The Role of Workfare in Striking a Balance between Incentives and Insurance in the Labour Market

31 Pages Posted: 4 Dec 2013

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Michael Svarer

Aarhus University - Department of Economics and Business Economics; Institute for the Study of Labor (IZA)

Date Written: January 2014

Abstract

Unemployment insurance tends to distort incentives in the labour market, affecting job search and wage formation adversely. We show in a search‐matching model that this moral hazard problem can be reduced by attaching a workfare requirement to the eligibility conditions for claiming unemployment benefits. Even when workfare has no effects on human capital or productivity, it is possible to improve labour market performance to create more jobs and lower unemployment by the introduction of workfare, and also to improve welfare. Hence the incentive structure in the labour market can be improved by workfare policies rather than benefit reductions.

Suggested Citation

Andersen, Torben M. and Svarer, Michael, The Role of Workfare in Striking a Balance between Incentives and Insurance in the Labour Market (January 2014). Economica, Vol. 81, Issue 321, pp. 86-116, 2014, Available at SSRN: https://ssrn.com/abstract=2362593 or http://dx.doi.org/10.1111/ecca.12057

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Michael Svarer

Aarhus University - Department of Economics and Business Economics ( email )

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Denmark
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+45 8613 6334 (Fax)

Institute for the Study of Labor (IZA)

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Germany

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