Department of Economics and Business Economics

The role of workfare in striking a balance between incentives and insurance in the labour market

Research output: Working paper/Preprint Working paperResearch

  • School of Economics and Management
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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages33
Publication statusPublished - 2008

    Research areas

  • Workfare, Labour market performance

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ID: 10919418