does the existence of unemployment compensation eliminate the economic cost of unemployment?

Answer 1

UNEMPLOYMENT INSURANCE DECREASES OUTPUT
In economics unemployment compensation is termed 'unemployment insurance'. The existence of unemployment insurance discourages certain people from working; those who value the compensation over the amount gained if working will not seek employment. In economics unemployment refers to one that is seeking employment and cannot find it. If one does not wish to be employed (employed & unemployed), then they aren't even in the labour force, as they do not supply or wish to supply any labour. Excessive unemployment insurance (eg. benefits in New Zealand) decreases the labour force and puts downward pressure on GDP growth by causing downward pressure on production levels.

PRIVATE BENEFITS/COSTS vs. PUBLIC BENEFITS/COSTS
The opportunity cost of being unemployed is the amount of money to be gained from being employed, pus the social aspects of employment and unemployment. If one values unemployment more than working, they will seek unemployment (i.e. quite or get fired) or continue to be unemployed. However, the fallacy in this reasoning is that this only concerns the individual's costs and benefits. The public costs and benefits are ignored when making an individual transaction, such as the downward pressure on GDP growth by creating a shortage (however subtle) of labour.

DOWNWARD PRESSURE ON GDP
If one is employed, they provide income tax payments (government revenue), labour, and consumption for the economy. If one is unemployed they take unemployment insurance (goverment spending), decrease labour in the economy, and only provide consumption. Consumption would likely have been higher if the individual had sought employment, afterall there are many negative connations with being unemployed, which would affect their decision on whether to seek employment or not.

CONCLUSION
Therefore, the existence of unemployment insurance does not eliminate the costs stemming from unemployment, though it may alleviate some of the costs by helping productive, skilled members of the workforce temporarily unemployed extend their job search period (see "Job Search Theory") to match their skills to the right job, which maximises economic efficiency. However, the existence of an overly 'luxurious' compensation scheme may discourage skilled labour from retreating from the labour market, whilst defrauding the government by claiming they are unemployed in order to obtain social security payments. It may also discourage the unemployed from seeking employment,as the compensation gained is high enough to compensate for the lack of employment.

Answer 2

Economic Costs Of Unemployment

Answer 3

In a net effect no. It is like you taking a twenty dollar bill, getting four $5 bills and putting one in each pocket, total $20, just spread around differently.
Unemploymet compensation is usually operated like an insurance program. Everyone pays a little and the limited number of occurees get the benefit. Just like auto insurance.
So if unemployment insurance was not available, each payer would have a few bucks extra each month, and spend or invest that money. That spending would match the spending of the unemployed person getting the benefit.
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