Question

Suppose the government decreases unemployment insurance. What would be the impact on the steady-state unemployment level? What type of unemployment would be affected?

Answer 1

Answer

If the government decreases the unemployment insurance, the unemployment level would fall because people will not have enough income to survive for a long period and they would start looking for work. When unemployment rate falls, the steady-state level of unemployment would also fall as the steady state rate of unemployment, also called the natural rate of unemployment, is nothing but the average unemployment rate around which the economy fluctuates.

Three out of four types of unemployment would be affected by the same. The types of unemployment that will be affected are: Seasonal unemployment, Structural unemployment and Cyclical unemployment.