Labour Supply Incentives Research Articles

Family taxation and labour market participation incentives in Italy

The potential implications of using the family as opposed to the individual as the unit of taxation are not clear. This applies both to work incentives and distributional outcomes. In this paper we evaluate the effects of a hypothetical reform of Italian income taxation both on labour supply incentives and on redistribution of income between families with different composition and income levels. In particular, we analyze the potential effects of a shift from the current system of individual taxation to a system of family taxation similar to the French family-splitting approach by implementing a tax-benefit model. Based on data from the Bank of Italy Survey of Household Income and Wealth, our simulations show a reduction in the degree of progressivity and a disincentive for the labour supply of additional earners within the family.

Introduction

Introduction

The German labor market after the Great Recession: successful reforms and future challenges

The reaction of the German labor market to the Great Recession 2008/09 was relatively mild – especially compared to other countries. The reason lies not only in the specific type of the recession – which was favorable for the German economy structure – but also in a series of labor market reforms initiated between 2002 and 2005 altering, inter alia, labor supply incentives. However, irrespective of the mild response to the Great Recession, there are a number of substantial future challenges the German labor market will soon have to face. Female labor supply still lies well below that of other countries and a massive demographic change over the next 50 years will have substantial effects on labor supply as well as the pension system. In addition, due to a skill-biased technological change over the next decades, firms will face problems of finding employees with adequate skills. The aim of this paper is threefold. First, we outline why the German labor market reacted in such a mild fashion, describe current economic trends of the labor market in light of general trends in the European Union, and reveal some of the main associated challenges. Thereafter, the paper analyzes recent reforms of the main institutional settings of the labor market which influence labor supply. Finally, based on the status quo of these institutional settings, the paper gives a brief overview of strategies to combat adequately the challenges in terms of labor supply and to ensure economic growth in the future.

In-Work Benefits for Married Couples: An Ex-Ante Evaluation of EITC and WTC Policies in Italy

This paper investigates labor supply and redistributive effects of in-work benefits for Italian married couples using a tax-benefit microsimulation model and a multi-sectoral discrete choice model of labor supply. We consider two in-work benefit schemes following the key principles of the Earned Income Tax Credit (EITC) and the Working Tax Credit (WTC) existing in the US and the UK, respectively. The standard design of these in-work benefits is however augmented with a new benefit premium for two-earner households in order to overcome the well-known disincentive effects that these welfare instruments may generate on secondary earners. In simulation, the proposed in-work benefits are financed through the abolition of Italian family allowances for dependent employees and contingent workers thus ensuring tax revenue neutrality. We show that our EITC and WTC reforms have strong positive effects on labor supply of wives, weak negative effects on labor supply of husbands, and strong positive effects on equity. The EITC is more effective than the WTC in boosting employment of wives, while the WTC is more effective than the EITC in fighting poverty. In both schemes, the trade-off between labor supply incentives and redistributive effects is crucially related to the new benefit premium for two-earner households. Other things being equal, tax revenue neutrality implies that a higher value of this policy coefficient yields stronger incentive effects and weaker redistributive effects.

The German Labor Market after the Great Recession: Successful Reforms and Future Challenges

The reaction of the German labor market to the Great Recession 2008/09 was relatively mild – especially compared to other countries. The reason lies not only in the specific type of the recession – which was favorable for the German economy structure – but also in a series of labor market reforms initiated between 2002 and 2005 altering, inter alia, labor supply incentives. However, irrespective of the mild response to the Great Recession, there are a number of substantial future challenges the German labor market will soon have to face. Female labor supply still lies well below that of other countries and a massive demographic change over the next 50 years will have substantial effects on labor supply as well as the pension system. In addition, due to a skill-biased technological change over the next decades, firms will face problems of finding employees with adequate skills. The aim of this paper is threefold. First, we outline why the German labor market reacted in such a mild fashion, describe current economic trends of the labor market in light of general trends in the European Union, and reveal some of the main associated challenges. Thereafter, the paper analyzes recent reforms of the main institutional settings of the labor market which influence labor supply. Finally, based on the status quo of these institutional settings, the paper gives a brief overview of strategies to combat adequately the challenges in terms of labor supply and to ensure economic growth in the future.

