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Our current system of unemployment compensation has increased nearly a

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Our current system of unemployment compensation has increased nearly a  [#permalink]

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Updated on: 03 Oct 2019, 21:27
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Our current system of unemployment compensation has increased nearly all sources of adult unemployment: seasonal and cyclical variations in the demand for labor, weak labor force attachment and unnecessarily long durations of unemployment. First, for those who are already unemployed, the system greatly reduces the cost of extending the period of unemployment. Second, for all types of unsteady work—seasonal, cyclical, and casual—it raises the net wage to the employee, relative to the cost of the employer. As for the first, consider a worker who earns \$500 per month or \$6,000 per year if she experiences no unemployment. If she is unemployed for one month, she loses \$500 in gross earnings but only \$116 in net income. How does this occur? A reduction of \$500 in annual earnings reduces her federal, payroll and state tax liability by \$134. Unemployment compensation consists of 50% of her wage or \$250. Her net income therefore falls from \$366 if she is employed, to \$250 paid as unemployment compensation.

Moreover, part of the higher income from employment is offset by the cost of transportation to work and other expenses associated with employment; and in some industries, the cost of unemployment is reduced further or even made negative by the supplementary unemployment benefits paid by employers under collective bargaining agreements. The overall effect is to increase the duration of a typical spell of unemployment and to increase the frequency with which individuals lose jobs and become unemployed. The more general effect of unemployment compensation is to increase the seasonal and cyclical fluctuations in the demand for labor and the relative number of short-lived casual jobs. A worker who accepts such work knows she will be laid off when the season ends. If there were no unemployment compensation, workers could be induced to accept such unstable jobs only if the wage rate were sufficiently higher in those jobs than in the more stable alternative. The higher cost of labor, then, would induce employers to reduce the instability of employment by smoothing production through increased variation in inventories and delivery lags, by additional development of off-season work, and by the introduction of new production techniques, e.g., new methods of outdoor work in bad weather.

Employers contribute to the state unemployment compensation fund on the basis of the unemployment experience of their own previous employees. Within limits, the more benefits that those former employees draw, the higher is the employer’s tax rate. The theory of experience rating is clear. If an employer paid the full cost of the unemployment benefits that his former employees received, unemployment compensation would provide no incentive to an excess use of unstable employment. In practice, however, experience rating is limited by a maximum rate of employer contribution. For any firm that pays the maximum rate, there is no cost for additional unemployment and no gain from a small reduction in unemployment. The challenge at this time is to restructure the unemployment system in a way that strengthens its good features while reducing the harmful disincentive effects. Some gains can be achieved by removing the ceiling on the employer’s rate of contribution and by lowering the minimum rate to zero. Employers would then pay the full price of unemployment insurance benefits and this would encourage employers to stabilize employment and production. Further improvement could be achieved if unemployment insurance benefits were taxed in the same way as other earnings. This would eliminate the anomalous situations in which a worker’s net income is actually reduced when he returns to work.

1. The author’s primary concern is to

(A) defend the system of unemployment compensation against criticism
(B) advocate expanding the benefits and scope of coverage of unemployment compensation
(C) point to weaknesses inherent in government programs that subsidize individuals
(D) suggest reforms to eliminate inefficiencies in unemployment compensation
(E) propose methods of increasing the effectiveness of government programs to reduce unemployment

2. The author cites the example of a worker earning \$500 per month in order to

(A) show the disincentive created by unemployment compensation for that worker to return to work
(B) demonstrate that employers do not bear the full cost of worker compensation
(C) prove that unemployed workers would not be able to survive without unemployment compensation
(D) explain why employers prefer to hire seasonal workers instead of permanent workers for short-term jobs
(E) condemn workers who prefer to live on unemployment compensation to taking a job

3. The author recommends which of the following changes be made to the unemployment compensation system?

(A) Eliminating taxes on benefits paid to workers
(B) Shortening the time during which a worker can draw benefits
(C) Removing any cap on the maximum rate of employer contribution
(D) Providing workers with job retraining as a condition of benefits
(E) Requiring unemployed workers to accept public works positions

4. The author mentions all of the following as ways by which employers might reduce seasonal and cyclical unemployment EXCEPT

(A) developing new techniques of production not affected by weather
(B) slowing delivery schedules to provide work during slow seasons
(C) adopting a system of supplementary benefits for workers laid off in slow periods
(D) manipulating inventory supplies to require year-round rather than short-term employment
(E) finding new jobs to be done by workers during the off-season

5. With which of the following statements about experience rating would the author most likely agree?

(A) Experience rating is theoretically sound, but its effectiveness in practice is undermined by maximum contribution ceilings.
(B) Experience rating is an inefficient method of computing employer contribution because an employer has no control over the length of an employee’s unemployment.
(C) Experience rating is theoretically invalid and should be replaced by a system in which the employee contributes the full amount of benefits he will later receive.
(D) Experience rating is basically fair, but its performance could be improved by requiring large firms to pay more than small firms.
(E) Experience rating requires an employer to pay a contribution that is completely unrelated to the amount his employees draw in unemployment compensation benefits.

