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Welfare benefits and work incentives: an analysis of the distribution of net replacement rates in Europe using EUROMOD, a multi-country microsimulation model

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  • Immervoll, Herwig
  • O'Donoghue, Cathal

Abstract

This paper considers the methodology of measuring replacement rates, comparing simulation based approaches, which simulate replacement rates for a representative sample of the population, with other approaches that simulate replacement rates for "typical" families or are entirely based on recorded household data. We emphasise the advantages of the first method. Utilising a cross-country microsimulation model for Europe, EUROMOD, we generate the distribution of replacement rates for four European countries, Denmark, France, Spain and the UK. In particular we show the important role of household composition and the presence of other household members' incomes in preserving the standard of living while out of work. We argue that, given this strong influence of primary incomes, replacement rates are not necessarily the best indicator of the impact of the taxbenefit system in this respect. To isolate the effects of the tax-benefit system on both work incentives and the degree of social protection for the out-of-work population, we therefore introduce a new measure, the “tax-benefit-to-earnings ratio”.

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Bibliographic Info

Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number EM4/01.

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Date of creation: 01 Jun 2002
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Publication status: published
Handle: RePEc:ese:emodwp:em4-01

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References

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  1. Sutherland, Holly & Immervoll, Herwig & O'Donoghue, Cathal, 1999. "An introduction to EUROMOD," EUROMOD Working Papers EM0/99, EUROMOD at the Institute for Social and Economic Research.
  2. Riphahn, Regina T., 2000. "Rational Poverty or Poor Rationality? The Take-up of Social Assistance Benefits," IZA Discussion Papers 124, Institute for the Study of Labor (IZA).
  3. Tim Callan & Brian Nolan & Cathal O'Donoghue, 1996. "What Has Happened to Replacement Rates?," Papers WP076, Economic and Social Research Institute (ESRI).
  4. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
  5. repec:fth:eeccco:133 is not listed on IDEAS
  6. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Snower, Dennis J., 1994. "Evaluating Unemployment Policies: What do the Underlying Theories Tell Us?," CEPR Discussion Papers 1081, C.E.P.R. Discussion Papers.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  9. David Carey & Harry Tchilinguirian, 2000. "Average Effective Tax Rates on Capital, Labour and Consumption," OECD Economics Department Working Papers 258, OECD Publishing.
  10. Berger, Frederic & Borsenberger, Monique & Immervoll, Herwig & Lumen, Julie & Scholtus, Bertrand & de Vos, Klaas, 2001. "The Impact of Tax-Benefit Systems on Low-Income Households in the Benelux Countries. A Simulation Approach Using Synthetic Datasets," EUROMOD Working Papers EM3/01, EUROMOD at the Institute for Social and Economic Research.
  11. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  12. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
  13. Aino Salom�ki & Teresa Munzi, 1999. "Net Replacement Rates of the Unemployed. Comparison of various approaches," European Economy - Economic Papers 133, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  14. Immervoll, H., 2000. "Fiscal Drag - An Automatic Stabiliser?," Cambridge Working Papers in Economics 0025, Faculty of Economics, University of Cambridge.
  15. Sutherland, Holly, 2001. "EUROMOD: an integrated European benefit-tax model: final report," EUROMOD Working Papers EM9/01, EUROMOD at the Institute for Social and Economic Research.
  16. FitzRoy, Felix R & Hart, Robert A, 1985. "Hours, Layoffs and Unemployment Insurance Funding: Theory and Practice in an International Perspective," Economic Journal, Royal Economic Society, vol. 95(379), pages 700-713, September.
  17. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
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Citations

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Cited by:
  1. Figari, Francesco & Immervoll, Herwig & Levy, Horacio & Sutherland, Holly, 2007. "Inequalities within couples: market incomes and the role of taxes and benefits in Europe," EUROMOD Working Papers EM6/07, EUROMOD at the Institute for Social and Economic Research.
  2. Bargain, Olivier & Orsini, Kristian, 2004. "In-work policies in Europe: killing two birds with one stone?," EUROMOD Working Papers EM4/04, EUROMOD at the Institute for Social and Economic Research.
  3. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," IZA Discussion Papers 1810, Institute for the Study of Labor (IZA).
  4. Natascha Van Mechelen & Sarah Marchal & Tim Goedemé & Ive Marx & Bea Cantillon, 2011. "The CSB-Minimum Income Protection Indicators dataset (CSB-MIPI)," Working Papers 1105, Herman Deleeck Centre for Social Policy, University of Antwerp.
  5. Burlacu, Irina S. & O'Donoghue, Cathal, 2012. "Differential Welfare State Impacts for Frontier Working Age Families," IZA Discussion Papers 6734, Institute for the Study of Labor (IZA).
  6. Narazani, Edlira & Shima, Isilda, 2008. "Labour supply modelling in Italy when Minimum Income Scheme is an option," EUROMOD Working Papers EM6/08, EUROMOD at the Institute for Social and Economic Research.
  7. Li, Jinjing & O'Donoghue, Cathal, 2011. "Incentives of Retirement Transition for Elderly Workers: An Analysis of Actual and Simulated Replacement Rates in Ireland," IZA Discussion Papers 5865, Institute for the Study of Labor (IZA).
  8. Herwig Immervoll & Cathal O'Donoghue, 2003. "Towards A Multi-Purpose Framework For Tax-Benefit Microsimulation," Computational Economics 0302002, EconWPA.
  9. Libor Dousek & Klara Kaliskova & Daniel Munich, 2013. "Distribution of Average, Marginal and Participation Tax Rates among Czech Taxpayers: Results from a TAXBEN Model," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 474-504, December.

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