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Free Thesis Statement About The Effects Of Unemployment

Type of paper: Thesis Statement

Topic: Unemployment , Social Issues , Workplace , Economics , Government , Politics , Increase , Taxes

Words: 1375

Published: 2020/11/23

A general definition for unemployment is the situation where individuals who are able and willing to work cannot find any form of income – earning jobs. A more structured definition of unemployment is “An economic condition marked by the fact that individuals actively seeking jobs remain un-hired,” (Investor Words, 2015). Additionally, unemployment figures are presented as percentages of the total population. These figures represent that proportion of the available workforce that does not have jobs. The level of unemployment in a country depends largely on the economic, educational and social factors in the society. There are several types of unemployment: cyclical, structural, seasonal, voluntary, or technical. While a number of individuals in the society prefer not to work, their unemployment status impacts the social and economic development of the country. There a number of factors that determines or the employment status of an individual. One of the main causes of unemployment in a country is the economic structure or strength of the country. When an individual loses his job, quits or fired, he becomes unemployed. This unemployment means that the individual will not be able to make a financial contribution to the economic development of the country. Individuals are sometime forced into unemployment as some jobs are seasonal and as such low season and off-seasons lends itself to an increase in the unemployment rate in the country. The tourism sector in the country is a clear example of seasonal employment in tourist based economic countries. On the other hand, countries that have a struggling or stagnant economy have grave problems with structural adjustments arising from economic instability in the country. Therefore, workers in these sectors are laid off when there is upheaval in the country’s economic standing. Additionally, unemployment arises from the rapid changes in the technological arena. These changes may decrease or increase the level of unemployment in the country. In companies that are unable to purchase new machinery for production, find that the operations within the company slows down considerably. The workers are left to choose between being laid off and working on rotation or shifts. Either way, the loss of income from unemployment leads to inevitable changes in the way individuals spend money and build the economy. New computer software and programs impact the amount of work that the employee carries out on a daily basis. Therefore, the employees whose jobs no longer require manual labor find that they too are unemployed. Stefania et.al points out “changes in the structure of industries and economic activities under the impact of diversification demand for goods, the economic crisis for a long time inevitably lead to the reduction of work requests,” (Stefania, 2013, p. 32) and unemployment. In addition, immigration affects the unemployment rate as immigrants work for very low wage packages and the skilled workers in the country lose their jobs. These immigrants migrate into the countries illegally and build a low-wage income based that impacts the economic development of the country. The illegal immigrants do not pay taxes and the government cannot collect revenues from these individuals. The fact that they work for low wages also has a tremendous impact on the country, as the skilled workers lose their jobs and the problems of re-training these workers after a while becomes a problem to the government and the companies . The health of the labor force and the willingness of the employees to work impacts the level of employment in the country. In fact, individuals who are not willing to adjust to the new ways of doing things in the workplace may find that they are fired. Poor health conditions contribute to a slowing down in the production in the country and an increase in the number of days that the individuals take from work. Many employers assess the workers level of dedication to their job and the level of enthusiasm that the workers display. Dedication and enthusiasm produce excellent work and limits the prospects of unemployment. The fact is that the level of income and the investment in the country determines the rate of unemployment in the country. If a country is prosperous, then the people remain employed as there is a demand for goods and services which are paid for by the consumer. As such, there is enough money to keep individuals employed. If there is no investment in the country, then the economic structure of the government fails and the country becomes indebted to lending agencies. The government use the monies the collect in taxes to run the country. If individuals do not work then they cannot pay taxes. As a result, the government faces an economic decline. The effect of unemployment