6. The author makes which of the following criticisms of the unemployment compensation system?

(A) It places an unfair burden on firms whose production is cyclical or seasonal.
(B) It encourages out-of-work employees to extend the length of time they are unemployed.
(C) It constitutes a drain on state treasuries, which must subsidize unemployment compensation funds.
(D) It provides a source of income for employees who have no income or have only reduced income from employment.
(E) The experience rating system means that employers responsible for higher than-average turnover in staff pay higher-than-average premiums.

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Difficulty Level: 650

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Last edited by SajjadAhmad on 03 Oct 2019, 21:27, edited 1 time in total.
Updated - Complete topic (792).
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Re: Our current system of unemployment compensation has increased nearly a  [#permalink]

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28 Oct 2018, 06:30
Please help me with the summary of the passage. If possible, the video analysis for the answering these questions. I have read this passage 3 times, still finding it difficult to answer these questions.
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Re: Our current system of unemployment compensation has increased nearly a  [#permalink]

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15 Dec 2018, 19:42

+1 kudos to the posts containing answer explanations of all questions

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Re: Our current system of unemployment compensation has increased nearly a  [#permalink]

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16 Dec 2018, 08:35
2
1. The author’s primary concern is to

(A) defend the system of unemployment compensation against criticism- opposite.
(B) advocate expanding the benefits and scope of coverage of unemployment compensation - opposite.
(C) point to weaknesses inherent in government programs that subsidize individuals - out of scope
(D) suggest reforms to eliminate inefficiencies in unemployment compensation - whole summary of the passage.
(E) propose methods of increasing the effectiveness of government programs to reduce unemployment- out of scope. no methods are discussed.

2. The author cites the example of a worker earning \$500 per month in order to

(A) show the disincentive created by unemployment compensation for that worker to return to work - given in the last lines of 1st para how the income gets reduced by UC.
(B) demonstrate that employers do not bear the full cost of worker compensation - out of scope
(C) prove that unemployed workers would not be able to survive without unemployment compensation - out of scope
(D) explain why employers prefer to hire seasonal workers instead of permanent workers for short-term jobs - out of scope.
(E) condemn workers who prefer to live on unemployment compensation to taking a job - out of scope

3. The author recommends which of the following changes be made to the unemployment compensation system?

(A) Eliminating taxes on benefits paid to workers - opposite
(B) Shortening the time during which a worker can draw benefits - out of scope
(C) Removing any cap on the maximum rate of employer contribution - given in the last para
(D) Providing workers with job retraining as a condition of benefits - out of scope
(E) Requiring unemployed workers to accept public works positions - out of scope

4. The author mentions all of the following as ways by which employers might reduce seasonal and cyclical unemployment EXCEPT

(A) developing new techniques of production not affected by weather - given in 2nd para
(B) slowing delivery schedules to provide work during slow seasons- given in 2nd para
(C) adopting a system of supplementary benefits for workers laid off in slow periods - inconsistent
(D) manipulating inventory supplies to require year-round rather than short-term employment- given in 2nd para
(E) finding new jobs to be done by workers during the off-season- given in 2nd para

5. With which of the following statements about experience rating would the author most likely agree?

(A) Experience rating is theoretically sound, but its effectiveness in practice is undermined by maximum contribution ceilings. - "The challenge at this time is to restructure the unemployment system in a way that strengthens its good features while reducing the harmful disincentive effects. Some gains can be achieved by removing the ceiling on the employer’s rate of contribution and by lowering the minimum rate to zero." this states that the EP is theoretically correct.

(B) Experience rating is an inefficient method of computing employer contribution because an employer has no control over the length of an employee’s unemployment. - inconsistent

(C) Experience rating is theoretically invalid and should be replaced by a system in which the employee contributes the full amount of benefits he will later receive.
- inconsistent
(D) Experience rating is basically fair, but its performance could be improved by requiring large firms to pay more than small firms. - inconsistent

(E) Experience rating requires an employer to pay a contribution that is completely unrelated to the amount his employees draw in unemployment compensation benefits. - opposite

6. The author makes which of the following criticisms of the unemployment compensation system?

(A) It places an unfair burden on firms whose production is cyclical or seasonal. - inconsistent
(B) It encourages out-of-work employees to extend the length of time they are unemployed. "The overall effect is to increase the duration of a typical spell of unemployment and to increase the frequency with which individuals lose jobs and become unemployed. The more general effect of unemployment compensation is to increase the seasonal and cyclical fluctuations in the demand for labor and the relative number of short-lived casual jobs." this gives the answer
(C) It constitutes a drain on state treasuries, which must subsidize unemployment compensation funds. - out of scope
(D) It provides a source of income for employees who have no income or have only reduced income from employment. - inconsistent. we need to find the criticism not benefits
(E) The experience rating system means that employers responsible for higher than-average turnover in staff pay higher-than-average premiums. - out of scope
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Re: Our current system of unemployment compensation has increased nearly a  [#permalink]

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17 Dec 2018, 05:25
Q1: C vs. D as these two options come the closest.

C is the clear winner as the scope of the passage is unemployment compensation and not unemployment itself. The effect of restructuring unemployment compensation will lead to people not wanting to spend prolonged periods in the unemployed state. But this is indirect. The passage as such is only talking about unemployment compensation structure. it's shortcomings and the way forward.

Good question.

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Re: Our current system of unemployment compensation has increased nearly a   [#permalink] 17 Dec 2018, 05:25
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