Deck 10: The Case of the Disappearing Workers

Question 1

To what extent do you believe that the existence of unemployment benefits increases the duration of unemployment and consequently the unemployment rate? (Hint: Use demand analysis and opportunity cost.)

Answer 1

Unemployment rate in an economy is the number of individuals who are willing to work and are seeking jobs but are unable to find any employment. It can be calculated by dividing the number of people currently unemployed by the total number of all the people presently in the labor force. It can be said that the provision of unemployment benefits increases the duration of unemployment and causing the unemployment rate in the economy to rise.
The extent to which the unemployment benefits affect the duration of unemployment and the unemployment rate can be explained by using the opportunity cost and demand analysis. The demand analysis takes into account the demand and supply of labor in the market. This can be explained with the help of the following graph. The above graph depicts the labor supply, L S and labor demand curve, L D in the economy. The equilibrium wage and quantity of labor are shown by W e and L e respectively. At point E, there is zero unemployment since it is the equilibrium where the quantity of labor supplied and the quantity of labor demanded are equal. Also, there are no discouraged workers at this point. Now, let a wage W d be considered. This would result in a labor supply L d. There would be discouraged workers at this wage level.
L d -L d ' represents the discouraged workers who want to work at wage W d but won't be hired. This is because the quantity of labor demanded is less than the quantity of labor supplied. It should be noted that the market is not in equilibrium at this wage level. So, the reason for the workers being discouraged is that there are certain forces in the economy preventing the labor market from reaching equilibrium.
Opportunity cost is the cost associated with choosing one alternative at the expense of the other available alternatives. Opportunity costs associated with unemployment are: the wages foregone, job experience and the social interactions at workplace. However, there are benefits such as less work-related stress, higher flexibility and more social exchanges with family and friends related to it as well. An individual takes into account these costs and benefits while ascertaining his commitment level to his job search.
A person will seek employment with greater vigor if the opportunity cost of unemployment relative to the benefits is very high. Government-aided unemployment benefits on the other hand reduce the opportunity cost of unemployment and thus lower the encouragement to look for a job. This means that the individuals who don't search for jobs as much would have a higher duration of unemployment.
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Question 2

Is it possible for the unemployment rate to be "too low"? In other words, can you conceive of a situation in which the economy would be worse off in the long run because there is not enough unemployment?

Answer 2

Unemploymen t rate can be defined as the number of people who are willing to work and are currently looking for employment but are unable to find employment. The calculation of the unemployment rate in an economy is calculated by a government agency. Usually, an unemployment rate of around 5 percent is considered normal.
Sometimes, the unemployment rate may be "too low". An unemployment rate below 2 percent may be considered very low. This is not a favorable situation for any economy. Low unemployment rates can be witnessed due to many reasons. For instance, if the government passes a law that forbids unemployment, then the workers would be forced to work at their current workplaces and they would lose their bargaining power. This would leave them susceptible to exploitation at the hands of the employers. Small intervals of unemployment can be beneficial for a person as it gives him a chance to find work that is better suited to his capabilities. Thus, too little unemployment may reflect that the workers are not matching up to their productivity levels.
Additionally, inflation tends to rise as unemployment rate in the economy falls to low levels. This happens because as a greater number of people work, they earn their incomes and have higher purchasing power. They are likely to purchase more goods, subsequently pushing the prices of these commodities up. This leads to inflation in the economy.
On a positive note, low rate of unemployment leads to greater economic activity, more demand for workers and a higher demand for commodities. The central and state governments collect higher tax revenues on account of the higher taxable incomes of the citizens.

Question 3

It is believed that much of the increase in the number of people collecting SSDI has resulted from decisions by workers at the SSA to make it easier to qualify for benefits. How are the disability rules set by SSA workers likely to change depending on (i) whether the SSA budget is held constant or expands when the number of SSDI recipients rises, (ii) the overall state of the economy, especially the unemployment rate, and (iii) the likelihood that individuals with disabilities will be discriminated against in the workplace?

Answer 3

Social Security Disability Insurance (SSDI) is a program administered by the SSA that pays remuneration to a person and some members of his/her family if they are 'insured'. Only those who have a disability and fulfill the necessary medical criteria for this program are eligible for receiving the benefits.
The SSDI participation would most likely increase too if the SSA budget is enlarged. The participation can increase if the amount of benefits given out is higher and if the number of those who advantage from this program rises. This will happen only if the economy is functioning well. When an economy performs well, the people earn more and the government collects higher revenues. These higher revenues can then be spent on social welfare programs if the government decides to do so. However, this might increase the number of applicants for these programs as people who are marginally disabled may apply too.
If the unemployment rate in the economy rises, then more people may try to register themselves for the disability benefits. This would happen as the people with marginal disability might choose to enter the benefits program rather than searching for a job in the unfavorable conditions of the employment market. This would directly raise the amount spent by the government on the welfare programs.
Moreover, if there was discrimination against the disable individuals in their workplaces, they would prefer not to work there if there is an alternative. The increased budget of the SSA may encourage some of these individuals to apply for disability benefits. To conclude, the workers would opt out of working if the cost of working rises and they have a substitute in the form of SSDI. This would lead to a higher participation in these programs.

Question 4

What would happen to the number of disabled people if Social Security disability payments were made subject to income taxes? Explain.

Question 5

During the latest recession Congress increased the length of time people could receive unemployment benefits to ninety-nine weeks (almost two years) from its previous level of twenty-six weeks (about six months). Analyze the impact of this change on (i) the unemployment rate and (ii) the average duration of unemployment.

Question 6

Imagine that at two different times-late 1933 (when the economy was struggling out of the depths of the Depression) and late 1939 (when the economy was expanding rapidly)-there were a million people on make-work government jobs who were officially classified as "unemployed" In which year (1933 or 1939) were these make-work employees more likely to have been displaced from private-sector jobs and in which were they more likely to have been displaced from the ranks of the unemployed? Explain. How would this distinction factor into your thinking about whether such people should be officially classed as "employed" or "unemployed"?