GE273/SCHLUDE

Question 1 of 1:

WEEK 1

GRANT WRIGHT

Explanation and Analysis 1: The Opportunity Cost of Macroeconomic Events

Event 1: The government passes a law allowing states to pay unlimited unemployment benefits to all unemployed workers for an unlimited amount of time.

Anytime we receive a benefit from use of a resource, it comes at a cost because we could have used that resource for a different opportunity. All of our decisions come at a cost and this cost is compared to the benefit we receive in deciding if we should undertake the action. The Opportunity Cost for a government that passes a law that allows states to pay unlimited unemployment benefits to all unemployed workers for an unlimited amount of time will fail at efficiency and equity of its society. This would not be a rational analysis due to it not having limits to the unemployment benefits. Having unemployment without limits will increase the opportunity cost of the recipients rejoining the labor force. Unemployment benefits are set lower than earnings to reduce the moral hazard that Becker discusses, but the gap between benefits and earnings is narrowed by the costs of work (such as commuting, and any disutility associated with work, such as fatigue and boredom) and by the benefits of household production and of leisureand those benefits, unlike earnings, are not taxed. The gap is so small for many unemployed people that studies show that they do not begin a serious job hunt until their unemployment benefits are about to expire.(Becker-Posner, Jul 2010) To many economists, persistent unemployment is a sign of market failure because unemployment is a waste of scarce resources and leads to a loss of potential output and a reduction in allocative efficiency. The economy is operating below the maximum output it could achieve.(Riley, Sept 2006)

GE273/SCHLUDE

WEEK 1

GRANT WRIGHT

The governments current labor market strategy is firstly to rely on monetary and fiscal policy to maintain a stable rate of economic growth as a pre-condition for high and stable rates of employment. Macroeconomic stability is regarded as essential for creating the right climate in which new jobs become available. Secondly, supply-side policies and in particular active labour market strategies such as New Deal and other welfare and education reforms are given a higher weighting in seeking to reduce structural aspects of the unemployment problem.(Riley, Sept 2006)

Works Cited
http://uchicagolaw.typepad.com/beckerposner/july252010 Geoff Riley, Eton College, September 2006