Improving work incentives in Serbia: evaluation of a tax policy reform using SRMOD

Abstract

Inactivity and unemployment rates as well as informal employment rates in Serbia are particularly high among low-paid workers. Several studies argued that one of main reasons for high entry costs in the labour market in Serbia is the existence of the mandatory minimum base for social security contributions (SSC). Our paper is the first one to provide empirical evidence about the incentive and distributional effects of the abolishment of the mandatory minimum SSC base. Using the tax and benefit micro-simulation model for Serbia (SRMOD), which is based on EUROMOD platform, we found that this policy reform would reduce effective average tax rates by more than it would reduce effective marginal tax rate. This implies a larger participation response than hours-of-work response. A decrease in both of these indicators is most pronounced for lower income groups. At the same time, the reform would trigger positive distributional effects since the number of individuals in low-income groups, whose disposable income would increase after the reform by more than 2%, is ranging from 3.3% to 5.8%. However, the impact of the reform on the overall level of inequality, measured by the Gini coefficient, would be small.

Labour Supply and Inequality Effects of In-Work Benefits: Evidence from Serbia

“…The results of macro-validation of SRMOD simulations are satisfactory, since the margin between the simulated income tax and social contributions compared to the administrative data ranges between 5% and 20%, a large share of discrepancy being attributed to the underreporting of income and sampling issues in the survey, since the average wage in the dataset is 8% lower than the one published by the Statistical Office (Ranđelović & Žarković-Rakić, 2013). The discrepancy between the simulated benefits and the amounts disclosed in administrative datasets is even lower, ranging from 5% to 15%.…”

“…First, bearing in mind that the effectiveness of the IWB policies depends on their design, as well as on the institutional characteristics of a targeted country, our paper constitutes a new methodological framework taking into account the characteristics of the labour market of a transition country. The existing literature has mostly focused on the developed economies, while the empirical literature for the European transition economies, to the best of our knowledge, is limited to the evidence for Slovenia (Kosi & Bojnec, 2009), Poland (Myck et al, 2013), Macedonia (Mojsoska et al, 2015) and Serbia (Clavet et al, 2019;Ranđelović & Žarković-Rakić, 2013;Žarković-Rakić et al, 2016). Second, since low labour market participation, high informality and high formal activation costs are common features of the Western Balkan economies, while the IWB policies are almost non-existent, the empirical results for Serbia may represent a considerable contribution not only to the existing empirical literature but also to a discussion on introducing making-work-pay policies in the region.…”

The effect of increasing the minimum wage on poverty and inequality in Bosnia and Herzegovina

“…In this paper the effect of increasing the minimum wage on poverty and inequality is calculated using BiHMOD, a microsimulation model for ex-ante evaluation of tax and social benefit policy changes, based on EUROMOD. EUROMOD-based national models have frequently been used to estimate the effects of the minimum wage in other countries, including Belgium (Penne et al, 2019), North Macedonia (Petreski & Kosovska, 2018), UK (Atkinson et al, 2017), Romania (Popescu et al, 2017), and Serbia (Ranđelović & Žarković Rakić, 2012).…”

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

“…Means test criteria for CA are to a large extent similar to those for MSA. 7 EUROMOD is the tax and benefit microsimulation model for the European Union(Randjelovic & Zarkovic Rakic, 2013).Being developed on the EUROMOD platform, SRMOD is to a very large extent comparable to EUROMOD in terms of data sources (SILC), the simulated policies (income taxes, social contributions and the main benefits), user interface and the output data format.…”