Making work pay in Croatia: An exante evaluation of two in-work benefits using miCROmod

Abstract

The aim of this paper is twofold. First, we introduce miCROmod, the most recent and comprehensive tax-benefit microsimulation model for Croatia. The focus of this paper is on its behavioural component, a structural labour supply model. Unlike in the standard discrete choice models, where labour supply follows from the agent's choice of work/leisure hours only, in our model, labour supply follows from the agent's choice from a set of jobs, which are characterised by work hours and a set of non-pecuniary job attributes that are unobserved by the researcher. In addition to the budget constraint, the agent faces constraints in the form of labour market opportunities. Second, we use the behavioural tax-benefit model to simulate the effects on the labour supply of couples and the income distribution of the introduction of in-work benefits-transfers conditional on working a certain number of hours. The following two benefits are considered: a family-based benefit imported from the UK, which is income-tested at the family level, and an individual-based benefit from Slovakia, which is income-tested at the individual level. According to the results, both are redistributive towards the needy. However, while the individual-based benefit increases the labour supply, the family-based benefit reduces it, contrary to its very purpose. An implication is that countries considering introducing an in-work benefit and that have most of their social transfers income-tested at the family level should be aware that family-level income-testing of in-work benefits might not improve work incentives, or might even harm them, especially if the benefits are generous.

The Distributional Impact of Social Spending on In-Kind and Cash Child Transfers in Croatia

“…Such models are an excellent tool for policy evaluation and various distributional analyses (Figari, Paulus, and Sutherland 2015). miCROmod consists of two modules: arithmetical (employed in this analysis) and behavioural (Urban, Bezeredi, and Pezer 2018;Bezeredi et al 2019). The arithmetical module, miCRO-modA, simulates central government cash transfers and taxes as well as the local government cash transfers and subsidies of the Croatian capital (Zagreb) and the three next biggest cities (Split, Rijeka and Osijek).…”