Do Generous Welfare Benefits Lead To High Unemployment? (Long Version)

(This was originally written as a college essay. For this reason it is 3,000 words long and contains a lot of economics terms references. It is meant as a help for anyone who wants an in-depth study of the topic with supporting facts and figures. For a short version in plain English see here. The essay was marked the best in my class of 80 students. It won the Undergraduate Award 2012 in Economics along with someone from Yale. I’m not trying to boast but I’m over the moon.)


This paper discusses the conventional wisdom that unemployment benefits create a disincentive to work, the so-called “welfare trap”. It examines if higher benefit levels or longer benefit durations lead to higher unemployment rates. Surprisingly, it finds that the disincentive effect is negligible to non-existent. A wide range of different studies have found little or no disincentive effect. The orthodox economic view which states that workers will quit their jobs if they will receive more money from unemployment benefits has been found to be naive and unrealistic. Despite the large number of people who believe it to be true, it simply is not supported by evidence. Continue reading “Do Generous Welfare Benefits Lead To High Unemployment? (Long Version)”