Megan McArdle calls for a special tax credit for the long-term unemployed, which would exempt workers from the payroll tax one month for every month of unemployment:

The result is a direct wage subsidy of more than 10%. But it is a time-limited subsidy, and one carefully targeted to those who need it the most. By the time the tax relief expires, these workers will have been reintegrated into the labor force. This will cost the government something of course–but not nearly as much as supporting them on welfare, disability, or early retirement–or the prison system.

This is a very intuitively appealing idea, and I’m curious as to the potential downsides.