The government of Arendelle is considering providing a social unemployment insur

Question

The government of Arendelle is considering providing a social unemployment insurance program. In particular, they are considering two options: the first would pay any worker who loses her job $100/week for a year, and the second would pay $600/week for a year. Both would be financed by collecting a tax from workers that keep their (full-time) jobs—for the first option, the tax would be $25/week, and for the second option, the tax would be $150/week.

Calculate the expected utility of both types of workers under each program, as well as in the absence of an unemployment insurance program. How do the workers rank the possibilities? Explain your answer in terms of redistribution and risk aversion.

Now assume that if laid-off workers receive unemployment benefits of $600/week, they will choose not to work part-time. How does this affect the expected utility of the workers under this program?

Explanation / Answer

Worker gets $100 a week under scheme 1

Worker gets $600 a week under scheme 2

First option would encourage workers to work more, $25 tax collection is also great as workers might not mind paying their mates some little cash to get by

Second option would discourage even existing workers to work. $150 a week tax is like handing over your moeny to government, It is just not feasible.

More workers would be willing to get laid off, Under this scheme laid off worker would recieve a windfall of profit. $600 a week is a great money for not working and they would never join labor force, Infact the existing worker want to get laid off and join this Second option if possible.

Eventually no one would be willing to pay such high fee every week.

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