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Workfare and Trade Unions: Labor Market Repercussions of Welfare Reform

  • Ronnie Schöb

Workfare proposals concentrate on the work incentives for welfare recipients, thus focusing on the labor supply side. This paper analyzes the effects workfare has on labor demand when the labor market is unionized. As workfare reduces the number of recipients of public financial assistance, a workfare regime, as opposed to a welfare system, weakens the outside option of trade unions in wage negotiations. It is shown that revenue-neutral workfare enforcement where any surpluses are rebated by i) reducing the income tax or ii) increasing a workers’ tax credit, unambiguously decreases gross wage rates and thus decreases equilibrium unemployment. Though trade union members may be worse off as a consequence of workfare enforcement, their compensation for the wage reduction is highest when the revenue-neutral rebate of savings is used to increase worker-specific tax credits.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-05/cesifo_wp942.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 942.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_942
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  1. Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
  2. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  3. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
  4. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
  5. Gerlach, Knut & Stephan, Gesine, 1996. "A paper on unhappiness and unemployment in Germany," Economics Letters, Elsevier, vol. 52(3), pages 325-330, September.
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