Optimal welfare and in-work benefits with search unemployment and observable abilities

This paper explores the optimal interaction between the tax system and social assistance in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. The relationship between welfare benefits and the optimal level of in-work benefits is U-shaped. This explains why in-work benefits are called for both in countries that grant low welfare benefits and countries that provide high welfare benefits. An earned-income tax credit optimally induces all agents to look for work if job search is cheap and effective, agents are not very risk averse, and the least-skilled agents are relatively productive.     

Reduction of child poverty in Serbia: Benefit or employment strategy?

Based on the Serbian Survey of Income and Living Conditions (SILC) and tax benefits and structural microsimulation models, we evaluate the labour supply and distributive effects of several reform strategies concerning two major social transfers in Serbia: child allowance and social monetary assistance. Our results show that, in a context of a low labour participation rate, and high unemployment and informality rates, a benefit strategy is by far the more cost‐effective option for reducing child poverty than an employment strategy that aims to raise the work incentives for parents. Both proposed reforms are found to be progressive.     

Labour-incentive reforms at preretirement age in Austria

Low participation rates of older workers in the labour market threaten the sustainability of the pension system in Austria. Given the current political debate on this issue, we try to shed light on employment and retirement behaviour of Austrian couples when income support is provided and pension benefits are reduced. Using a sample of married couples with both partners aged 50–65, we find that the proposed reform increases the labour supply of middle-income men whereas the effects on women are weaker. However, somehow surprisingly, we find that these reforms have an increasing effect on unemployment/inactivity probabilities which in turn is outweighed by a decreasing effect on the retirement probabilities in case of women. These findings emphasize the importance of a joint consideration of labour supply and retirement behaviour of married couples when introducing pension reforms and tax-benefit policies.     

The integration of child tax credits and welfare: Evidence from the Canadian National Child Benefit program

In 1998, the Canadian government introduced a new child tax credit. The innovation in the program was its integration with social assistance (welfare). Some provinces agreed to subtract the new federally-paid benefits from provincially-paid social assistance, partially lowering the welfare wall. Other provinces did not integrate benefits, providing a quasi-experimental framework for estimation. We find large changes in social assistance take-up and employment in provinces that provided the labour market incentives to do so. In our sample, the integration of benefits can account for between 19 and 27% of the decline in social assistance receipt between 1997 and 2000.     

Taxes,female labour supply and household income: differences between the Netherlands and the Federal Republic of Germany

The article investigates the effect of taxes and social premiums on female labour supply and household income. A comparison is made between labour supply and household income between the Netherlands and the Federal Republic of Germany in 1992. A discrete choice model for labour supply is used in which taxes and social premiums are implicitly incorporated. As male labour supply is highly inelastic an individual, male chauvinist model is used. The estimated models are used to simulate the effect of the differences in the tax and social premium system on the differences in labour supply and income between both countries. The results indicate that labour force participation is higher the more individualized the system. The German system leads to a lower tax burden compared to the Dutch system. It is concluded that differences in the tax and social premium system between both countries have hardly any influence on the differences in the inequality of net household labour income. There is evidence that the German system leads to a slightly more unequal distribution of household income. It is also concluded that although the tax and social premium system does influence labour supply and income, it can be doubted whether these effects are substantial.     

Work incentive and other effects of social assistance and unemployment benefit policy in the Czech Republic

In this paper we provide an account of most of the passive labor market policies (unemployment compensation, social assistance, state social support and the pension system) in the Czech Republic during the 1990–1996 period. The eligibility requirements and benefit levels are described in great detail. Using Labor Force Survey data, we compare the characteristics of unemployed people receiving unemployment benefits with those receiving social assistance and those not receiving any benefits and we find significant differences in their characteristics. Finally, we provide an analysis of the work disincentive effects of the unemployment and social assistance benefits by comparing these benefits to market wages and by analyzing the effect of being in the system on the duration of unemployment of two cohorts of unemployed in 1994 and 1995. We find that social assistance benefits are fairly generous for low income families with more children, individuals with these characteristics have a higher probability of receiving social assistance and they tend to stay unemployed longer than those people with relatively fewer dependants. We conclude that the social assistance scheme seems to be having some disincentive effects for at least one group in the population.     

Reforming Social Welfare in Germany: An Applied General Equilibrium Analysis

Abstract. In this paper, the effects of social assistance reform proposals are discussed for the case of Germany using a computable general equilibrium model that incorporates a discrete choice model of labour supply. This allows us to identify general equilibrium effects of the reforms on wages and unemployment. The simulation results show that general equilibrium wage reactions mitigate labour supply effects and that unemployment in fact decreases. Wage reactions are thus sufficiently strong to prevent additional labour supply from translating into higher unemployment. The simulations indicate that major cuts in welfare payments are necessary to produce substantial employment effects.     