varies according to the largest areas of employment. The government suffers from unemployment because less people work and therefore there is a reduction in the amount of taxes that these unemployed individuals pay. As a consequence, the government gets less tax revenue and this has a tremendous impact on the financial capacities of the country. The lower economic growth or GDP suffers when there is a high rate of unemployment in the country. Businesses will not be able to produce the required quota of services and goods that would generally improve the economy of the country. As such, there is a limit to the output of the goods and services that organizations produce. Hence, the GDP reduces and the government’s spending and taxation reduces. With this reduction, the government’s finances reduce and there is an increase health and welfare costs in the country. Unemployment in the economy leads to the reduction in the number of individuals who work. With the loss of income, individuals cannot pay for health care costs and the increase in claims. The increase in claims put a strain on the government revenues. The increase in unemployment has increases the supply-side costs. This means that the unemployment in the in the economy increases as more people will be out of a job. These individuals should be taught practical skills so that they can become employable by companies. The increase in skills training programs brings about an increase in the amount of money that the government must spend to train these unemployed individuals. This added expenditure places a strain on the government financial resources as the money could be spent on other areas that need development. Companies suffer from the unemployment rate in the country. The biggest problem that these companies will have is the issue of lower wage costs. The reality is that unemployment in a country leads to an increase in the supply of labor in the companies. As a result, there is downward pressure on the wages that these individuals receive as labor decreases and desperate individuals take jobs for lower wages than is the norm. Unemployment leads to the creation of an increased labor pool. This labor pool gives companies a variety of choices with the pool of workers. Consequently, firms hired skilled and experienced workers for low wages. Similarly, the demand for goods and services decrease as there is less demand for such services. The fact is that unemployment gives way to a reduction in the dispensable income of individuals. In the end, there is a reduction in company profits as the sales decrease. Additionally, the rate of unemployment increases the demand for inferior goods as individuals will gravitate towards cheaper goods rather than quality goods. With the increase in unemployment in the country, individuals lean towards purchasing lower quality goods as these are more affordable. Unemployment has a tremendous impact on the people in a country. Unemployed individuals resort to substandard living conditions. Conversely, these individuals suffer a loss of income and as such, they deplete their savings easily and in turn buy inferior goods at a lower rate. The loss of skills increases as individuals who are unemployed stop working and lose interest in maintaining their employable skills. The fact is that the length of time that an individual stays unemployed, the more money the companies have to pay to retrain these individuals. In the end, the unemployed mass often become de-motivated as they lose confidence in self. Katz reiterates the idea that “many job losers from sectors such as construction and manufacturing may face difficulties in making the psychological and financial adjustments as well as gaining the training and education required for the new jobs available in the growing sectors ,” (Katz, 2010, p. 6). In addition, Katz suggests that “greater educational attainment has been the traditional way young Americans acquire the skills demanded by growing occupations and regions,” (Katz, 2010, p. 6), but with the increase in unemployment children cannot get a solid education that will guarantee them a place in the job market. In fact, “greater federal aid to higher education may be necessary, given the budgetary problems of most states,” Katz, 2010, p. 6) and the lack of employment opportunities for families. In concluding, unemployment is the lack of jobs for skilled and unskilled workers. There are different types of unemployment. Many of these unemployment issues arise from justifiable situations in the economy as the government suffers financial setbacks from the changes in the global market. Regardless of the causes of unemployment, it has a tremendous impact on the society as a whole. The government faces loss of revenue and an increase in the money that they spend as they try to keep the economy alive. In addition, companies lose skilled workers who have to be re-trained when they stay unemployed for too long. Individuals who are unemployed become de-motivated and many become depressed because they lose their self-confidence.

