Unemployment
Benefit transfers

In Discussion Paper No. 1086, Programme Director Dennis Snower examines the employment and unemployment implications of permitting unemployed people to use part of their unemployment benefits to provide employment vouchers to the firms that hire them. This opportunity to transfer unemployment benefits, `benefit transfers', would help replace the unemployment trap by providing an incentive to seek and provide jobs. The vouchers would rise with people's unemployment duration and with the amount of training provided to them by the hiring firm. The policy would be costless to the government since the cost of the employment vouchers is set equal to the amount saved on unemployment benefits. It would not be inflationary since the long-term unemployed, at whom the vouchers are targeted, have little influence on wage setting.

The paper suggests that such a scheme may make a substantial contribution to reducing unemployment in a number of OECD countries. The reason is not that labour demand is generally very responsive to changes in labour costs (standard estimates of aggregate short-run labour demand elasticities are well under a half in most OECD countries), but that many countries spend a lot on unemployment benefits, particularly if these benefits are broadly defined to include not only the cash payments to the unemployed, but also all the associated welfare state benefits and the foregone tax revenues. Moreover, such a scheme could also play an important role in tackling regional unemployment problems.

The Simple Economics of Benefit Transfers
Dennis J Snower

Discussion Paper No. 1086, November 1994 (HR)