In-Work Benefits and Unemployment

Abstract:     
In-work benefits are becoming an increasingly relevant labour market policy, gradually expanding in scope and geographical coverage. This paper investigates the equilibrium impact of in-work benefits and contrasts it with the traditional partial equilibrium analysis. We find under which conditions accounting for equilibrium wage adjustments amplifies the impact of in-work benefits on search intensity, participation, employment, and unemployment, compared to a framework in which wages are fixed. We also account for the financing of these benefits and determine the level of benefits necessary to achieve efficiency in a labour market characterized by search externalities.

Number of Pages in PDF File: 31

Keywords: in-work benefits, search, labour force participation, wage adjustment

JEL Classification: J21, J38, H24

working papers series