Works Cited

Investor Words, Unemployment (2015) Viewed at http://www.investorwords.com Accessed February 22, 2015 Katz, Lawrence, (2010, April 29) Long-Term Unemployment in the Great Recession Testimony for the Joint Economic Committee U.S. Congress Hearing on “Long-Term Unemployment: Causes, Consequences and Solutions” Cannon House Office Building, Room 210 Stefania, L. et.al (2013) The Impact of Unemployment on Economic Growth in Romania, During The Crisis Academy of Economic Studies, Bucharest Romanian Statistical Review nr. 6 / 2013

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Home — Essay Samples — Economics — Unemployment — Unemployment: Causes, Effects, and Solutions

Unemployment: Causes, Effects, and Solutions

• Categories: Unemployment

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Words: 685 |

Published: Jan 30, 2024

Words: 685 | Pages: 2 | 4 min read

Table of contents

Introduction, causes of unemployment, effects of unemployment, solutions to combat unemployment, a. economic factors.

• Global recession: During economic downturns, companies may reduce employment to cut costs and remain competitive.
• Automation and technological advancements: The use of machines and technology may replace human workers in some industries, leading to job losses.
• Outsourcing of jobs: Companies may choose to outsource jobs to other countries where labor costs are lower, leaving domestic workers unemployed.

B. Societal Factors

• Lack of education and skills: Individuals without proper education and job training may be ill-equipped to meet the demands of a constantly evolving job market.
• Discrimination in hiring processes: Certain groups, such as women, minorities, and older workers, may face barriers in securing employment due to discrimination.
• Dependency on welfare programs: Some individuals may choose to remain on welfare programs due to a lack of incentive to enter the workforce or because they cannot find suitable employment.

A. Economic Effects

• Reduction in consumer spending: Without a steady income, unemployed individuals may have less money to spend, resulting in a decline in consumer spending.
• Decline in government revenue: With fewer people working, the government may see a decline in tax revenue, which can impact its ability to provide necessary services and promote economic growth.
• Increase in social welfare expenses: The government may need to allocate more funds toward social welfare programs, such as unemployment benefits and food assistance, to support those who are unemployed.

B. Social Effects

• Increase in crime rates: Individuals who are unemployed may resort to criminal activities to make ends meet, leading to a rise in crime rates.
• Mental health issues: Unemployment can cause stress, anxiety, and depression, which can negatively impact an individual's mental health.
• Strained relationships and family instability: Unemployment may cause financial strain and tension within families, leading to relationship problems and instability.

A. Economic Solutions

• Encouraging entrepreneurship and small business development: Providing resources and support for individuals to start their own businesses can lead to job creation and economic growth.
• Promoting vocational training and skill development programs: Ensuring that individuals have access to education and training programs can increase their job readiness and competitiveness in the job market.
• Implementing balanced trade policies: Creating policies that promote fair trade and reduce job outsourcing can protect domestic jobs and promote job growth.

B. Social Solutions

• Addressing educational disparities and providing access to quality education: Providing quality education to disadvantaged communities can improve their job readiness and reduce unemployment rates.
• Combating discrimination in the workplace: Enforcing anti-discrimination laws and promoting diversity and inclusion in the workplace can reduce barriers to employment for certain groups.
• Strengthening social safety net programs: Ensuring that social welfare programs are designed to incentivize work and provide support to those in need can promote economic stability and reduce poverty.
• Bureau of Labor Statistics. (2021, October 8). Employment Situation Summary. https://www.bls.gov/news.release/empsit.nr0.htm

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Scarring Effects of Unemployment: A Meta-analysis

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Introduction

Causes of unemployment, effects of unemployment, works cited.

Unemployment causes and effects are vital to recognize in order to solve the problem. Analyzing them can also allow people to realize what consequences are to expect. Yet, first of all, all the essential terminology should be defined.

Unemployment refers to a state of not having a job. It entails individuals with the ability to work, a resolve to find employment, available and in the hunt for employment (Stone 25). Categories of unemployment include classical, structural, frictional, cyclical, and hidden types.

Classical unemployment entails a situation in which earnings received for a job go beyond ordinary levels. This results in limited job vacancies for people. The structural type refers to a situation in which unemployed individuals fail to meet job requirements in terms of skills needed (Stone 29). Frictional unemployment concerns the changeover phase between jobs, while the cyclical one refers to a state in which claims in the economy fail to offer jobs to people. When the claim for goods and services lowers, there is a limited production that requires few workers (Stone 29). Finally, the hidden type refers to the unemployment of prospective workers due to errors made in generating statistics on the subject (Stone 30).

