The impact of in-work benefits on work incentives and poverty in four European countries

Abstract

This article studies the impact of design characteristics of in-work benefits on labour supply and poverty in an international comparative setting, taking account of both first-order (without taking labour supply effects into account) and second-order effects (taking labour supply effects into account). We use the microsimulation model EUROMOD, which has been enriched with a structural discrete choice labour supply model to take account of labour supply reactions. The analysis is performed for four EU member states: Belgium, Italy, Poland and Sweden. The results show that design characteristics matter substantially, though the specific effects differ in magnitude across countries, indicating there is no one-size-fits-all solution. Throughout the analysis, numerous trade-offs are uncovered: not only between work incentives and poverty goals, but also within work incentives themselves. Taking account of behavioural reactions attenuates the impact on poverty outcomes, signalling the importance of bringing these effects into the empirical analysis.