Answer to Question #203102 in Macroeconomics for Akhona Klanisi

Question

In response to unemployment challenges in an economy, the government put in place several macroeconomic policies. Discuss at a theoretical level how public policies such unemployment benefits and tax incentives can affect the employers, government, and the level of unemployment, taking into account the age groups, skills endowments and substitution effects of the various workers in an economy

Answer 1

Unemployment benefits, for example, lead to higher levels of unemployment in the short term because employees are hesitant to look for new jobs until they are certain of enough unemployment benefits. Unemployment benefits provide individuals with some financial security as they hunt for job in a difficult environment. Unemployment benefits, on the other hand, alter the incentives that unemployed people face, extending the job hunt. The approach benefits the unemployed by relieving the strain of seeking work at the expense of overall productivity and long-term economic growth. As workers' reliance on the state grows, social welfare programs may alter their mindsets, causing them to become less motivated and unhappy. Unemployment insurance is designed in such a way that the reward and length of benefits are proportional to the worker's previous income, as this affects the individual's motivation to look for job. Workers have a greater motivation to prevent job loss and improve job search efforts if they fund their own unemployment funds. Employer payroll taxes could be reduced, resulting in higher earnings and more hiring. Individual employee contributions encourage personal savings while also providing greater certainty and fairness by ensuring that all workers receive their fair share of the tax now collected to fund public unemployment benefits. Marginal tax rates rise as a result of the substitution impact. People tend to work fewer hours as other options for spending their time become more appealing. The income effect, in which people's after-tax income falls short of what they would have earned otherwise. People tend to work longer hours because they need to work harder to maintain the same level of living with less after-tax income. However, the impact on labor supply is not consistent. Changes in taxes and transfers affect different groups of employees differently. When marginal tax rates have risen in the past, married women, on average, have worked less than working-age males.