Work or Shirk : Finding the optimal enforced effort in activation and evaluating the job stimulus for social benefit recipients, by introducing effective leisure in a labor supply model

Abstract: Social benefits were forecasted to increase by 13 percent to 2022 before the pandemic hit the economy (Prop. 2018/19:1). In the latest forecast it has almost doubled: an increase of 24 percent to 2022 (Prop. 2020/21:1). Youths and immigrants are particularly affected by the downturn, especially since labor market sectors were both groups often have their first job are in the center of attention for government restrictions to lower the spread of Covid-19. These two groups are overrepresented among social benefit recipients when being unemployed (Socialstyrelsen, 2020), since they have not qualified to national unemployment insurances (Rosengren, 2017). The municipal social assistance was intended to be the outermost safety net. Though the transfer should be short-term, over 40 percent of the households receiving social benefits do it for more than ten months, and the share increases[1]. Social benefit could now be considered a complement to national transfers and an extra unemployment benefit for those who are not eligible for the national social safety system on the labor market. Municipalities are allowed to demand participation in different activities – henceforth called activation – as a prerequisite for social benefit eligibility. Under the assumption of full-time activation for social benefit recipients, the difference in leisure between employment or unemployment with activation is zero (0). This affect the cost of labor for the individual, which is usually partly described as the relative value of leisure (non-monetary costs). If it does not cost any leisure to leave unemployment for employment, the disutility of work decrease. Social benefits also reimburse monetary labor costs, such as commuting, wherefore there is no difference in fixed labor costs either. Differences in disposable income is then the only remaining variable to decide the individuals labor supply, according to conventional labor market theory; if the disposable income when working exceed the disposable income when not working, the individual should work. A social benefit recipient is eligible for the job stimulus after six months of social benefit dependency, giving a 25 percent earnings disregard on the net labor income. This is an exception from the usual one-to-one discount (or 100 percent marginal effect) on the transfer when receiving other incomes, such as national transfers or wage. The stimulus is intended to increase the incentives for working and motivate those who are long-term recipients to be active on the labor market[2]. During this time period, all recipients have a larger disposable income if working compared to not working – combined with the other assumptions above, this means all recipients should work when being eligible for job stimulus. Available data (Socialstyrelsen, 2016) shows only 1.8 percent of all recipients actually had labor incomes and got the earnings disregard, inferring a deviation from the expectations of common labor market theory. Meaning there could be an unknown variable in the utility function, decreasing the utility from working more than the utility increase from the job stimulus. There are a variety of possible explanations, such as asymmetric information, stigmatization, matching problems et cetera. In this thesis, the focus will be effort. This is the explanation closest to the standard model, where the disutility of lost leisure due to labor is the centerpiece. In my previous thesis (Rosengren, 2019), I introduced a draft of an effort model. In this model, working came with a larger effort than activation giving rise to a disutility. The income differential needs to exceed the cost of the extra effort if the individual should choose to work. Expanding the standard model could provide a more sufficient tool for analyzing labor market participation and employment effects in the social benefit system. This thesis provides a model for analyzing the individual’s decision on the extensive margin – to work or not to work – in transfer systems, with regard to effort, shirking and effective leisure. I simulate the effort level corresponding to the share of social benefit recipients observed to have labor income during the job stimulus spell. Finding the effort in activation being approximately 71.5 percent of the effort when employed. I also forecast the effect of the planned increase in the job stimulus from 25 to 50 percent by the same simulation; 1 percent of the social benefit recipients are expected to leave activation for employment due to the doubled job stimulus. I optimize effort (from the policy-maker’s perspective) at different skill levels to find the effort level were all will supply labor. If enforcing 99.65 percent effort 83.44 percent are expected to leave activation for work.