Microeconomic Policy Evaluation - Example

Microeconomic Policy Evaluation Name: Course: Instructor: Institution: Date of Submission: Introduction Unemployment benefits occurs as the temporary income that is given to the eligible parties. The eligibility of receiving the benefits is dependent on different aspects from different countries. Mainly it is given as income to individuals who are eligible for work, and have lost their jobs without having done any wrong. To collect the unemployment benefits one must be actively looking for work, and willing/ ready/ capable of working. It is also a necessity that to be eligible one must have worked before and earned a given wage in different states. The report engages on a microeconomic policy evaluation of increase in unemployment benefits including evidencing that the increase in the benefits will also lead to high increase on unemployment levels. The report also considers the Australian Unemployment benefits as a case study for the project. Unemployment Benefits Increase Policy Evaluation In Australia, every citizen looking for work is entitled to an employment benefit of $492.60, who also qualify for about $121 to be given for assisting in rent payment during a fortnight. Currently, the unemployment benefit is $474.20, which includes the costs of housing. Australia is one the countries where individuals remain indefinitely on the dole (Whyte, 2013). Efficiency and Equity are the commonly used terms to define market equilibrium. Market equilibrium is the position where demand meets supply perfectly. According to Pareto, efficiency is when resource allocation is attained without hurting another, which in demand and supply is given as the market equilibrium. According to economists, efficiency is attained through utility maximization. Equity is given as the satisfaction that the members gain after the utilities are distributed. Reduced benefits increase employment, while increased benefits reduce employment rates (Farber & Robert, 2015). The unemployment benefit occurs as a welfare program that has significantly helped in the reduction of poverty through supporting the unemployed through the cash transfer. The cash transfer leads to an increase in the utility level of beneficiaries. Increasing Unemployment benefits Utility Unemployment Benefits According to the graph above, as the unemployment benefits increase, the utility the gainers receive increase. Consequently, poverty within the economy is reduced due to the benefits provided. Thus, based on this principle, the increase of the unemployment benefits as provided will reduce poverty levels highly as the unemployed have better chances at attaining their needs despite lack of employment. However, the satisfaction that the people attain through the unemployment benefits may in future harm the economy as individuals become choosy in the jobs they take. However, during recessions or when labor demand is low and high supply available, the benefits help in maintaining the economies wellbeing as poverty levels will not increase or play a part in deteriorating the economy (Gerfin & Michael, 2002). For instance, when one considers the intergovernmental grant programs, one perceives that the government, spends more money than the money collected through the income tax. Thus, on the stipulation that the increase of the unemployment benefits occurred in such an economy, it will experience the vertical fiscal imbalance. The unemployment benefits occur as unconditional grants. As a non-matching grant it provides the community with economic wellbeing since the recipient can consume more goods since it increases the income effect. However, it is possible that the government may over spend due to high supply of income and little or lack of constraints on the expenses. To ensure efficiency according to Pareto is attained, one could use the compensation tests. Compensation tests and the consumer surplus is one key method of evaluating policies. The compensation test is developed to measure the desirability of a change or policy in this case. It presents that the improvement of a policy is attained if the gainers (unemployed individuals) compensate the losers (government). However, given the unemployment benefit in Australia, the gainers are satisfied with the benefits to sustain their daily lives. However, they do pay back the government when they get work through tax. However, since the gainers cannot compensate the government fully since they do not have to pay back the benefits, the government is left loosing. Thus, in terms of the compensation test based on Kaldor criterion, the unemployment benefit in Australia is not a viable policy. That is; the policy will increase unemployment rates as the gainers will be slow in searching for work (Hagedorn, Fatih, Iourii, & Kurt, 2013). Consumer Surplus occurs as the difference that is perceived to occur between what the consumer are prepared and obliged to pay. Effect of price increase on consumers The unemployent benefits are derived from the income tax that the taxpayers pay. Based on the figure above, when the unemployment benefits are increased, the deadweight loss increase as well as the taxes. This does not consider possible income changes that is increase or decrease of incomes. Thus, according to the graph above, as the quantity of the benefit inceases the price of products on the consumers decreases. That is; despite the decrease the taxes paid increase including the deadweight loss. Thus, the unemployment benefit should provide equal satisfaction to the gainers on the stipulation that the price of the products in the market were to increase. Thus, given that with an increase in the unemployment benefits, the price of products decrease despite increase in taxes and deadweight, the unemployment benefit increase leads to a positve welfare on the consumers and gainers of the benefits. The unemployment benefits are not compensated by the unemployed receiving the benefits. According to the Keynesian welfare state principle, the economic output of a country is affected by the agregate demand of the economy. Increasing the unemployment benefits shifts the loss attained by the benefits from the keynesian principle since the aggregate demand is affected. Unemployment is perceived as a key problem for the individuals, and the economy as well. The tax system including the taxation factors such as income levels of individuals are key factors in the unemployment benefit compensations. Long-term loss of work would stipulate one getting the unemployment benefits from the government without any income value/ tax to the agregate demand of an eonomy. Thus, the economy would be volatile and unstable. Unemployment is relative to the efficiency of the wages in the market. That is; many employers will not make profits is they hired the unemployed unless they dropped the wages of those already employed, which would harm the economy (McCombie & Anthony, 2016). On the other hand, it is possible that when they lower the wages of the employed persons, the overall performance and profit of the companies will be hurt since the individuals will exercise low efforts. Thus, the unemployment rate is determined by a number of factors including the welfare gained if the persons remain unemploymed. Thus, it is likely that the unemployment benefits do reduce