The Simple Economics of Benefit Transfers

IMF Working Papers, January 1, 1995

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Permits unemployed people to use part of their unemployment benefits to provide employment vouchers to the firms that hire them—“benefit transfers.”
Benefit transfers convert unemployment benefits into employment subsidies, creating an incentive to work that replaces the unemployment trap.
Vouchers increase with people’s unemployment durations and with the amount of training provided.
The policy is designed to be costless to the government because the cost of the employment vouchers is set equal to the amount saved on unemployment benefits.
The policy is not expected to be inflationary because the long-term unemployed, on whom the vouchers are targeted, have little influence on wage setting.

Employment vouchers function as a subsidy paid to hiring firms when they employ previously unemployed individuals.
Vouchers are calibrated to rise with:
- Unemployment duration.
- Amount of training provided to the hired worker.
By effectively increasing the employer’s net compensation cost for hiring the unemployed, vouchers reduce the effective wage cost and raise labor demand for targeted workers.
The conversion of benefit receipt into an employment subsidy changes the unemployed worker’s incentive from remaining out of work to accepting employment.

Fiscal neutrality:
- The scheme is structured so that the government’s cost of providing vouchers equals the savings from reduced unemployment benefit payouts.
Inflationary impact:
- Targeting long-term unemployed—who have little influence on wage setting—minimizes risk of inflationary wage pressures.

Targeting:
- Focused on the long-term unemployed to maximize impact on employment without provoking broader wage-setting responses.
Training linkage:
- Larger vouchers are provided when additional training is supplied, encouraging skill acquisition alongside employment.
Expected outcomes:
- Increased hiring of long-term unemployed.
- Reduced unemployment trap effects.
- Stronger incentives for job acceptance and participation in training.

Implement employment vouchers that:
- Are financed by the resulting reductions in unemployment benefit expenditures (costless to government).
- Scale with unemployment duration and training intensity to better match employer incentives and worker re-employment prospects.
Prioritize targeting on long-term unemployed to limit inflationary effects and to concentrate support where wage-setting influence is limited.
Link vouchers to training to improve long-term employability and labor demand for subsidized hires.

IMF Working Paper — Dennis J. Snower, January 1, 1995.