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Unemployment and Inactivity Traps in the Czech Republic: Incentive Effects of Policies

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  • Kamil Galuscak
  • Jan Pavel

Abstract

We investigate to what extent high net replacement rates between non-work and work household income may distort work incentives. Using a microsimulation model, we find that net replacement rates are particularly high for households with a working partner and children. While net replacement rates decreased moderately between 1996 and 2006 as wages rose faster than social benefits, the incidence of unemployment traps remains high. In particular, about a third of all employed individuals have a low incentive to avoid short spells of unemployment with the unemployment benefits provided, while unemployment traps are also widespread among the unemployed. The incidence of unemployment traps increased further in 2007 despite a reform of benefits. In particular, housing benefit, which was overhauled to reflect housing costs, increases net replacement rates, distorting work incentives particularly among households with children. In addition, the rise in parental allowance may lock eligible individuals in non-employment, increasing the loss of human capital among non-working parents. This is particularly important for single parents, who face the highest specific unemployment rate, and also long unemployment spells among all household types. While the link between net replacement rates and labour market stocks and flows is not straightforward across household types, further research should focus on the labour market behaviour of particular household types.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2007/9.

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Date of creation: Dec 2007
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Handle: RePEc:cnb:wpaper:2007/9

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Keywords: Labour supply; microsimulation models; net replacement rate; survey data; tax-benefit reform; unemployment trap.;

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References

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  1. repec:ese:emodwp:em2-02 is not listed on IDEAS
  2. Sorm, Vit & Terrell, Katherine, 2000. "Sectoral Restructuring and Labor Mobility: A Comparative Look at the Czech Republic," Journal of Comparative Economics, Elsevier, vol. 28(3), pages 431-455, September.
  3. Ondřej Schneider, 2004. ": Who Pays Taxes and Who Gets Benefits in the Czech Republic," Working Papers IES 68, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  4. Tito Boeri & Katherine Terrell, 2001. "Institutional Determinants of Labor Reallocation in Transition," William Davidson Institute Working Papers Series 384, William Davidson Institute at the University of Michigan.
  5. 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.
  6. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  7. Tomáš Jelínek & Ondøej Schneider, 2001. "Czech Social Security and Tax System and Their Impact on the Income Distribution," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 51(12), pages 639-657, December.
  8. Chiara Bronchi & Andrew Burns, 2000. "The Tax System in the Czech Republic," OECD Economics Department Working Papers 245, OECD Publishing.
  9. Herwig Immervoll, 2003. "The Distribution Of Average And Marginal Effective Tax Rates In European Union Member States," Public Economics 0302005, EconWPA.
  10. Kamil Galuscak & Daniel Munich, 2005. "Structural and Cyclical Unemployment: What Can We Derive from the Matching Function?," Working Papers 2005/02, Czech National Bank, Research Department.
  11. Stepan Jurajda & Daniel Münich, 2002. "Understanding Czech Long-Term Unemployment," William Davidson Institute Working Papers Series 498, William Davidson Institute at the University of Michigan.
  12. Giuseppe Carone & Herwig Immervoll & Dominique Paturot & Aino Salomäki, 2004. "Indicators of Unemployment and Low-Wage Traps: Marginal Effective Tax Rates on Employment Incomes," OECD Social, Employment and Migration Working Papers 18, OECD Publishing.
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Cited by:
  1. Guzi, Martin, 2013. "An Empirical Analysis of Welfare Dependence in the Czech Republic," IZA Discussion Papers 7478, Institute for the Study of Labor (IZA).
  2. Joanna Tyrowicz, 2009. "When Eastern Labour Markets Enter Western Europe. CEECs Labour Market Institutions upon Euro Zone Accession," National Bank of Poland Working Papers 61, National Bank of Poland, Economic Institute.
  3. Jan Babecky & Oxana Babetskaia-Kukharchuk & Kamil Galuscak & Dana Hajkova & Jaroslav Hermanek & Tomas Holub & Roman Horvath & Petr Jakubik & Lubos Komarek & Zlatuse Komarkova & Petr Kral & Filip Novot, 2008. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2008," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as08 edited by Dana Hajkova, August.
  4. Michal Franta, 2008. "Time Aggregation Bias in Discrete Time Models of Aggregate Duration Data," Working Papers 2008/10, Czech National Bank, Research Department.

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