The causes and effects of unemployment impact individuals, society and the economy in general. The overall problem issue results from various factors relating to social, economic, environmental, political and individual elements in an economy. So, to gather both consequences and causes of unemployment, this essay attempts to consider and analyze them separately.

Unemployment results from several causes and factors related to an economy. Some causes are due to personal choices while others are beyond individual control (Stone 31). People invest many resources in gaining reputable education and eligibility for jobs, but often find themselves with no employment (Stone 34). Unemployment results from factors and causes discussed below.

The first cause is inflation. Inflation refers to the progressive increase in prices of commodities and services in the economy. Economic inflation is one of the major causes of unemployment (Stone 37). Inflation results in a limited market activity by economies that cannot match efforts by others due to escalating prices. The economy experiences trouble, and progressively employers fire some workers to reduce the cost of production. This result in unemployment among the individuals fired.

The second cause is recession. Recession refers to decline Gross Domestic Product (GDP) of an economy, employment rate and market activity (Dawson 75). Economic recession links directly with economic inflation. Recession results from inflation where people are not able to afford goods and services offered by the economy (Stone 41).

A decline in production and more imports than exports characterize a recession. These elements influence negatively on GDP of an economy. This results in increased rates of unemployment because many employers refuse to hire while others fire some of their employees (Stone 43).

Another cause is change in technology. Rapid change in technology is driving many employers into diversifying and improving the effectiveness of their workforce (Dawson 78). Some of technology applied replaces individuals in the production process as some process executed manually apply through technology.

This leads to several people losing their jobs. Job dissatisfaction is also another leading cause of unemployment (Dawson 78). New technology results in some employees being involved partially in production activities, which leads to frustration. Frustrations may lead to employee resignation (Dawson 80). This causes unemployment.

Another cause is employee worth (Dawson 85). Employees put a lot of effort and dedication in their activities but often end up unappreciated by their employers. This may result to lack of motivation among employees, which may compel them to stop working for their employers (Dawson 85).

This leads to individuals being unemployed until they find employers who appreciate their efforts. Discrimination in places of work is another cause of unemployment. Discrimination could be because of age, gender, social class, race, religion or ethnic background. Securing a job in such a working environment is extremely difficult and may discourage people from looking for jobs as well as forcing those already in jobs to quit (Dawson 87).

Other causes of unemployment relate to an individual and include disability, attitude towards potential employers, negative perceptions about jobs and employees as well as an individual’s ability to look for a job (Dawson 93). Welfare payments should be discouraged as they reduce the will of unemployed people to look for jobs. People develop dependency on grants and lack any meaning in employment since they are able to meet their basic needs (Dawson 98).

Unemployment has both positive and negative effects. However, negative effects of unemployment surpass positive effects (Stone 65). Unemployed individuals experience difficulties meeting their basic needs as well as contributing to economic prosperity of their countries (Stone 66). In recessions, many people lose their jobs, but companies usually develop mechanisms to produce more goods with limited workforce. Unemployment leads to effects discussed below.

The first effect is loss of income. Unemployment results in individuals losing their source of income and livelihood. Most people in employment use their incomes to get mortgages and other forms of financing (Stone 69). Loss of income leads to poor living standards and increased risk on health.

Another effect of unemployment is social exclusion. A work place provides a platform for socialization. When people lose their jobs, their social circle reduces considerably and end up excluded from the social environment. Other social problems associated with unemployment include crime, bribery and gambling (Stone 70).

Unemployment causes political instability (Stone 75). When majority of a country’s population is unemployed, life becomes hard, and people develop hostile characters. They consider their government as ineffective and incapable of providing the needs of its people (Stone 76). Such individuals participate in movements that oppose government policies through riots that result in political instability.

effects of unemployment include over exploitation of available labor, reduced rate of economic growth, reduced human capacity, loss of human resources and increase in poverty levels (Dawson 101). One positive effect of unemployment is the availability of adequate labor at reduced market prices. When many people are unemployed, labor is available at competitive prices because people are always eager to have some income (Stone 80).

