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Workfare: An Effective Alternative to the Combination Wages

18 Pages Posted: 9 Nov 2006  

Holger Bonin

IZA Institute of Labor Economics; Centre for European Economic Research (ZEW)

Hilmar Schneider

IZA Institute of Labor Economics; DIW Berlin, German Institute for Economic Research

Date Written: October 2006

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.

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

JEL Classification: J68, J38, H24, J22

Suggested Citation

Bonin, Holger and Schneider, Hilmar, Workfare: An Effective Alternative to the Combination Wages (October 2006). IZA Discussion Paper No. 2399. Available at SSRN: https://ssrn.com/abstract=943473

Holger Bonin (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany
+49 228 3894 303 (Phone)
+49 228 3894 510 (Fax)

Centre for European Economic Research (ZEW)

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Hilmar Schneider

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

DIW Berlin, German Institute for Economic Research

Mohrenstra├če 58
Berlin, 10117
Germany

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