Work Incentives at the Extensive and Intensive Margin in Europe: The Role of Taxes, Benefits and Population Characteristics

Abstract

Tax and benefit systems play an important role in determining work incentives at both, the extensive and the intensive margin of labour supply. The aim of this paper is to provide a comprehensive comparative analysis of work incentives in the EU. Our analysis makes use of microsimulation techniques and representative household surveys from all 28 EU countries to compare the distribution of short-and long-term participation tax rates and marginal effective tax rates across population subgroups. We focus on people currently in work and characterise the population facing low work incentives in each country. Our results highlight the large variation in the distribution of work incentives across EU countries, explained not only by differences in the design of tax-benefit systems, but also by the characteristics of the labour force across countries. Unemployment insurance benefits contribute substantially to short-term participation tax rates and explain on average 20 percentage point difference between work incentives of short-vs. long-term unemployment. Our analysis further highlights the need to use microdata to study differences across countries in terms of the population subgroups facing low incentives to work with the aim to inform the policy debate on potential reforms to make work pay.

Trapped in inactivity? Social assistance and labour supply in Austria

“…To highlight the impact of the reform on work incentives for labour market participation, we calculate the net replacement rate-the ratio of net income out of work and net income in work-for all individuals and present them by different household types. For a detailed overview of the methodology of the net replacement rate, see Jara et al (2020). Our results shown in Table 5 suggest that the reform would slightly increase incentives to stop working for singles with children, while on the other hand the reform will increase the incentives to remain employed for both couples with and without children.…”

Rethinking social assistance amid the COVID‐19 pandemic: Guaranteeing the right to income security in Ecuador

“…To the best of our knowledge, there is no comparative evidence on METR for Latin American countries. Therefore, to provide a benchmark for comparison, we note that METR in Ecuador is substantially low compared to the European context, where the lowest mean METR is 21.9% for Bulgaria (Jara et al, 2020). The low METR observed in Ecuador is the result of two factors.…”

“…We followJara et al (2020) and calculate METR for individuals with positive earnings by increasing their earnings by 3% and recalculating their household disposable income. For households with multiple earners, the procedure is done for each earner, holding the information of other earners fixed.METR are then defined as follows: where is the change in household disposable income following an individual's increase in earnings and represents the marginal increase in earnings.…”

Microsimulation of tax-benefit systems in the Global South: a comparative assessment

“…We use marginal effective tax rates (METRs), which denote the proportion of a marginal increase in earnings that is taxed away due to social insurance and tax liabilities and loss of benefit entitlement. The calculations are conducted using EUROMOD's Marginal Tax Rate (MTR) addon, developed based on Jara and Tumino (2013) and Jara et al (2020), where METR is computed for individuals with positive earnings by increasing their earnings by 3 per cent and recalculating their household disposable income. 5 For households with more than one earner, the procedure is applied to each earner while holding the information of other earners fixed.…”