The paper explores the employment implications of allowing people the opportunity of using a
portion of their incapacity benefits to provide employment vouchers for employers that hire
them. The analysis indicates that introducing this policy could increase employment, raise the
incomes of incapacity benefit recipients, and reduce employers’ labor costs. The analysis
explicitly derives the optimal voucher, i.e. the voucher that maximizes employment at no
extra budgetary cost. This voucher is shown to depend on the size of incapacity benefits, the
separation rate in the absence of the voucher, and the degree of displacement; but it does
not depend on the hiring rate. Numerical calculations show the optimal voucher to be large by
the standards of many existing employment subsidies.