Optimal Workfare in a Society of Workers and Non-Workers

This paper studies the unemployment insurance and redistribution policy of a government who contemplates using workfare. We consider a population composed of employed and unemployed workers as well as individuals who do not seek employment (non-workers). Job search behavior is private information implying that non-workers can claim UI benefits rather than the social assistance they are eligible for. As a consequence, optimal pecuniary UI schemes underinsure workers against unemployment. We show that requiring unproductive activities in exchange for UI benefits (workfare) can Pareto improve welfare by facilitating better unemployment insurance, and we characterize the situations where this is the case