Most economic theories predict a rise in unemployment when unemploy ment benefits increase. The reason is that more people will be willing to exit from work, and fewer people will enter the workforce, when benefits are high. We argue that these theories oversimplify the situation because they do not take into account the way benefits are monitored. We present a model of monitoring benefits which leads to three conclusions that are different from standard economic theory: (1) Size of unemployment benefit has no effect on unemployment; (2) Duration of unemployment benefit has a positive effect on unemployment; (3) Size of unemployment benefit has a positive effect on the monitoring of benefits. We present historical evidence in favor of these propositions from a series of countries, and test them cross-nationally with Organization for Economic Cooperation and Development (OECD) data.
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