The impact of in-work benefits on work incentives and poverty in four European countries

Abstract

This article studies the impact of design characteristics of in-work benefits on labour supply and poverty in an international comparative setting, taking account of both first-order (without taking labour supply effects into account) and second-order effects (taking labour supply effects into account). We use the microsimulation model EUROMOD, which has been enriched with a structural discrete choice labour supply model to take account of labour supply reactions. The analysis is performed for four EU member states: Belgium, Italy, Poland and Sweden. The results show that design characteristics matter substantially, though the specific effects differ in magnitude across countries, indicating there is no one-size-fits-all solution. Throughout the analysis, numerous trade-offs are uncovered: not only between work incentives and poverty goals, but also within work incentives themselves. Taking account of behavioural reactions attenuates the impact on poverty outcomes, signalling the importance of bringing these effects into the empirical analysis.

Keywords

EUROMOD Labour supply poverty impact work incentives

Get full access to this article

View all access options for this article.

References

Aaberge

Flood

(2013) U.S. versus Sweden: The Effect of Alternative In-Work Tax Credit Policies on Labour Supply of Single Mothers. IZA Discussion Paper No. 7706. Bonn, available at https://ssrn.com/abstract=2349029.

Bargain

Orsini

(2006) ‘In-Work Policies in Europe: Killing Two Birds with One Stone?’ Labour Economics 13(6): 667–97.

Blank

R.M.

Card

Robbins

P.K.

(2000) ‘Financial Incentives for Increasing Work and Income among Low-Income Families’, in Blank

R.M.

Card

(eds) Finding Jobs: Work and Welfare Reform, pp. 373–419. New York: Russell Sage Foundation.

Blundell

Macurdy

(1999) ‘Labour Supply: A Review of Alternative Approaches’, in Ashenfelter

Card

(eds) Handbook of Labor Economics, vol. 3, pp. 1560–695. London: Elsevier.

Blundell

Shephard

(2011) ‘Employment, Hours of Work, and the Optimal Taxation of Low-Income Families’, Review of Economic Studies 79(2): 481–510.

Blundell

Duncan

McCrae

Meghir

(2000) ‘The Labour Market Behavior of the Working Families Tax Credit’, Fiscal Studies 21(1): 75–103.

Bourguignon

Spadaro

(2006) ‘Microsimulation as a Tool for Evaluating Redistribution Policies’, Journal of Economic Inequality 4(1): 77–106.

Brewer

Duncan

Shephard

Suarez

M.J.

(2006) ‘Did Working Families Tax Credit Work? The Impact of in-Work Support on Parents’ Labour Supply and Take-Up Behavior in Great Britain’, Labour Economics 13(6): 699–720.

Cantillon

Vandenbroucke

(2014) Reconciling Work and Poverty Reduction: How Successful Are European Welfare States? New York: Oxford University Press.

10.

Chetty

Friedman

J.N.

Saez

(2013) ‘Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings’, American Economic Review 103(7): 2683–721.

11.

De Luca

Rossetti

Vuri

(2014) ‘In-Work Benefits for Married Couples: An Ex-Ante Evaluation of EITC and WTC Policies in Italy’, IZA Journal of Labor Policy 3(1): 1–23.

12.

Edmark

Liang

C.-Y.

Mörk

Selin

(2016) ‘The Swedish Earned Income Tax Credit: Did It Increase Employment?’ FinanzArchiv: Public Finance Analysis 72(4): 475–503.

13.

Eurostat (2018) ‘In-work at-risk-of-poverty rate’, available at http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tespm070&plugin=1.

14.

Figari

(2010) ‘Can in-Work Benefits Improve Social Inclusion in the Southern European Countries?’ Journal of European Social Policy 20(4): 301–15.

15.

Figari

Narazani

(2015) The Joint Decision of Labour Supply and Childcare in Italy under Costs and Availability Constraints. ImPRovE Working Paper No. 15/09. Antwerp: Herman Deleeck Centre for Social Policy, University of Antwerp.

16.

Goedemé

Van den Bosch

Salanauskaite

Verbist

(2013) ‘Testing the Statistical Significance of Microsimulation Results: A Plea’, International Journal of Microsimulation 6(3): 50–77.

17.

Immervoll

Pearson

(2009) A Good Time for Making Work Pay? Taking Stock of in-Work Benefits and Related Measures across the OECD. OECD Social, Employment and Migration Working Papers No. 81. Paris: OECD.

18.

Immervoll

Kleven

H.J.

Kreiner

C.T.

Saez

(2007) ‘Welfare Reform in European Countries: A Microsimulation Analysis’, The Economic Journal 117: 1–44.

19.

Kenworthy

(2019) ‘Do Employment-Conditional Earnings Subsidies Work?’ in Cantillon

Goedemé

Hills

(eds) Decent Incomes for All: Improving Policies in Europe, pp. 154–75. Oxford: Oxford University Press.

20.

Kurowska

Myck

Wrohlich

(2016) ‘Making Work Pay: Increasing Labour Supply of Secondary Earners in Low Income Families’, Contemporary Economics 11(2): 161–70.

21.

Liebman

(2002) ‘The Optimal Design of the Earned Income Tax Credit’, in Meyer

Holtz-Eakin

(eds) Making Work Pay: The Earned Income Tax Credit and Its Impact on American Families, pp. 196–234. New York: Russell Sage Foundation.

22.

Marx

Vanhille

Verbist

(2012) ‘Combating in-Work Poverty in Continental Europe: An Investigation Using the Belgian Case’, Journal of Social Policy 41(1): 19–41.

23.

Nelson

(2013) ‘Social Assistance and EU Poverty Thresholds 1990-2008. Are European Welfare Systems Providing Just and Fair Protection against Low Income?’ European Sociological Review 29(2): 386–401.

24.

Organisation for Economic Co-operation and Development (OECD) (2005) Increasing Financial Incentives to Work: The Role of in-Work Benefits (OECD Employment Outlook). Paris: OECD.

25.

Organisation for Economic Co-operation and Development (OECD) (2011) Taxation and Employment. OECD Tax Policy Studies No. 21. Paris: OECD.

26.

Saez

(2002) ‘Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses’, The Quarterly Journal of Economics 117(3): 1039–73.

27.

Sutherland

Figari

(2013) ‘EUROMOD: The European Union Tax-Benefit Microsimulation Model’, International Journal of Microsimulation 1(6): 4–26.

28.

Vandelannoote

Verbist

(2019) ‘The Design of in-Work Benefits: How to Boost Employment and Combat Poverty in Belgium?’ in Cantillon

Goedemé

Hills

(eds) Decent Incomes for All: Improving Policies in Europe, pp. 383–416. Oxford: Oxford University Press.

29.

Van Soest

(1995) ‘Structural Models of Family Labor Supply: A Discrete Choice Approach’, Journal of Human Resources 30(1): 63–88.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.00 MB

0.26 MB