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Do Conditional Benefits Reduce Equilibrium Unemployment?

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  • FREDERICK Van DerPLOEG

Abstract

Although unconditional unemployment benefits destroy jobs in competitive and noncompetitive labor markets, conditional benefits can spur job growth in noncompetitive labor markets. Unconditional benefits reduce the penalty of shirking and misconduct, while conditional benefits increase this penalty. This is shown for the efficiency‐wage, no‐shirking model of the labor market developed by Shapiro and Stiglitz (1984). Switching from unconditional to conditional benefits lowers unemployment. Tough eligibility requirements are thus important components of the welfare state. However, if conditional benefits are financed by a payroll tax, conditional benefits exert upward wage pressure so that unemployment falls by less and may even increase.

Suggested Citation

  • FREDERICK Van DerPLOEG, 2006. "Do Conditional Benefits Reduce Equilibrium Unemployment?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 603-610, October.
    • Handle: RePEc:bla:jpbect:v:8:y:2006:i:4:p:603-610
    DOI: 10.1111/j.1467-9779.2006.00280.x
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