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When workers are laid off, equity considerations argue for the unemployment benefits system to provide them with some income until they can find new jobs. After all, no one plans to be laid off, so unemployment benefits are a form of insurance. But there's an efficiency problem: why work if you can get income for doing nothing? The economy isn't operating efficiently if people remain unemployed for a long time, and unemployment benefits encourage unemployment. Thus, there's a trade-off between equity and efficiency. The more generous are unemployment benefits, the less income is lost by an unemployed person, but the more that person is encouraged to remain unemployed. So greater equity reduces efficiency.

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12y ago

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