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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/5: “The Simple Economics of Benefit Transfers”

Author(s):
International Monetary Fund
Published Date:
August 1995
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This paper examines the implications of allowing unemployed people--particularly those who have been unemployed for a long time--the option of “transferring” some of their unemployment benefits into employment vouchers, that is, using a portion of their unemployment benefits to subsidize their own employment. In this way, the policy aims to turn the disincentive to work that is created by the unemployment benefit system into an incentive to seek and provide jobs.

The Benefit Transfer Program (BTP) has five salient features that distinguish it from the standard wage subsidy programs attempted heretofore: (1) it is voluntary; (2) the size of each person’s employment voucher is linked to the size of his or her existing unemployment benefits; (3) the longer a person is unemployed, the larger is the stream of employment vouchers to which he or she is entitled; (4) once a person has found a job through the BTP, the size of the voucher gradually falls the longer the person remains employed; and (5) larger vouchers are given to employers who can prove that they are devoting these funds to training their new recruits.

The paper indicates that the BTP may make a substantial contribution to reducing unemployment in a number of member countries of the Organization for Economic Cooperation and Development (OECD), The reason is not that labor demand is generally very responsive to changes in labor costs--standard estimates of aggregate short-run labor demand elasticities are well under 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 forgone tax revenues.

Since the amount that the government spends on the employment vouchers is set so as not to exceed what it would spend anyway on unemployment support, the reduction in unemployment can be achieved at no extra budgetary cost. All that has happened is that the funds that previously encouraged unemployment are now encouraging employment. If the employment vouchers are appropriately directed at the long-term unemployed, the reduction in long-term unemployment could be achieved without stimulating inflation because the long-term unemployed exert a negligible dampening influence on wages. By linking the vouchers to training, the BTP could become the basis for national training programs.

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