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The role of workfare in striking a balance between incentives and insurance in the labour market

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  • Torben M. Andersen
  • Michael Svarer

    ()
    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

Workfare policies are often introduced in labour market policies to improve the trade-off between incentives and insurance as an alternative to benefit reductions. Most of the debate on such policies has focussed on the direct effect of those participating in the scheme, and in particular the possible locking-in effect reducing job search. In a general equilibrium search framework, we show that the effects of workfare policies critically depend on the response of those not in the programme when they take into account that workfare is a condition for remaining eligible for unemployment benefits. This implies that unemployed not yet in workfare may search more for regular jobs, and employed may accept lower wages since the outside option becomes less attractive. Introduction of workfare policies into an unemployment insurance scheme is shown to contribute to a reduction in both open and total unemployment. It is also shown that the direct search effects of workfare policies are a poor indicator of the overall effect workfare policies have on labour market policies.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-05.

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Length: 33
Date of creation: 31 Mar 2008
Date of revision:
Handle: RePEc:aah:aarhec:2008-05

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Web page: http://www.econ.au.dk/afn/

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Keywords: Workfare; Labour market performance;

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References

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  1. Fredriksson, Peter & Holmlund, Bertil, 2003. "Optimal Unemployment Insurance Design:Time Limits, Monitoring, or Workfare?," Working Paper Series 2003:17, Uppsala University, Department of Economics.
  2. Chambers, Robert G., 1989. "Workfare or welfare?," Journal of Public Economics, Elsevier, vol. 40(1), pages 79-97, October.
  3. Christian Holzner & Volker Meier & Martin Werding, 2006. "Workfare, Monitoring, and Efficiency Wages," CESifo Working Paper Series 1749, CESifo Group Munich.
  4. James Albrecht & Susan Vroman, 2001. "Equilibrium Search with Time-Varying Unemployment Benefits," CESifo Working Paper Series 487, CESifo Group Munich.
  5. Torben Andersen & Michael Svarer, 2007. "Flexicurity – Labour Market Performance in Denmark," CESifo Working Paper Series 2108, CESifo Group Munich.
  6. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  7. Besley, Timothy & Coate, Stephen, 1995. "The Design of Income Maintenance Programmes," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 187-221, April.
  8. Brett, Craig, 1998. "Who Should Be on Workfare? The Use of Work Requirements as Part of an Optimal Tax Mix," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 607-22, October.
  9. Claus Thustrup Kreiner & Torben Tranas, 2005. "Optimal Workfare with Voluntary and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 459-474, 09.
  10. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers 968, Queen's University, Department of Economics.
  11. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics 2006:12, Stockholm University, Department of Economics.
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Citations

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Cited by:
  1. Christian Holzner & Volker Meier & Martin Werding, 2006. "Workfare, Monitoring, and Efficiency Wages," CESifo Working Paper Series 1749, CESifo Group Munich.
  2. Torben M. Andersen & Michael Svarer, 2007. "Flexicurity – labour market performance in Denmark," Economics Working Papers 2007-09, School of Economics and Management, University of Aarhus.
  3. Eichhorst, Werner & Konle-Seidl, Regina & Koslowski, Alison & Marx, Paul, 2010. "Quantity over Quality? A European Comparison of the Changing Nature of Transitions between Non-Employment and Employment," IZA Discussion Papers 5285, Institute for the Study of Labor (IZA).
  4. Andersen, Torben M, 2012. "Migration, Redistribution and the Universal Welfare Model," IZA Discussion Papers 6665, Institute for the Study of Labor (IZA).
  5. Torben Andersen & Michael Svarer, 2008. "Flexicurity in Denmark," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 6(4), pages 15-20, December.
  6. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
  7. Jochen Michaelis & Alexander Spermann, 2009. "Geringqualifizierte Arbeit, Marktlöhne und Sozialpolitik: Konzepte für Deutschland," MAGKS Papers on Economics 200920, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  8. Torben M. Andersen, 2011. "Social policies and activation in the Scandinavian welfare model: the case of Denmark," Economics Working Papers 2011-10, School of Economics and Management, University of Aarhus.
  9. Alessio J. G. Brown & Dennis Snower, 2009. "Incentives and Complementarities of Flexicurity," Kiel Working Papers 1526, Kiel Institute for the World Economy.

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