Tax Policy Design and the Role of A Tax-Free Threshold

This paper examines the role of the tax-free threshold in a tax and transfer system consisting of a range of taxes and income support payments. The simultaneous payment of tax and receipt of income support, seen by some commentators as a problem, is examined. The analysis shows that with an income support system, a tax-free range is not required to achieve redistribution. With the aim of improving labor supply incentives while maintaining approximate revenue and distribution neutrality, a policy change involving the elimination of the tax-free threshold in Australia is examined using a behavioral microsimulation model which accounts to a large extent for population heterogeneity. The results demonstrate that the tax-free threshold can be eliminated under these conditions, but labor supply incentives cannot simultaneously be improved. This means that the status quo could be more or less maintained while eliminating the tax-free threshold.

Immigration policy and employment assimilation in the United States

We examine the impact of immigration policy on the employment propensity and assimilation of immigrants using a pooled cross-section of the 1994–2004 Current Population Surveys (CPS). The results are generally consistent with positive immigrant employment assimilation. A Blinder–Oaxaca style decomposition shows that the foreign-born obtain more employment primarily through human capital acquisition and changes in labour market conditions rather than higher returns to observable skills, as sometimes seen in wage studies. In addition, our analysis suggests that immigration policies may influence both labour demand and supply incentives and are associated with structural shifts in the labour market.

Assessing the employment effects of the German welfare reform – an integrated CGE-microsimulation approach

The purpose of this article is to quantify the employment effects of the recent German welfare reform. The key element of this reform was to merge the coexisting transfer systems Social Assistance (SA) and Unemployment Assistance (UA) into one unified benefit (Arbeitslosengeld II – ALG II). We also consider a second reform scenario that is intended to further improve the labour supply incentives of low-skilled workers. Our methodological contribution is to use an integrated CGE-microsimulation model. In adopting such an approach, we are able to combine the advantages of microsimulation studies by accounting for the large amount of heterogeneity in terms of households’ preferences and budget constraints with the advantages of an applied general equilibrium model. The latter permits us to identify potential general equilibrium repercussions through changes in wages and unemployment. The simulations indicate that the introduction of ALG II results in a negligible increase in employment of only 45 000 individuals. In contrast, a cut in benefit levels combined with a decrease in transfer withdrawal is shown to produce somewhat larger employment effects of about 190 000 individuals.

How to Reform Pension Systems? Comparing Outcomes in Austria and Ireland

This paper investigates the pension policies and outcomes of two countries, Austria and Ireland, representing two different welfare models. How do these different systems perform in terms of income adequacy, labour supply incentives for older workers, and actuarial fairness? Although there is no ‘optimal’ design for a pension system, there seems to be a convergence in systems between countries. Countries with established welfare models that have evolved over time need to rethink the basic paradigms of their pension policies for the future. This paper contains specific policy recommendations about pension reform. We highlight the importance of behavioural incentives with respect to raising average retirement ages, and the need for government engagement in providing an adequate retirement income.

Employment Effects of Welfare Reforms: Evidence from a Dynamic Structural Life-Cycle Model

In this paper we develop a dynamic structural life-cycle model of labor supply behavior which fully accounts for the eects of income tax and transfers on labor supply incentives. Additionally, the model recognizes the demand side driven rationing risk that might prevent individuals from realizing their optimal labor supply state, resulting in involuntary unemployment. We use this framework to study the employment eects of transforming a traditional welfare state, as is currently in place in Germany, towards a more Anglo-American system in which a large proportion of transfers are paid to the working poor.

The Impact of Social Policy Initiatives on Labour Supply Incentives: A Review of the Literature

The paper also provides an overview and comparison of methodologies commonly employed in labour market research. It demonstrates the danger of evaluating programs using short-term longitudinal data. It concludes by identifying a need for more reliable and up-to-date data, particularly longitudinal data, to better understand the long-term effects of work incentive programs.By reviewing current Australian and international literature, this research has improved our understanding of the effects of various work incentives on labour supply for different sub-groups. Key findings include: - the benefit level is found to have a small negative impact (for both men and women) on exit rates and labour supply - in-work benefits schemes in the United States and United Kingdom have demonstrated positive results for sole parents, but are small or ambiguous for partnered men and women - women, particularly sole mothers, are most sensitive to financial incentives - education improves employment prospects and appears to increase job tenure, with women benefiting more than men from a higher level of education - the effects of training are more ambiguous, with on-the-job-training proving effective for young men with low levels of education, but workfare programs appear to reduce the probability of finding work for educated people - early results from Australian studies indicate workfare and work experience programs (particularly wage subsidies and brokered employment programs) are effective in reducing the duration of unemployment, and increasing the duration of employment.