the disincentive that causes employers to increase wages that increases the incentive effort theemployed persons give in a company. Consequently, the increase in employent benefits leads to a reduction in the demand for labor in an economy. As a result, the decrease in demand for labor creates an increase in the supply of labor, which helps reduce the rate of unemployment in an economy among other factors. For instance, in Australia, the increase in employment benefits has led to an increase in the number of unemployed persons. However, the number of permanently employed persons is increasing, which is beneficial to the economy (ABS, 2017). Thus, the increase in the unemployment benefits is beneficial to the economy. Policies must be considered in terms of fiscal and monetary policy. The fiscal policy considers how the governent revenue is collected and used and how the process influences the economy (Bojas, 2002). Spending and income collection changes can affect the aggregate demand of an economy including the income distribution among other factors. On the other hand, the monetary policy considers the supply of money in a state to ensure stability of prices in the economy. In terms of the fiscal policy the unemployment benefits derive from the taxes that people pay (Launov & Klaus, 2013). However, they spend more than the income gained through the benefits, which stipulates that with time the economy will be unstable. However, in terms of monetary policy, the government does control the supply of money, thus regulating the economy, which influences the amount of money the consumers (gainers of the unemployment benefits) spend and save for long-term profits and increase in interest rates. Thus, according to the graph above based on the Keynes model, when the unemployment benefits increase, the consumers spend more and save more increasing the supply and movement of money in the economy (Keynes, 2007). Consequently, as the IS curve increases the interest rates presented as (i) also increase, which increases the real GDP of an economy. In regards to Australian economy, the increase of the unemployment benefits will increase the distribution and supply of money in the economy increasing the economy’s real GDP presented as Y in the graph above. The Unemployment rate of Australia from January 2017 has increased highly as presented below. The unemployment rate has increased despite the economy providing about 60 thousand jobs (Trading Economics, 2017). Unemployment rate vs. employed persons in Australia Based on the figures above, the employed persons in Australia is similarly high to the unemployment rate in the country. Thus, despite increase in jobs in the country, the unemployed continue to increase, mainly because most of them are searching for full time jobs (ABS, 2017). Unemployment benefits in Australia have been increased over the last few months, which is a key reason to the increase in unemployed persons based on the increase in an unemployment rate as shown above. Many factors affect the employment rate in any economy including the demand and supply of labor in an economy. However, unemployment benefits also play a role in increasing the number of persons unemployed. The unemployment benefits on the other hand increase the distribution of money supply in a country while reducing poverty levels, which leads to an increase in the GDP rate of the economy. In such a situation, the increase of the unemployment benefits is not a negative policy, but positive based on the increase in maintaining the stability of the economy. According to the microeconomic theory of production, production is a short run. That is; it presents a period where the inputs are not increased such as capital given in terms of unemployment benefits. Labour is always variable while capital is fixed, which is expressed as Q = f (L, K) where Q is the output of the production from labor (L) and capital (k). One must consider the total output attained during a certain period including finding the average and marginal products of the total product. When the unemployment benefits increase, it presents that in the equation Q = f (L, K) k is the variable factor while labor is constant. In such an equation, total output will be negative since production inputs do not increase or change. That is; the unemployment benefits are given to unemployed persons who have no input from the income earned. Thus, the labor is zero while capital is one. In such a case, the production cost is high, which stipulates the policy is not effective in reducing the unemployment rate in the economy. Conclusion Unemployment benefits can either be positive or negative to an economy depending on how the economy responds to the benefits. In an economy, the provision of unemployment benefits increases the istribution of money supply in the economy, which is a monetary policy for controlling unemployment rates and ensuring the stability of the economy. In relation to Australia, the increase of unemployment benefits may have led to an increase in the number of unemployed persons receiving the benefits However, the number of permanently employed persons has increased and more jobs are been developed. The economy is stable, though slow and can effectively reduce the poverty level in the country. On the other hand, the increase in the unemployment benefits is not a positive decision based on the microeconomic theory of production. The theory supports policies where inputs increase output through labor changes while capital remains constant. In the case of unemployment benefits, the output is negative since there are no inputs increasing or improving the output. Thus, the policy of increasing unemployment benefits can either be positive or negative depending on the perspective and reaction to the increase by the economy. References ABS. (2017, 4 13). Australian Bureau of Statistics. Retrieved from 6202.0 - Labour Force, Australia: http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0 Bojas, G. J. (2002). Labor Economics. New York: McGraw-Hill. Farber, H. S., & Robert, G. V. (2015). Do extended unemployment benefits lengthen unemployment spells? Evidence from recent cycles in the US labor market. Journal of Human Resources , 873 - 909. Gerfin, M., & Michael, L. (2002). A microeconometric evaluation of the active labour market policy in Switzerland. The Economic Journal, 854 - 893. Hagedorn, M., Fatih, K., Iourii, M., & Kurt, M. (2013). Unemployment benefits and unemployment in the great recession: the role of macro effects. No. w19499. National Bureau of Economic Research. Keynes, J. M. (2007). The General Theory of Employment, Interest and Money. Basingstoke, Hampshire: Palgrave Macmillan. Launov, A., & Klaus, W. (2013). Estimating incentive and welfare effects of nonstationary unemployment benefits. International Economic Review, 1159 -1198. McCombie, J., & Anthony, P. T. (2016). Economic growth and the balance-of-payments constraint. New York: Springer publishers. Trading Economics. (2017, 4 13). Australia Unemployment Rate. Retrieved from Trading Economics: http://www.tradingeconomics.com/australia/unemployment-rate Whyte, S. (2013). Dole around the world: how does Australia stack up? Crikey, 1-1 Retrieved from: https://www.crikey.com.au/2013/01/16/dole-around-the-world-how-does-australia-stack-up/. Read More