Education, Work and Wages in the UK

Abstract. This paper is concerned with the relationship between education, wages and working behaviour. The work is partly motivated by the sharp distinction in the literature between the returns to education and the effect of wages on labour supply. Education is the investment that cumulates in the form of human capital while labour supply is the utilization rate of that stock. Yet, variation in education is usually the basis for identifying labour supply models – education is assumed to determine wages but not affect labour supply. Moreover, it is commonly assumed that the private rate of return to education can be found from the schooling coefficient in a log-wage equation. Yet, the costs of education are largely independent of its subsequent utilization but the benefits will be higher the greater the utilization rate. Thus the returns will depend on how intensively that capital is utilized and we would expect that those who intend to work least to also invest least in human capital. Indeed, the net (of tax liabilities and welfare entitlements) return to education will be a complex function of labour supply and budget constraint considerations.
Here we attempt to model the relationship between wages, work, education and the tax/welfare system allowing for the endogeneity of education as well for the correlations between the unobservable components of wages and working behaviour. We use the estimates to simulate the effect of a new UK policy designed to increase education for children from low-income households.     

Take–up of Means–tested Benefits and Labour Supply

This paper examines take–up rates in a model in which there is a fixed non–refundable cost of applying for benefits. The model involves a joint decision regarding both labour supply and the take–up of the benefit. There is a single means–tested benefit involving a 'taper rate' at which benefits are withdrawn as earnings increase. It is found that take–up increases as the level of the taper rate increases, and the value of benefits increases. The achievement of 100% take–up is associated with labour supply responses whereby there are few, if any, individuals who are both working and eligible for benefits. The results have implications for the effects of lowering the taper rate on the costs and effective targeting of benefits.     

The Earned Income Tax Credit: Targeting the poor but crowding out wealth

This paper quantifies the individual, aggregate and welfare effects of the US Earned Income Tax Credit (EITC). In particular, we analyze the labour supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labour income and a tax on savings. An increase in EITC generosity raises labour force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population.     

EU Enlargement and the Future of the Welfare State

The eastern enlargement of the EU resembles German unification in its momentousness. Whereas the latter led to a 26% increase in the population of the Federal Republic, the former will increase the population of the EU by 28% if all ten entry aspirants are accepted. A special problem will be posed by migration. Given the existing wage differences between eastern and western European countries, a massive westward migration can be expected after enlargement. A temporary east–to–west migration until the eastern countries create an efficient capital stock makes economic sense if this is driven by wage differences and meets with a flexible labour market. Migration does not make economic sense, however, if, and to the extent that, it is induced by the current social assistance systems. Moreover, welfare–motivated migration would create competition among western European states to frighten off potential migrants, and this would lead to an erosion of the traditional social welfare state. If the EU plan incorporated limitation on the free movement of labour, beneficial migration would also cease. A better solution would be to limit access to the western social systems, at least for a transitional period, in order to filter out migration induced by differing social standards. An EU–wide application of the home–country principle in the granting of social benefits would achieve this goal.     

Elimination of Social Security in a Dynastic Framework

Much of the existing literature on social security has taken the extreme assumption that individuals have little or no altruism; this paper takes an opposite assumption that there is full two-sided altruism. When households insure members that belong to the same family line, privatizing social security can gain public support. In our benchmark model calibrated to the U.S. economy, privatization without compensation is favoured by 52% of the population. If social security participants are fully compensated for their contributions, and the transition to privatization is financed by a combination of debt and a consumption tax, 58% experience a welfare gain. These gains and the resulting public support for social security reform depend critically on a flexible labour market. If the labour supply elasticity is low, then support for privatization disappears.     

Social Security and Early Retirement: The Relationship Between Workers,Firms and Governments

In this paper we survey a number of theoretical and empirical studies in order to propose explanations to the fall of labour force participation at older age. Starting from the largely studied effect of social security schemes on labour supply, we explore the employers behaviour and the role of governments in the development of early retirement schemes. We show that early retirement is the result of a global agreement between firms and government where workers have incentives to early exit the labour market due to generous non actuarial benefits. Firms have an advantage to separate older workers because they are costly compared to young workers and governments hope that by pushing elderly into early retirement they will solve the massive unemployment problem.     

