The project aims at analysing the effectiveness of “Welfare-to-work” approaches to reforming existing welfare programmes. Approaches of this kind are characterised by the introduction of a new set of incentives for welfare recipients who are obliged to work in public employment programmes in return for receiving benefits, are entitled to receive benefits only for a limited period of time, and are actively supported when searching and taking up work. Our research focuses on a theoretical analysis of how these new elements of welfare programmes are expected to affect individual behaviour and labour market performance. In addition, empirical evidence as to the impact on employment and income as well as the fiscal effects is surveyed. Here, we concentrate on the experience with Welfare-to-work reforms enacted in the US, the UK, Denmark and the Netherlands; also, we look at related experiments conducted in Germany.
Theoretical research is devoted to the three main elements of Welfare-to-work policies, viz. work obligations, time limits on benefits, and support of welfare recipients in their job search. Analyses are based on the efficiency wage model developed by Shapiro and Stiglitz (1984) and on the matching models suggested by Pissarides (2000) and Coles and Masters (2000). Consequences of the new framework for the incentives faced by individuals are explicitly taken into account. Also, we assume that unemployment is basically involuntary. Thus, employment effects mainly arise from responses of labour demand to the new incentive structure, or from modifications of matching procedures, not from changes in labour supply. Theoretical work is augmented by comparative surveys of Welfare-to-work reforms conducted in five industrialised countries, including any empirical evidence collected there which may be suited to confirm, or reject, predictions derived from our models.
For the empirical parts of the project, we will assess existing work that is relevant with respect to the variables for which predictions can be derived from the theoretical analysis, concentrating on employment, individual earnings and household income, and fiscal effects. Results that have been established in empirical research will be surveyed in some detail.
Introducing or tightening time limits on welfare use makes the state of unemployment relatively more uncomfortable. In addition, expenditure per unemployed is reduced, which induces a smaller tax rate. Both effects enables the firms to cut gross wages, which leads to more employment. Utility levels of employed workers and welfare recipients move in the same direction as the net wage. Compared to these two groups, unemployed who do not receive any benefit will gain in utility when the eligibility period for welfare use is shortened.
The empirical literature on the impacts of time limits on welfare use stresses the effects on the welfare recipients. Many of them reduce welfare use already before the time limit is reached. While the impact of employment is mixed, income tends to increase.
Introducing a work obligation for welfare recipients reduces gross wages and increases employment. With an endogenous monitoring technology in firms, the monitoring intensity will rise due to a lower opportunity cost. This yields a smaller utility differential between employed workers and welfare recipients. Lifetime utility levels of both groups can increase even if the net wage declines.
Holzner, Christian, Volker Meier and Martin Werding, "Time Limits on Welfare Use under Involuntary Unemployment", CESifo Working Paper Nr. 1220, 2004 ( Abstract / Download )
Holzner, Christian, Volker Meier and Martin Werding, "Time Limits in a Two-tier Unemployment Benefit Scheme under Involuntary Unemployment", Ifo Working Papers Nr. 29, 2006 ( Abstract / Download )
Holzner, Christian, Volker Meier and Martin Werding, "Workfare, Monitoring, and Efficiency Wages", CESifo Working Paper Nr. 1749, 2006 ( Abstract / Download )
Ochel, Wolfgang, "Welfare Time Limits in the United States – Experiences with a New Welfare-to-Work Approach", CESifo Working Paper Nr. 1210, 2004 ( Abstract / Download )
Ochel, Wolfgang, "Welfare-to-Work Experiences with Specific Work-First Programmes in Selected Countries", International Social Security Review 58 (4), 2005, 67-93 ( More Information )
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