January 2000

IZA DP No. 108: Modeling Financial Incentives to Get Unemployed Back to Work

published in: Journal of Institutional and Theoretical Economics, 2006, 162 (2), 227-252

We model how unemployment benefit sanctions - benefit reductions that are imposed if unemployed do not comply with job search guidelines - affect unemployment. In our analysis we find that not only micro effects concerning the behavior of individual unemployed workers are relevant, but also macro-spillover effects from the additional creation of vacancies, which originates from the increased effectiveness of labor supply. We advocate that for a given loss in welfare for the unemployed benefit sanctions are more effective in reducing unemployment than an across the board reduction in the replacement rate.