxes, it is certainly possible that they will respond by decreasing wages and/or increasing prices. In addition, unemployment insurance can also result in laziness where the former-worker finds no need to rush to find a job (moral hazard). Furthermore, unemployment insurance can also lead to crowding out of private saving. When deciding the validity of unemployment insurance, the benefits and costs above must be evaluated. In my opinion, there seems to be economic justification to providing these benefits to the poor and disabled but not necessarily the wealthy. In terms of the wealthy, then the moral hazard and crowding out consequences are more significant than with the poor.