Question

How would unemployment benefits affect the labor market and why?

Answer 1

Unemployment benefits are provided to unemployed workers who have no job for a certain period of time. If there are no unemployment benefits then these workers will continue to look for a job and hence some of them will find it sooner. Due to the presence of unemployment benefits some of the unemployed workers decide not to go for a job and this reduces the quantity of labour supplied at every wage rate. Therefore the presence of unemployment benefits reduces the labour supply at each wage rate which shifts labor supply curve left. This increases the market wage rate and reduces the size of the employment while increasing the size of unemployment