Consider a one-sided search model of unemployment we developed in class. In class discussion we never mentioned how unemployment insurance benefit, b, is financed. For this question, you are going to incorporate it to the model. Let's assume that in order to finance the unemployment insurance benefit, b, the government imposes lump-sum tax, T, on each employed worker. Assuming that the economy is in a long-run steady-state equilibrium, the total amount that needs to be paid out to unemployed workers is bU, where as usual, U repre-

Consider a one-sided search model of unemployment we developed in class. In class discussion we never mentioned how unemployment insurance benefit, b, is financed. For this question, you are going to incorporate it to the model. Let's assume that in order to finance the unemployment insurance benefit, b, the government imposes lump-sum tax, T, on each employed worker. Assuming that the economy is in a long-run steady-state equilibrium, the total amount that needs to be paid out to unemployed workers is bU, where as usual, U repre-

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

please include graphs

Consider a one-sided search model of unemployment we developed in class. In
class discussion we never mentioned how unemployment insurance benefit, b, is
financed. For this question, you are going to incorporate it to the model.
Let's assume that in order to finance the unemployment insurance benefit, b,
the government imposes lump-sum tax, T, on each employed worker. Assuming
that the economy is in a long-run steady-state equilibrium, the total amount
that needs to be paid out to unemployed workers is bU, where as usual, U repre-
sents the fraction of unemployed. The total amount of tax collected (which we
can interpret as an unemployment insurance premium) from employed workers
is (1U)T. The government runs balanced budget, hence, bU = (1 – U)T.
In this new setting, please show the effect of an increase in unemployment in-
surance benefits, b, on reservation wage, w*, and on the long-run unemployment
rate, U.

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