The Moral Hazard Argument and its Implications to Unemployment

The first thing that comes to our mind when we hear about an economic recession is the collapse of numerous business and financial institutions. But perhaps the most significant and most destructive consequences are the massive layoffs and the rise of unemployment levels. With an underperforming economy, business institutions are forced to trim their workforce in order to reduce expenses and increase profit. Unknowing of the greater risks, these layoffs will in fact cause numerous unlikable and devastating consequences in the future.

It is such an eerie and uncomfortable feeling whenever you lost your job which was your only source of income. Most people utterly despise having come to a state of poverty or at least being unable to purchase what one needs or what one wants. Americans will definitely agree with me in mentioning that finding jobs today isn’t as easy as during pre-recession period. More people are losing their jobs or their source of income compared to people who gets accepted for work.

The U.S. Department of Labor stated that the U.S. unemployment rate is now at 9.5% and will continue increase if the government doesn’t find immediate solutions to create newer jobs. What worries most economists and individuals are the 479,000 people who recently lost their jobs and now are applying for unemployment benefits. In July, Republican senators tried to prevent the extension of jobless benefits for 2.5 million Americans. Republicans argue that $34 billion price tag for the bill isn’t reasonable enough as it will only increase the budget deficit.

Arizona Senator Jon Kyl voiced out a more philosophical approach indicating that unemployment insurance doesn’t create newer jobs and will only hinder people from seeking a new work. He emphasized that it is a moral hazard when unemployed people behave irresponsibly and become lazy when given jobless compensation. Several economists and advisers are worried that the U.S. might well become like Europe where unemployment benefits are permanently available and with the unemployment rate considerably higher at normal or recession-free times.

The moral hazard argument was basically tagged as inapplicable at recent times because of the many problems that the nation is facing. Today’s situation is certainly not normal and bad things really do happen. Raj Chetty, a Harvard economist, emphasized that in a recession, cutting jobless benefits to encourage them to look for jobs that do not basically do not exist is very unreasonable. Democrats will pursue the extension of jobless benefits in order to stop the bleeding and prevent jobless people from drowning more into poverty.