In-work policies in Europe: Killing two birds with one stone?

Abstract

Generous social assistance has been held responsible for inactivity traps and social exclusion in several European countries, hence the recent trend of promoting employment through in-work transfers. Yet, the relative consensus on the need for dmaking work payT policies is muddied by a number of concerns relative to the design of the reforms and the treatment of the family dimension. Relying on EUROMOD, a EU-15 integrated tax-benefit microsimulation software, we simulate two types of in-work benefits. The first one is means-tested on family income, in the fashion of the British Working Family Tax Credit, while the second is a purely individualized policy. Both reforms are built on the same cost basis (after behavioral responses) and simulated in three European countries suspected to experience large poverty traps, namely Finland, France and Germany. The potential labor supply responses to the reforms and the subsequent redistributive impacts are assessed for each country using a structural discrete-choice model. We compare how both reforms achieve poverty reduction and social inclusion (measured as the number of transitions into activity). All three countries present different initial conditions, including existing tax-benefit systems and distribution of incomes and wages. These sources of heterogeneity are exploited together with different labor supply elasticities to explain the cross-country differences in the impact of the reforms. D

Tax incentives and family labor supply in Austria

“…Tax deductions, on the other hand, foster stronger labor market integration of women over the life-cycle, in particular when combined with subsidization of childcare costs and favourable employment legislation (Bargain and Orsini, 2006). Therefore, a policy shift from universal child transfers to child tax deductibles is unlikely to have negative effects on fertility in the long-term.…”

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“…The small amount of the credit is however not likely to induce to a massive participation effect, but it is the idea of the government to substantially increase the level of the tax credit in the future. 28 Bargain and Orsini (2004) use a structural labor supply model to assess the second round effects the tax credit described in this paper and of an individualized measure having the same budgetary cost in the same three countries. They conclude that, although only the individualized measure may be realistically expected to achieve an increase in employment, the efficiency cost with respect to both the employment and poverty reduction objectives remain extremely high.…”

“…Source: Authors' computations using EUROMOD. Ilmakunnas (1992) Married and cohabitating 0.29 -females in working age Kusimanen (1997) Married and cohabitating 0.10 -females in working age Bargain and Orsini (2004) Married and cohabitating 0.15 0.28 females (either inactive or Inactive or employed in employment) single women with partners in employment…”

“…Some broad conclusions may nevertheless be drawn: consistently with economic theory, wage elasticities of single women are significantly lower than elasticities of married or cohabiting women. The significant exception of Finland, reported by Bargain and Orsini (2004) should deserve further analysis.…”

“…Bargain and Orsini (2004) follow Blundell, Duncan, McCrae, and Meghir (2000) and evaluate the second round effect of different in work policies using a structural model of labor supply. Such procedure, however, relies heavily on the specified functional form and on the assumed distribution of disturbances.…”