Question 1

How replacement rates in Ireland compare to other OECD countries

Most of the OECD countries provide high replacement rates for the lower-income earners in order to protect them from poverty when they retire from their jobs. Basing the replacement rate calculations on income obtained from employment, taxation, family income supplements and other job allowances, a replacement rate that is above 70 percent requires ultimate attention.

The 2013 results from the OECD Review of the Irish Pension System show that Ireland positions itself favorably when compared to other OECD countries. The OECD Review provided some impressive information on pension arrangements between Ireland and other countries with a comparable system (OECD Economic Surveys: Ireland 2013). As such, the country can generously provide some substantial amount of pension to the low-income earners, thus contributes to the low pensioner poverty rates. However, Ireland is facing other challenges in sustaining its financial position as the population ages and financial market risks increases due to the impact of the economic crisis that the country is facing.

Implications of high replacement rates for the unemployment rate

In case the replacement rates are too high, people will tend to be lazy, and some end up quitting work because they will still get enough funds to help them continue living. As such, if there are no regulations as to the benefits received, too high replacement rates could lead to an increase in the rate of unemployment. In addition, too high replacement rate could also increase the disincentive to work (Holzmann and Palmer 2006). For instance, around 25% of the Australians rely on the government’s benefits as their basic source of income. Nonetheless, only a fraction of individuals that are unemployed receive the replacement benefits as being unemployed does not entirely qualify one to get the benefits. From the OECD reports, the level of the replacement rate in a particular country distinguishes the current rates and OECD average rates from other OECD countries.

When a country is in an economic crisis, several people lose their jobs and could easily be faced with poverty, which further makes it difficult for that particular country to rise back to its former economic position. However, with a high replacement rate, it becomes easier for such a country to mitigate the escalating effects of unemployment and help its citizens to retain their purchasing power. In most nations, the replacement rates at the start of the unemployment period are normally higher for those who are parents as compared to the individuals who are single.

Question 2

Suppose legislation is passed which places a legal requirement on employers to provide free dental care to all employees. This raises the cost of an employee by €2 per hour.

1. What effect does this new law have on the demand for labor? Explain using a graph.

According to Fredriksson and Söderström (2008), with an increased rate of the benefits provided to the employees, the wages of the employees are likely to increase tremendously.

 

 

 

Benefits

 

 

 

 

 

 

 

 

 

 

 

Wages

The bold line represents the statutory replacement rate while the dotted line represents the actual replacement rate. According to this figure, the benefits accrued increases in direct proportion to the wage rates. Most of the employees will get discouraged, possibly because this new law does not satisfy their needs but reduces their normal wages, thus quit. On the other hand, some people will get motivated to undertake the jobs, replacing those that quit. In the end, the rate at which the benefits are provided to the employees will end up matching the level at which labor is supplied.

1. If employees place a value on the free dental care that is exactly equal to its cost, what effect does the new law have on the supply of labor. Explain using a graph.

With the high economic development in a country, it is a necessary and sufficient condition for the country’s institutions to protect the workers. More also, the country should be in a position to offer them more replacement rates in order to boost their performance at work as well as promote economic development.

Benefits

 

 

 

 

Employment

From the graph, it is evident that the giving more benefits to the employees will increase the level of labor supply in a higher proportion. By placing value on the benefits that are offered by the employer, more people are likely to be attracted into such employment in order to enjoy the free benefits, which match their preferences. If the trend is kept constant, those that were originally employed will keep their jobs and normally work, thus there will be no substantive change in the supply of labor. However, a little addition of the benefits will exponentially boost the level of labor supply as more individuals look for employment.

 

1. Suppose that workers do not value the dental care at all. How does this affect the supply of labor? How does it affect the number of people unemployed? Explain using a graph.

Unemployment rewards are factors that greatly determine the employees’ wages because they tend to influence all the outside opportunities.

supply of labour

It is extremely difficult for an individual to engage in activities that do not benefit them in any way, and that does not match their tastes and preferences. As such, people will tend to avoid such events and invest more of their time and other material resources on activities that they value most. From the graph, in case the employees do not value the benefits brought about by dental care, they will tend to avoid any job that imposes this aspect on them. Therefore, an increase in the dental care or imposing this benefit on an employee will reduce the supply of labor. Many people will quit their jobs, thus increasing the level of unemployment.

 

References

Fredriksson, P. and Söderström, M. (2008). Do Unemployment Benefits Increase Unemployment? New Evidence on an Old Question. Retrieved from http://www.ne.su.se/polopoly_fs/1.214118.1418287558!/menu/standard/file/dp3570.pdf

OECD Economic Surveys: Ireland 2013 – Books – OECD iLibrary. (2013). Retrieved from http://www.oecd-ilibrary.org/economics/oecd-economic-surveys-ireland-2013_eco_surveys-irl-2013-en

Holzmann, R., & Palmer, E. E. (2006). Pension reform issues and prospect for non-financial defined contribution (NDC) schemes. Washington, D.C., World Bank. http://public.eblib.com/choice/publicfullrecord.aspx?p=459516