Fighting Unemployment With a Stick

By Phil Izzo


As the U.S. struggles with the problem of persistent long-term unemployment, a study of incentives in the Netherlands suggests a stick is more effective than a carrot.


“Carrot and Stick: How Reemployment Bonuses and Benefit Sanctions Affect Job Finding Rates,” Bas van der Klaauw of VU University Amsterdam and Jan C. van Ours of Tilburg University, Netherlands, examine the effects of both positive and negative financial incentives on the long-term jobless in Rotterdam. In the early 2000s the city ran a program that provided reemployment bonuses for job seekers who were able to find a job and hold it for at least six months. At the same time, benefit recipients who didn’t actively look for work, or otherwise failed to comply with eligibility requirements, would be subject to a temporary reduction in their benefits.



“Our main findings are that reemployment bonuses don’t seem to have worked, while benefit sanctions increased the job finding rate significantly,” the economists write.



Van der Klaauw and van Ours note an earlier study in the U.S. that showed a positive effect from reemployment bonuses, but that bonus was focused on people that were unemployed for short periods of time. The Rotterdam study only looked at welfare recipients who are unemployed for more than a year, suggesting bonuses are less effective for the long-term unemployed.



Currently, U.S. lawmakers continue to debate whether to extend unemployment benefits. Some have suggested that the extension offers an incentive to keep the unemployed from accepting available jobs, while others argue that a dearth of jobs is the main factor keeping people on the unemployment rolls longer. The study doesn’t take a stand on whether to extend benefits, but it does suggest that monitoring recipients eligibility increases their chances of finding work.



“Our findings that a stick works while a carrot doesn’t may be related to present-bias of some workers,” the economists write. “To the extent that some welfare recipients are present-biased an incentive scheme that requires immediate search effort in exchange for delayed rewards in terms of a future bonus may not be an effective scheme. Benefit sanctions breaking the present bias by imposing immediate costs to lack of search effort might indeed be an effective and welfare improving scheme.”



Van der Klaauw and van Ours also point to previous studies that add one caveat: those who face benefit cuts also face reduced post-employment earnings. “Actual benefit reductions lower the quality of post-unemployment jobs both in terms of job duration as well as in terms of earnings. For unemployed workers the net effect of a benefit sanction on postunemployment income is negative. Over a period of two years after leaving unemployment workers who got a benefit sanction imposed face an income loss equivalent to 30 days,” they write.