Transition from cash benefits to work: The case of Slovenia

The paper investigates the working of the unemployment insurance and social assistance systems during Slovenia's transition, when both systems came under increased pressure. It describes unemployment insurance and social assistance programs, reviews trends in number of beneficiaries and expenditures, and identifies main issues in getting unemployed cash benefit recipients back to work: deficient targeting, too easy access to cash benefits to the better-off, adverse incentives created by cash benefit systems, and doubletrack provision of means-tested assistance to the unemployed.     

The impact of taxes on female labour supply

There is little agreement in economics on the factors influencing labour supply and hence on the impact of taxes. Within the marginal model, real wages and incomes are directing people's labour market behaviour independent of time and space, whereas the human resources approach takes account of the social environment and past behaviour. Even if strong assumptions are made, the neoclassical theory cannot predict the outcome of a wage increase. The labour supply response depends on the relative strengths of the substitution and the income effect. Since nonparticipation in the labour market is explained by a reservation wage being higher than the market wage, this is the only situation in which neoclassical theory would predict a rise in labour force participation with a wage increase. This case occured in a ‘natural experiment’ in Sweden. The Swedish tax system changed in 1971 from joint to separate taxation of spouses resulting in a substantial increase in the net wage of married women. This article investigates the impact of the change in the Swedish tax system on female labour force participation, concluding that it cannot explain the substantial rise in the participation rates of Swedish women. This is a significant result, questioning standard neoclassical theory and supporting the more institutional views of human labour market behaviour. That is that time and space as well as the social environment are important when analyzing labour supply. This will have consequences for international comparisons. Only factors which explain developments within one country might be relevant for explaining international differences, e.g. in labour force participation.     

The predictive value of subjective labour supply data: A partial-adjustment model with measurement error

This paper tests the predictive value of subjective labour supply data for adjustments in working hours over time. The idea is that if subjective labour supply data help to predict working hours, the subjective data must contain at least some information on individual labour supply preferences. In this paper, I formulate a partial-adjustment model that allows for measurement error in the observed variables. Applying estimation methods that are developed for dynamic panel data models, I find evidence for a predictive power of subjective labour supply data concerning desired working hours in the German Socio-Economic Panel 1988–1995.I wish to thank John Haisken-DeNew, Astrid Kunze, Markus Pannenberg, Winfried Pohlmeier, Frank Windmeijer, Rainer Winkelmann, my former colleagues at IZA and two anonymous referees for their valuable comments. The author gratefully acknowledges DIW for providing the data.First version received: December 2001/Final version received: December 2003     

Family labour supply: some empirical results from agriculture

The family is often taken as the decision-making unit in utility maximizing theories of labour supply. At a simple level, the family is composed of two elements, dependents and workers. This paper seeks to quantify the influence of these two elements on family labour supply in agriculture. Family farms are particularly suited to such analysis since institutional rigidities, like the fixed working week, are absent. Econometric methods are used on data from farms in the north-west of england for the year 1976/7. The cross-sectional study uses single equation methods. The results show that only family composition determines the labour supply of the farm family: they can then be used to quantify the effects of individual groups of dependents and workers on family labour supply.     

Social Security Earnings Test and the Labour Supply of the Elderly: New Evidence from Unique Survey Responses in Japan

This study proposes an alternative approach of utilizing direct responses to a survey on the social security earnings test for the elderly to provide new evidence on the sensitivity of the labour supply decision of workers aged between 60 and 64 with respect to the test. Our empirical results show a discouraging effect on working in a large proportion of these workers in Japan, even after correcting for the observed attributes of individuals who reported being either affected or unaffected.     

Social security and the elderly: A simulation of policy changes

This paper investigates the labour supply effects and the corresponding financial implications that would result from some specific changes in the British social security system. For that purpose it uses a previously estimated model of labour supply decisions by elderly people and carries out a simulation exercise of each of the policy changes considered. These are: raising the state retirement pension, abolishing the earnings rule, changing the statutory pensionable age and introducing a system of flexible retirement. We find that, of the four policy changes considered, the last two would have the largest labour supply effects.     

Gender roles,labour market participation and household income position

In empirical research on labour supply behaviour, variables like age, education or the household's financial situation as well as economic and demographic characteristics, social attitudes and gender role schemes are believed to influence the annual working hours. This paper starts from the assumption that these determinants work differently according to the poverty level of the household in which the individual lives. Using data from the German Socio-Economic Panel (GSOEP), the paper empirically tests this hypothesis for women and men living in households with a disposable income above the poverty line and of those living in poor households. The results of multiple regression analysis show traditional gender role patterns in labour supply decisions, but only for persons in households with an income above the poverty line.