Unemployment has various categories that include classical, structural, frictional, cyclical and hidden unemployment (Stone 26). Unemployment results from several factors that vary in terms of the supporting conditions. Some causes are due to personal choices while others are beyond individual control. Unemployment has both positive and negative effects, although negative effects surpass positive effects. Welfare payments should be discouraged as they reduce the will of unemployed people to look for jobs (Stone 50).

People should be encouraged to look for a job instead of waiting on grants because they may not achieve financial freedom to satisfactory levels. In order to reduce the effects of unemployment, governments should develop and implement policies that regulate circumstances in which an employer can fire an employee (Dawson 90). This will prevent victimization of employees by employers who take advantage of weak policies on labor regulation and employee protection.

Dawson, Graham. Inflation and Unemployment: Causes, Consequences and Cures . California: University of California, 2008. Print.

Stone, Jack. Unemployment: The Shocking Truth of Its Causes, Its Outrageous Consequences and What Can Be Done About It . New York: Trafford on Demand Pub, 2007. Print.

• The Meta-Synthesis and Meta-Analysis Effect on Research Translation
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IvyPanda. (2018, November 30). Scarring Effects of Unemployment: A Meta-analysis. https://ivypanda.com/essays/causes-and-effects-of-unemployment/

"Scarring Effects of Unemployment: A Meta-analysis." IvyPanda , 30 Nov. 2018, ivypanda.com/essays/causes-and-effects-of-unemployment/.

IvyPanda . (2018) 'Scarring Effects of Unemployment: A Meta-analysis'. 30 November.

IvyPanda . 2018. "Scarring Effects of Unemployment: A Meta-analysis." November 30, 2018. https://ivypanda.com/essays/causes-and-effects-of-unemployment/.

1. IvyPanda . "Scarring Effects of Unemployment: A Meta-analysis." November 30, 2018. https://ivypanda.com/essays/causes-and-effects-of-unemployment/.

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The Effect of Unemployment on Life Satisfaction: A Cross-National Comparison Between Canada, Germany, the United Kingdom and the United States

• Published: 01 May 2018
• Volume 14 , pages 1035–1058, ( 2019 )

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• Wen-Hao Chen   ORCID: orcid.org/0000-0003-2509-5504 1 &
• Feng Hou 1  

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This paper investigates the effect of unemployment on life satisfaction from a comparative perspective. It also tests whether the link between unemployment and life satisfaction is moderated or reinforced by contextual unemployment across regions within a country—either through a negative spillover or a positive social-norm effect, or both. The results suggest that noticeable non-pecuniary costs are associated with unemployment in the four countries studied. Cross-national differences also emerged in the impact of the moderating factors. Regional unemployment is a strong moderating factor of own unemployment in Canada and to a lesser extent in the United States; the effect is ambiguous in the United Kingdom and exacerbating in Germany. The results also support a negative spillover effect of regional unemployment on the employed in the United States and Germany, no spillover effect in the United Kingdom and, surprisingly, a positive overall spillover effect in Canada. Sensitivity testing further revealed that this Canadian anomaly was a phenomenon mainly in Atlantic Canada, not across the whole country.

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Is happiness U-shaped everywhere? Age and subjective well-being in 145 countries

Social Determinants of Mental Health: Where We Are and Where We Need to Go

Measuring objective and subjective well-being: dimensions and data sources

Based on the 2012 Happy Planet Index, Gallup World Poll ( http://happyplanetindex.org ).

A few exceptions include Sharpe and Capeluck ( 2012 ), who showed a significant gap in life satisfaction between very young and old Canadians. Life satisfaction decreased for people aged 65 and over. Similarly, Sharpe et al. ( 2010 ) and Lu et al. ( 2015 ) found considerable variation in life satisfaction across Canadian cities. This highlights the importance of regional factors in explaining the well-being of individuals.

