## The Simple Economics of Benefit Transfers

_IMF Working Papers, January 1, 1995_

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## Bibliographic details
- Authors: Dennis J. Snower
- Published: January 1, 1995
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842128.001

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### Summary of core proposal
- 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.

### Mechanism and behavioral effects
- 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 and macroeconomic implications
- 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, training, and labor-market outcomes
- 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.

### Policy implications and recommendations
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-simple-economics-of-benefit-transfers-1282_