A comparison of family policy designs of Australia and Norway using microsimulation models

Many of the Australian family support schemes are income-tested transfers, targeted towards the lower end of the income distribution, whereas the Norwegian approach is to provide subsidized non-parental care services and universal family payments. We contrast these two types of policies and discuss policy changes within these policy types by presenting results from simulations, using microsimulation models developed for Australia and Norway. Labor supply effects and distributional effects are discussed for the hypothetical policy changes of replacing the means-tested family payments of Australia by the Norwegian universal child benefit schedule and vice versa, and of reducing the childcare fees in both countries. The analysis highlights that the case for policy changes is restricted by the economic environment and the role of family policy in the two countries. Whereas there is considerable potential for increased labor supply of Australian mothers, it may have detrimental distributional effects and is likely to be costly. In Norway, mothers already have high labor supply and any adverse distributional effects of further labor supply incentives occur in an economy with low initial income dispersion. However, expenditure on family support is already high and the question is whether this should be further extended.

Financing Social Security: Simulating Different Welfare State Systems for Germany

In Germany, there is an ongoing debate about how to increase the efficiency of the social security system and especially its financing. The aim of this paper is to simulate different financing systems for Germany. The introduction of a Liberal British or the Southern Greek financing system increases inequality and poverty, as well as labour supply incentives. The introduction of the Social-democratic Danish financing system decreases inequality of incomes, but does not necessarily lead to less poverty. Tax payments are extremely high, whereas social contribution payments are relatively low leading to mixed incentives effects.

Effects of Flat Tax Reforms in Western Europe on Equity and Efficiency

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and e? ciency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and e? ciency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.

Social Security Privatization with Income-Mortality Correlation

While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing. We simulate a 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $30,100 of extra resources for each future household after all transitional losses have been paid. When wages are not insurable, privatization reduces efficiency by about $8,100 per future household. We check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions. First, privatization performs better in a closed economy, where interest rates decline with capital accumulation, than in an open economy. Second, privatization also performs better when an actuarially-fair private annuity market does not exist. Third, government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually harm.

Does Social Security Privatization Produce Efficiency Gains?

While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing when households face uninsurable risks. We simulate a stylized 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $21,900 of new resources for each future household (growth adjusted over time) after all households have been fully compensated for their possible transitional losses. However, when wages are not insurable, privatization reduces efficiency by about $5,600 per future household despite improved labor supply incentives. We check the robustness of these results to different model specifications and arrive at several surprising conclusions. First, privatization actually performs relatively better in a closed economy, where interest rates decline with capital accumulation, than in an open economy where capital can be accumulated without reducing interest rates. Second, privatization also performs relatively better when an actuarially-fair private annuity market does not exist than when it does exist. Third, introducing progressivity into the privatized system to restore risk sharing must be done carefully. In particular, having the government match private contributions on a progressive basis is not very effective at restoring risk-sharing - too much matching actually harms efficiency. However, increasing the progressivity of the remaining traditional system is very effective at restoring risk sharing, thereby allowing partial privatization to produce efficiency gains of $2,700 per future household.

Effects of Flat Tax Reforms in Western Europe on Income Distribution and Work Incentives

The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and efficiency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.

The impact of income taxation on the ratio between reservation and market wages and the incentives for labour supply

This article extends previous research about the determinants of reservation wages by analysing the effect of progressive income taxation on the ratio between reservation and net market wages. Based on micro data for Germany Socio-Economic-Panel (SOEP) we show that joint income taxation in Germany which discriminates by marital status, has a strong and highly significant impact on the reservation/market wage ratio. Relative to single filers, this leads to strong negative labour supply incentives for secondary earners and to positive incentives for first earners in married couples.