However, Canadian studies have focused on different determinants of subjective well-being. Helliwell and Putnam ( 2004 ) and Helliwell ( 2006 ) explored the role of social context. Hou ( 2014 ) looked at the association between individual life satisfaction and the average income of others living in the same geographic area.

See other country studies such as those by Korpi ( 1997 ) on Sweden, Woittiez and Theeuwes ( 1998 ) on the Netherlands, and Frey and Stutzer ( 2000 ) on Switzerland.

Stavrova et al. ( 2011 ) argued that contextual unemployment rates capture only the “descriptive” norm to work, but what really matters is the societal “injunctive” norm to work (e.g., what most people approve or disapprove of). Using data from 28 OECD countries, they showed that unemployment hurts less in societies with more tolerant attitudes towards being out of work.

Some studies have argued that contextual unemployment may harm employees’ well-being regardless of job security considerations. Employees may experience guilt or reduced morale when their coworkers become unemployed (Brockner 1992 ; Noer 1993 ).

According to the OECD data, the strictness of EPL is higher in Germany but modest in three other English-speaking countries. UI generosity (measured by the net replacement rate) is difficult to compare cross-nationally since it varies according to the type of household, earnings group, number of earners in the household etc. Overall, the net replacement rate for one-earner married couple whose earnings equal to 67% of the average worker is higher in Canada and Germany than in the US and UK ( http://stats.oecd.org ).

The Canadian employment insurance (EI) uses a variable entrance requirement system that allows the eligibility and benefit entitlements to be sensitive to economic fluctuations, expanding generosity when unemployment rates increase ( https://www.canada.ca/en/services/benefits/et.html ). The Canadian unemployment insurance (UI) was renamed to employment insurance (EI) after the mid-1990s.

Clark et al. ( 2010 ) argued that securely (insecurely) employed people suffer more (less) from greater regional unemployment because if they become unemployed, they will deviate more (less) from the social norm.

The U.S. data (originally 1 = very satisfied, 2 = satisfied, 3 = dissatisfied, 4 = very dissatisfied) were recoded so that the life satisfaction scores were in the same ascending order as in the other datasets.

Stevenson and Wolfers ( 2008 ) used a similar but more sophisticated approach—standardization through an order probit, fixed-effects procedure—to reconstruct a common life satisfaction index across countries. Their approach yielded results very close to the simple standardization approach used in this study.

In Canada, regions are defined according to 33 census metropolitan areas (CMAs) and 57 economic regions that cover the population not in the CMAs. The three other countries’ regions are based mainly on government jurisdictions: 50 states plus Washington, D.C., for the United States; 12 office regions for the United Kingdom; and 13 federal states for Germany.

Common individual determinants include age, age squared, gender, self-reported health condition, race, immigration status, educational attainment, marital status, household size, pre-tax household income and regional unemployment rate. Survey weights from corresponding years were applied in all regressions.

See Diener et al. ( 1999 ) for a literature review.

The income variable is represented by a series of dummies indicating to which quintile group an individual belongs. Since some people do not report income, a dummy is also included in the model (not reported) to indicate the missing income group.

Winkelmann and Winkelmann ( 1998 ) used German SOEP data and showed that for the unemployed, it would require a sevenfold increase in income to compensate for the drop in life satisfaction. Helliwell and Huang ( 2014 ) found that the ratio of nonpecuniary to pecuniary effects from personal unemployment is about 5.6 for the U.S. Powdthavee ( 2008 ), based on the BHPS data, showed that the negative effect of unemployment on life satisfaction would require an increase in annual income of GBP143,000 to compensate

Note that regional unemployment is measured in fractional terms such as 0.05, which refers to a 5% unemployment rate.

The positive association between life satisfaction and the interaction of own unemployment and contextual unemployment may also reflect an “amenity effect,” if high unemployment regions offer some benefits (such as low pace of life, accessible outdoor activities) that improve life satisfaction.

