From April 2021, the Australian unemployment benefit (JobSeeker) is set to be increased by $25 per week. This is the permanent first increase in unemployment benefits in real termssince 1994.

While advocates have been calling for an increase in the unemployment benefit for many years, critics argue that any increases may disincentivise work for some people. However, research by Melbourne University economist Professor Jeff Borland has shown that boosting JobSeeker would not keep Australians away from paidwork.Professor Borland analysed the effect of the temporary increase in JobSeeker (of $125 per week) that was instituted in 2020 as part of the Federal government's coronavirus response and found that it did not reduce the incentives to seek paid work for unemployed Australians.

Using our model of choice and conflict developed, explain why an increase in unemployment benefits of $125 per week is unlikely to cause a reduction in the incentives to search for work? Would an increase in JobSeeker lead to a Pareto improvement? (Hint: How does it affect the reservation option and indifference curve of unemployed workers relative to the minimum wage).