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Why do Scandinavians Work?

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  • Torben Andersen
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    Abstract

    Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation rate despite high tax rates and a generous social safety net. This either refutes the standard incentive argument or leave the Scandinavian countries as a puzzle. This paper argues that both the standard view and the Scandinavian experience can be reconciled when taking into account both the pecuniary and non-pecuniary incentives build into the social safety net. The social safety net in the Scandinavian countries is at the same time both generous and employment conditioned. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. Such employment conditionalities make it possible to achieve distributional objectives without jeopardizing the incentive structure.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-05/cesifo1_wp3068.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3068.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3068

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    Related research

    Keywords: tax incentives; labour supply; activation;

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    1. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U. S. and Europe: Why so Different?," Harvard Institute of Economic Research Working Papers 2068, Harvard - Institute of Economic Research.
    2. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
    3. Michiel Evers & Ruud de Mooij & Daniel van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
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    6. Pedersen, Peder J. & Smith, Nina, 2002. "Unemployment Traps: Do Financial Dis-incentives matter?," CLS Working Papers 01-1, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
    7. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
    8. Christian Holzner & Volker Meier & Martin Werding, 2006. "Workfare, Monitoring, and Efficiency Wages," CESifo Working Paper Series 1749, CESifo Group Munich.
    9. Orsetta Causa, 2008. "Explaining Differences in Hours Worked among OECD Countries: An empirical analysis," OECD Economics Department Working Papers 596, OECD Publishing.
    10. Pierre Cahuc & Yann Algan, 2009. "Civic Virtue and Labor Market Institutions," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 111-45, January.
    11. Kluve, Jochen, 2006. "The Effectiveness of European Active Labor Market Policy," IZA Discussion Papers 2018, Institute for the Study of Labor (IZA).
    12. Erixon, Lennart, 2008. "The Rehn-Meidner Model in Sweden: Its Rise, Challenges and Survival," Research Papers in Economics 2008:2, Stockholm University, Department of Economics.
    13. Raj Chetty, 2008. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," NBER Working Papers 13844, National Bureau of Economic Research, Inc.
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