The four Atlantic provinces are New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.

The other possible reason for the counterintuitive Canadian results may be due to the fact that finer geographical (i.e. sub-provincial) units were used in the analysis. When provincial (instead of regional) unemployment rates were used in the regressions, the results remained similar. Specifically, the spillover effect (the coefficient on the regional unemployment rate) became 0.923 (instead of 0.749); and the social-norm effect (the coefficient on unemployment x regional unemployment rate) remained large (1.89).

The estimates in Table  4 suggest that the gap would disappear at a regional unemployment rate of 50% for the U.S. sample and 32% for the U.K. sample. Both rates are out of sample. The U.K. estimates are not statistically significant at the 10% level.

As an example, standardized scores were simulated for individuals with the following characteristics: men who are aged 40, high school graduates, native-born, in good health, married, in the middle household income quintile, in 2008 and in a region with an unemployment rate of 7%.

These indicators were derived from OECD data ( http://stats.oecd.org ).

Based on World Values Survey wave 5, about 60% of prime-age (30–50) individuals in Germany reported that work is very important in life. The comparable figures were 50.6%, 44.3% and 36.4%, respectively, for Canada, the United Kingdom and the United States ( http://www.worldvaluessurvey.org/WVSOnline.jsp ).

In fact, Sharpe and Smith ( 2005 ) argued that the lack of full-time jobs in Atlantic Canada may be driven in part by social contracts between workers and firms, whereby operations are full-year but include seasonal “shifts” of workers who work long enough to qualify for EI benefits only.

Borjas, G. (1987). Self-section and the earnings of immigrants. American Economic Review, 77 (4), 531–553.

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Chen, WH., Hou, F. The Effect of Unemployment on Life Satisfaction: A Cross-National Comparison Between Canada, Germany, the United Kingdom and the United States. Applied Research Quality Life 14 , 1035–1058 (2019). https://doi.org/10.1007/s11482-018-9638-8

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Received : 22 November 2017

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DOI : https://doi.org/10.1007/s11482-018-9638-8

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THE DETERRENT EFFECT OF CRIMINAL SANCTIONS ON AFDC FRAUD: AN ECONOMETRIC STUDY

This research measures the general deterrent effect of the risk of conviction and severity of punishment on the incidence of AFDC fraud in the State of Maryland. This study also determines the impact of law-enforcement expenditures and various socioeconomic factors on fraud rates. The enforcement of laws against welfare cheating and the treatment of fraudulent cases resemble the operation of the broader Criminal Justice System. Thus, this inquiry considers fraud as a specific offense which can be studied as an application of general economic theories of crime deterrence. A three-equation simultaneous econometric system is taken from one of such theories and adjusted to reflect the welfare environment. The model uses pooled cross-section and time-series aggregate data and the Maryland counties as the units of analysis. The results indicate that the expected cost of punishment (i.e., the product of the probability of conviction and the severity of punishment) produces a significant deterrent effect. However, the generated effect is not necessarily significant from a policy viewpoint. The impact of the size of the defrauded AFDC grant and the unemployment rate were found to outweigh the deterrent effect of the cost of punishment and expected earnings from employment. Also, the results show that increases in fraud rates and crime rates, other than AFDC fraud, reduce the magnitude of the deterrent effect of the cost of punishment. On the other hand, increases in investigative expenditures and productivity of investigators/prosecutors/judges were found to augment the effect of the cost of punishment. Similarly, the data analysis detected high costs of punishment in wealthy counties. Finally, the study found investigative resources to be allocated in an incremental manner and to be insensitive to prevailing rates and social losses from fraud. This inquiry concludes that the expected cost of punishment imposed on potential AFDC cheaters in the State of Maryland does not lead to fraud control and prevention. This will be achieved only when the expected cost of punishment at least equals the expected illegal gains from fraud. Strategies to achieve this goal are suggested by the findings of this study.

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