Optimal Income Maintenance and the "Unemployable"
Journal of Public Economic Theory, 2004, vol. 6, issue 3, 509-537
This paper examines optimal income maintenance policy with asymmetric information about individuals' abilities. A minimum skill level is required for employment. The unemployable are those (low) ability types who find this minimum investment too costly. To guarantee some minimum income level, the government chooses between welfare, workfare, earnings subsidies, and training. Results show that the optimal scheme entails training. Moreover, though complex separating mechanisms are both feasible and encourage investments in skills, the least-cost income maintenance scheme is quite simple: the government offers training at the lowest level consistent worth employment to all who want it. Copyright 2004 Blackwell Publishing Inc..
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