Income Transfers and Work Effort: The Netherlands and the United States in the 1970s

Abstract

SUMMARY The growing leniency and generosity of public income support systems has been hypothesized to negatively affect work effort. The magnitude of this effect is estimated for the U. S. and the Netherlands in the 1970s, using a three‐stage Probit‐OLS model employed on micro data sets. Individuals are viewed as choosing the number of hours worked on the basis of expected labor income, expected transfer income, labor market and demographic characteristics and health. The elasticity of annual hours worked with respect to expected transfer income was estimated to be ‐0.22 for U. S. and ‐0.82 (1980) for the Netherlands. Combining these elasticities with the annual percentage increases in transfer generosity yields a yearly reduction in the number of hours worked of 0.65% for the U. S. and 2.7% for the Netherlands during the 1970s. These results suggest that growing transfers have had a substantial and negative impact on desired work effort and thus on production and economic performance, especially in the Netherlands.

Poor Children in Rich Countries

“…Welfare programs are related to economic need and therefore are reduced when beneficiaries increase their income from earnings. This reduction of welfare benefits with increases in earned income creates an implicit tax rate on earned income, which tends to reduce labor force participation and hours worked (13,14).…”

Some Historical Dimensions of the Welfare State ‘Crisis’

“…A typical example of this can be seen in a recent article by Wolfe et al (1984) which examines the effect of income transfers on work effort in the Netherlands and the US in the 1970s. The authors begin by pointing out that public expenditure on major income transfer programmes has expanded rapidly over the last decade while growth rates have fallen and unemployment rates have risen.…”