Modeling Financial Incentives to Get the Unemployed Back to Work

We model how unemployment benefit sanctions – benefit reductions that are imposed if unemployed do not comply with job search guidelines – affect unemployment. We find that benefit sanctions are more effective in reducing unemployment than an across-the-board reduction in the replacement rate, for a given loss in welfare for the unemployed. We decompose the effects of a sanction system into micro, crowding-out, spillover, and tax effects.