Answer to Question #32408 in Macroeconomics for jennifer

Question #32408
A politician has calculated that the total social benefit of the current amount of unemployment compensation is $3 billion per year. The total social cost of unemployment compensation is currently only $2 billion. The politician argues that a net gain to society would occur if we increased the level of unemployment compensation until total costs rise enough to equal total benefits. Is the politicians logic in the argument correct? Why or why not?
Expert's answer
Unemployment benefits (also, depending on the jurisdiction, called unemployment insurance, The Dole or unemployment
compensation) are payments made by the state or other authorized bodies to
unemployed people. Benefits may be based on a compulsory para-governmental
insurance system. Depending on the jurisdiction and the status of the person,
those sums may be small, covering only basic needs, or may compensate the lost
time proportionally to the previous earned salary.
To Keynesian economists unemployment insurance programs act as an automatic
stabilizer. When employment grows, program revenue rises through increased tax
revenues while program spending falls as fewer workers are unemployed. This
creates a surplus of funds for the unemployment program to draw upon during a
recession. In a recession, unemployment benefits tax revenues fall and program
spending rises as more workers lose their jobs and receive benefits. The
increased payments to unemployed workers puts additional funds into the
economy; however, others argue that the taxation necessary to support this
system serve to decrease employment.

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