The impacts of introducing work requirements for welfare recipients are studied in an efficiency wage model. If the workfare package is not mandatory, it will reduce employment, profits, and utility levels of employed and unemployed workers. In contrast, mandatory effort requirements will generally raise both employment and profits and reduce the tax rate. The impact on the net wage is ambiguous. Changes of utility levels of employed and unemployed workers have the same sign as the variation in the net wage. The possibility of a Pareto improvement may explain the widespread support for welfare to work experiments.
KeywordsWorkfare Welfare Efficiency wages
JEL ClassificationH53 J41 J60
I would like to thank Sascha Becker and an anonymous referee for helpful comments on an earlier version of this paper.
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