The carrot or the stick? What works better in getting people from benefits into work?

To increase their transition from welfare to work, benefit recipients in the municipality of Rotterdam were exposed to various financial incentives, including both carrots and sticks. Once their benefit spell exceeded one year, welfare recipients were entitled to a reemployment bonus if they found a job that lasted at least six months. However, they could also be punished for noncompliance with eligibility requirements and face a sanction, i.e. a temporary reducing of their benefits.

From a policy point of view municipalities would like to know which instrument works better. In a recent paper (July 2010) published by two Dutch economists they analyse the Rotterdam employment policy of how benefit sanctions and reemployment bonuses affect job finding rates of welfare recipients. They find the stick of benefit sanctions to be more effective in bringing unemployed from welfare to work than the carrot of reemployment bonuses. A summary of the paper can be read at: http://www.voxeu.org/index.php?q=node/5420 .