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6 - The simple economics of benefit transfers

Published online by Cambridge University Press:  07 September 2010

Dennis J. Snower
Affiliation:
University of London
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Summary

Introduction

Having plowed the field, the farmer and his son maneuver the tractor across the adjoining road. Suddenly they see a Jaguar speeding towards them at 100 mph. A second before expected impact, the Jaguar veers into the field, skids through a cloud of dust, regains the road and flies off into the distance. The farmer turns to the boy and says, ‘Son, we left that field just in time.’

The spirit of this tale goes a long way towards explaining the evolution of unemployment policy in many EC countries and elsewhere. The policy is to pay people when they are unemployed and tax them when they find jobs. So, far from inducing workers to seek employment and firms to take them on, the policy in fact discourages them from doing so and thereby contributes to the unemployment problem. Having done so, the unemployment benefit system is then seen as particularly essential in providing a safety net for those out of work. This is not the only occasion on which economic policy creates the problem it is meant to solve, but it is particularly unconscionable in times of recession, when unemployment becomes a flagrant waste of human resources.

If the money governments spend on unemployment benefit could be redirected so as to provide an incentive, rather than a disincentive, for employment, many countries struggling with the twin burdens of high unemployment and costly unemployment benefits might reap a substantial benefit.

Type
Chapter
Information
Unemployment Policy
Government Options for the Labour Market
, pp. 163 - 198
Publisher: Cambridge University Press
Print publication year: 1997

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