High Unemployment Insurance Benefits Employment and the Economy

May 26, 2008

Companies are willing to pay higher wages in order to ensure that workers remain committed and contribute their best efforts to maximize productivity levels, according to a study in the International Journal of Economic Theory published by Wiley-Blackwell. An increase in unemployment insurance, while implying higher wages, is nevertheless beneficial to long term economic activity.

The study titled “Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy” analyses the dynamic evolution of the economy to understand sources of persistent employment and find ways to tackle the problem.

Author Dr. Jean-Michel Grandmont – senior researcher at the International Center of Economics and Finance (ICEF) of the University Ca’ Foscari, Venice, Italy and at the Centre de Recherches en Economie et Statistique (CREST), Paris, France - says, “Firms are reluctant to cut down on wages even in the times of rising unemployment because productivity, or willingness to provide appropriate effort, of employed workers, depends to a large extent on wages.”

Conventional wisdom suggests that an increase in unemployment insurance will be detrimental to employment as firms have to pay higher wages to maintain their workers’ productivity and proper effort levels, and therefore are less willing to hire. However, higher wages and unemployment compensation mean higher consumption of employed and unemployed workers which in turn implies larger production and more employment.

Dr. Grandmont adds. “Despite the benefits, the increased unemployment insurance will also imply greater economic volatility by increasing the likelihood of booms and bursts due to volatile expectations of economic agents about the dynamics of the economy.”

Source: Wiley

Explore further: Oceanographer Ballard elected to American Academy

add to favorites email to friend print save as pdf

Related Stories

Hartz IV reform did not reduce unemployment in Germany

Nov 07, 2013

The Hartz IV reform of the German labor market has been one of the most controversial reforms in the history of the reunited Federal Republic of Germany. It has been widely seen as the end of the welfare state leading into ...

Poverty stuck at 15 percent—record 46.5 million

Sep 17, 2013

The nation's poverty rate remained stuck at 15 percent last year despite America's slowly reviving economy, a discouraging lack of improvement for the record 46.5 million poor and an unwelcome benchmark for President Barack ...

3Qs: Expert weighs in on how to play a bull market

Mar 11, 2013

The Dow Jones industrial average reached a record high on Tuesday and continued rising throughout the week, erasing all of the losses suffered in the Great Recession of 2008–2009. But many investors have ...

Wealthy disagree with most Americans about income policies

Feb 22, 2013

(Phys.org)—As Congress and President Obama wrestle over the "sequester" and other measures that would dramatically cut government spending, the first systematic study of the political attitudes of wealthy Americans indicates ...

Recommended for you

Bloody souvenir not from decapitated French king: DNA

6 hours ago

Two centuries after the French people beheaded King Louis XVI and dipped their handkerchiefs in his blood, DNA analysis has thrown new doubt on the authenticity of one such rag kept as a morbid souvenir.

User comments : 0

More news stories

Study links California drought to global warming

While researchers have sometimes connected weather extremes to man-made global warming, usually it is not done in real time. Now a study is asserting a link between climate change and both the intensifying California drought ...

Autism Genome Project delivers genetic discovery

A new study from investigators with the Autism Genome Project, the world's largest research project on identifying genes associated with risk for autism, has found that the comprehensive use of copy number variant (CNV) genetic ...