DP2361 | Modelling Financial Incentives To Get Unemployed Back To Work

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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 behaviour of individual unemployed workers are relevant, but also macro-spillover effects from the additional creation of vacancies, which originates from the increased effectiveness of labour 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.