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

CESifo Working Paper Series No. 2267

University of Aarhus Economics Working Paper No. 2008-5

38 Pages Posted: 1 Apr 2008

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: April 2008

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.

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

JEL Classification: J68

Suggested Citation

Andersen, Torben M. and Svarer, Michael, The Role of Workfare in Striking a Balance between Incentives and Insurance in the Labour Market (April 2008). CESifo Working Paper Series No. 2267, University of Aarhus Economics Working Paper No. 2008-5, Available at SSRN: https://ssrn.com/abstract=1114766

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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