Journal Article

Optimal Welfare-to-Work Programs

Nicola Pavoni and G. L. Violante

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 1, pages 283-318
Published in print January 2007 | ISSN: 0034-6527
Published online January 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00422.x
Optimal Welfare-to-Work Programs

More Like This

Show all results sharing these subjects:

  • Welfare and Poverty
  • Mobility, Unemployment, and Vacancies

GO

Show Summary Details

Preview

A Welfare-to-Work (WTW) program is a mix of government expenditures on various labour market policies targeted to the unemployed (e.g. unemployment insurance (UI), job search monitoring (JM), social assistance (SA), wage subsidies). This paper provides a dynamic principal—agent framework suitable for analysing chief features of an optimal WTW program, such as the sequence and duration of the different policies, the dynamic pattern of payments along the unemployment spell, and the emergence of taxes/subsidies upon re-employment. The optimal program endogenously generates an absorbing policy of last resort (“social assistance”) characterized by a constant lifetime payment and no active participation by the agent. Human capital depreciation is a necessary condition for policy transitions to be part of an optimal WTW program. The typical sequence of policies is quite simple: the program starts with standard UI, then switches into monitored search and, finally, into SA. The optimal benefits are decreasing during unemployment insurance and constant during both JM and SA. Whereas taxes (subsidies) can be either increasing or decreasing with duration during UI, they must decrease (increase) during a phase of JM. In a calibration exercise, we use our model to analyse quantitatively the features of the optimal program for the U.S. economy. With respect to the existing U.S. system, the optimal WTW scheme delivers sizeable welfare gains to unskilled workers because the incentives to search for a job can be retained even while delivering more insurance and using costly monitoring less intensively.

Keywords: I38; J64; J65

Journal Article.  19245 words.  Illustrated.

Subjects: Welfare and Poverty ; Mobility, Unemployment, and Vacancies

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.