Question

Compare two countries, one that has unlimited employment insurance and one in which workers are eligible for 26 weeks of employment insurance. One reason why the country with more employment insurance may have a higher equilibrium unemployment rate is that:
a) unemployment payments are not enough to live on.

b) workers in the country with unlimited unemployment benefits are likely to be older.

c) workers in the country with unlimited unemployment benefits have less incentive to search diligently for work.

d) workers in the country with unlimited unemployment benefits have more incentive to search diligently for work.

Answer 1

Answer:

c) workers in the country with unlimited unemployment benefits have less incentive to search diligently for work.

Explanation:

In the country with unlimited unemployment benefits, many unemployed people will stop looking for a job because they can live off the benefits.

They will only look for a job if the wage they would earn is likely to be higher than the amount of money they get from benefits. In other words, they will only do so if the marginal cost of looking for a job (losing the benefits) is less than the marginal benefit (the wage earned in the found job).

This event causes a higher equilibrium unemployment rate because it increases a specific type of unemployment that prevents the economy from reaching full-employment (it increases frictional unemployment).