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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 Andersen
  • Michael Svarer

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 CESifo Group Munich in its series CESifo Working Paper Series with number 2267.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2267

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Keywords: active labour market policy; risk; search; unemployment;

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References

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  1. Holzner, Christian & Meier, Volker & Werding, Martin, 2010. "Workfare, monitoring, and efficiency wages," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(1), pages 157-168, March.
  2. James Albrecht & Susan Vroman, 2005. "Equilibrium Search With Time-Varying Unemployment Benefits," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(505), pages 631-648, 07.
  3. Claus Thustrup Kreiner & Torben Tranas, 2005. "Optimal Workfare with Voluntary and Involuntary Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 107(3), pages 459-474, 09.
  4. Besley, T. & Coate, S., 1991. "The Design Of Income Maintenance Programs," Papers, Princeton, Woodrow Wilson School - John M. Olin Program 74, Princeton, Woodrow Wilson School - John M. Olin Program.
  5. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  6. Torben Andersen & Michael Svarer, 2007. "Flexicurity – Labour Market Performance in Denmark," CESifo Working Paper Series, CESifo Group Munich 2108, CESifo Group Munich.
  7. Peter Fredriksson & Bertil Holmlund, 2003. "Optimal Unemployment Insurance Design: Time Limits, Monitoring, or Workfare?," CESifo Working Paper Series, CESifo Group Munich 1019, CESifo Group Munich.
  8. Chambers, Robert G., 1989. "Workfare or welfare?," Journal of Public Economics, Elsevier, Elsevier, vol. 40(1), pages 79-97, October.
  9. 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.
  10. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics, Stockholm University, Department of Economics 2006:12, Stockholm University, Department of Economics.
  11. Katherine Cuff, 1998. "Optimality of Workfare with Heterogeneous Preferences," Working Papers, Queen's University, Department of Economics 968, Queen's University, Department of Economics.
  12. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 249-61, March.
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Citations

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Cited by:
  1. Jochen Michaelis & Alexander Spermann, 2009. "Geringqualifizierte Arbeit, Marktlöhne und Sozialpolitik: Konzepte für Deutschland," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200920, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Holzner, Christian & Meier, Volker & Werding, Martin, 2010. "Workfare, monitoring, and efficiency wages," Munich Reprints in Economics, University of Munich, Department of Economics 19396, University of Munich, Department of Economics.
  3. Torben M. Andersen & Michael Svarer, 2007. "Flexicurity – labour market performance in Denmark," Economics Working Papers, School of Economics and Management, University of Aarhus 2007-09, School of Economics and Management, University of Aarhus.
  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, Ifo Institute for Economic Research at the University of Munich, vol. 6(4), pages 15-20, December.
  6. Torben M. Andersen, 2011. "Social policies and activation in the Scandinavian welfare model: the case of Denmark," Economics Working Papers, School of Economics and Management, University of Aarhus 2011-10, School of Economics and Management, University of Aarhus.
  7. Alessio J. G. Brown & Dennis Snower, 2009. "Incentives and Complementarities of Flexicurity," Kiel Working Papers, Kiel Institute for the World Economy 1526, Kiel Institute for the World Economy.
  8. 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).
  9. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 28, Directorate General Taxation and Customs Union, European Commission.

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