Workfare: An Effective Alternative to the Combination Wages

Abstract:     
In the debate on in-work benefits in Germany it is often overlooked that such subsidies may only be effective if basic minimum income is remarkably decreased for those who are employable. However, proposals following this principle will hardly achieve political consensus as can be derived from reactions to the model of ifo or the board of economic advisors. IZA is therefore proposing workfare as an effective alternative, which may accomplish a strong incentive for the acceptance of low paid jobs without having to cut the current welfare level. Simulations based on a micro-econometric labor supply model show that this could add to the workforce an additional number of 800,000 workers. Roughly the same effect could be achieved by the ifo model, however, at the expense of massive cuts of disposable income for welfare recipients. Hence, workfare turns out as an efficient alternative. Moreover, there is no useful combination between in-work benefits based on the current welfare level and workfare.

Number of Pages in PDF File: 18

Keywords: in-work benefits, low-wage subsidies, labor supply, discrete choice, Germany

JEL Classification: J68, J38, H24, J22

working papers series