From the Shortage of Jobs to the Shortage of Skilled Workers: Labor Markets in the EU New Member States

Labor markets in the transition economies of Central and Eastern Europe underwent a dramatic transformation. Notably, this transformation took place within just a few years. Until the mid-2000s job opportunities were scarce and unemployment was high. But since then labor demand has picked up and unemployment has dropped substantially. In contrast to the earlier period of weak labor demand, it is now the supply side of the labor market that constrains job creation. These spectacular improvements can hardly be attributed to the greater labor market flexibility or to the more efficient matching of workers with jobs because no major reforms to labor market institutions were recently implemented in the region. Instead, the main cause was a strong increase in labor demand, as evidenced by the increase in the job vacancy rates and real wages. The surge in labor demand is likely to reflect successful enterprise restructuring supported by the improvements in the investment climate and access to global markets associated with the EU accession. For a long time enterprises in transition economies were improving competitiveness by shedding of redundant labor. Now they use productivity gains to invest, expand output and hire more workers. However, the emerging skills shortages may constrain firm growth. Thus the transition economies face a challenge of mobilizing effective labor supply. This requires improving labor supply incentives and investing in education. This paper documents the recent changes in labor market conditions in the transition economies, suggests tentative explanations, and finally suggests policies to address the emerging challenges.

Social Security Meets Race

P resident Bush has appealed to African-American voters by arguing that they would benefit from the replacement of part of the traditional Social Security retirement income system with private retirement accounts. The argument goes like this: The average 50-year-old African American has a life expectancy of 27.3 years, as compared to an average of 30.5 years for Caucasians. This means that African Americans receive retirement benefits for fewer years and are more likely to die before receiving any benefits at all. In a system of private retirement accounts, African Americans could bequeath their accounts to their heirs, thereby closing some of the “black-white” wealth gap and ensuring that blacks no longer get a bad deal from Social Security. There are good reasons for introducing private retirement accounts, such as increasing national savings and improving labor supply incentives. But achieving racial parity in Social Security benefits is not one of them. Blacks benefit disproportionately from other features of Social Security. Because they have below-average lifetime earnings, they are helped by the Social Security benefit formula that replaces a larger fraction of pre-retirement earnings for low earners than for high earners. For the retirement portion of Social Security, these two effects almost exactly cancel, meaning that blacks receive rates of return on their Social Security payroll tax payments at least equal to those for whites. When benefits for disability and young survivors are included, blacks clearly receive an above-average return from the current Social Security system. Because Social Security benefits are protected from inflation and last as long as you live, they are especially valuable to low-income groups that count on them for a large portion of retirement income. Thus, changing Social Security may in fact harm, rather than help, blacks. ![Figure][1] CREDIT: J. SCOTT APPLEWHITE/AP It is hard to judge how different racial and ethnic groups would fare under an approach that has not yet been fully defined, but there are reasons for worry. First, the president proposes to divert payroll tax revenue away from the current system. That raises the chance that disability and survivor benefits will be cut, disproportionately affecting blacks. Second, there might not be any redistribution from high earners to low earners in the privatized portion of the reformed system, meaning that gains to blacks from the bequeathability of accounts will be at least partially offset. Third, any sensible privatization plan will require retirees to convert their account balance into annuities upon retirement; because members of long-lived groups will receive annuity payments for more years, there will continue to be redistribution from groups with low life expectancy to groups with high life expectancy. Fourth, the introduction of market risk into Social Security will be more of a burden for low-income groups such as blacks. One could design a system with privatized accounts in which blacks do fine: by maintaining disability benefit levels, enhancing redistribution from high earners to low earners, and requiring that annuities provide payments to the retired worker or his or her heirs for a minimum of 10 years. Blacks could indeed be winners from such a reform. But these features are unrelated to privatization; all could be accomplished within the traditional Social Security system. If the real objective is to help demographic groups with short life expectancy, tinkering with Social Security rules may not be the best approach. Instead, investing in the health of low-income populations with early mortality could produce greater benefits in the short run and help to close the longevity gap in the long run. Under the present system, if black and white longevities were equal, blacks would receive about $4 billion of additional Social Security benefits per year. That's less than 2% of spending on Medicaid, the nation's medical assistance program for low-income individuals. Even if that sum were sensibly invested in expanding access to health care, improving community health centers, increasing research expenditures on racial differences in disease, and so on, it is doubtful whether longevity differences could be eliminated. That's because the differences are large, and the things that are likely to have the biggest impact—changing diet and exercise habits—are hard to alter with government policy. Thus, investing in the health of low-income populations may well be the best way to spend money on behalf of groups with short life spans. But we should not kid ourselves into believing that investments of this size will erase racial differences in health outcomes. And the president should not kid African Americans that Social Security privatization will make them richer. [1]: pending:yes