Translation:He is unemployed and lives on unemployment benefits.
Arbeidsledig is construced of two words arbeid = work, labour. And ledig = free, vacant, unused. Dagpenger of dag = day and penger = money. In Norwegian you often find two words contracted like this unlike in english where they are parted. In Norwegian the meaning often change if the words are parted
There's an error here, surely. "He is unemployed and lives on unemployment pay" is judged to be an incorrect translation, but "unemployment pay" and "unemployment benefits" (or "benefit") mean the same as "unemployment pay", in England at least. And the first of the offered correct solutions is definitely not right: "He is unemployed and lives on unemployment."
Actually it just comes down to different countries having different terms for "welfare/benefits/dole/unemployment benefits". Also unemployment can be used as a noun and substituted for these words in some countries. Your translation is obviously correct, but someone has to manually add those translations and they probably just haven't come across the term "unemployment pay". =)
What is your point? The OP said that the English sentence is annoyingly long, but it is literally only one word longer. So I offered a translation that is the same length by replacing "unemployment benefits" with "welfare". Unemployment and welfare might not be the same thing but UNEMPLOYMENT BENEFITS (the actual phrase used by duo lingo) is the same thing as welfare.