What are the merits and demerits of unemployment compensation as a built-in stabilizer? Can you think of any changes in unemployment compensation that might improve its effectiveness as a stabilizing technique?

Question

What will be an ideal response?

Answer 1

The merits of unemployment compensation as a built-in stabilizer are that it provides a source of income and spending power during a period when eligible workers would have otherwise lost their regular source of income. It provides security during a period of temporary layoffs, or during the period of job-search. The demerits are primarily related to the probable loss in work incentives that result. To the extent that workers can live on their unemployment benefits, they have less incentive to engage in productive work and may prolong their job search.
Any changes that provide more assistance, encouragement, and incentives for unemployed workers to engage in productive work during recessionary periods would enhance the stabilizing power of unemployment compensation. Such policies as requiring the unemployed to register for work and to provide assistance with job-seeking and training programs to upgrade skills would be examples of policies that add to the automatic stabilizing effect of unemployment insurance.