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Financial work incentives and the long-term unemployed: the case of Belgium

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  • Diego Collado

Abstract

There is an abundant body of research studying the effect of financial work incentives on employment. Most studies exploit variation within groups over time or across employed and unemployed people, while little research has studied individual changes over time and focused on the long-term unemployed (LTU). In Belgium the long-term unemployment rate is high and the household incomes of many LTU are below the at-risk-of-poverty threshold. Policy proposals aiming to improve this situation might benefit from knowing whether changes in work incentives affect the likelihood of taking up work. Thus, we study whether changes in work incentives, measured by the participation tax rate (PTR), affected the likelihood of going from long-term unemployment to more than half a year of employment. We examine the seven two-year episodes that took place between 2005 and 2012 in Belgium. During these years there were policy changes that affected work incentives and thus contribute to the identification of behavioural effects. We also study whether changes in effective marginal tax rates (EMTRs) affected the hours worked by people already in the labour market working part-time. Increasing out-of-work incomes while maintaining how much work pays would require increasing in-work compensations. As this would probably raise EMTRs, studying the intensive margin is also warranted. We calculate work incentives using the tax-benefit microsimulation model EUROMOD, adapting it to utilise longitudinal data. Results from regression analysis show that a 10 percentage point increase in the PTR (i.e. if work paid less) had a negative average marginal of around 4 percentage points on the probability of taking up work. This effect is sizable considering that the baseline probability of transitioning to more than half a year of employment was 9 per cent. Changes in EMTRs did not have a statistically significant effect on hours worked by part-timers. This might leave some room to compensate increases in out-of-work transfers with changes in in-work transfers.

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  • Diego Collado, 2018. "Financial work incentives and the long-term unemployed: the case of Belgium," Working Papers 1803, Herman Deleeck Centre for Social Policy, University of Antwerp.
    • Handle: RePEc:hdl:wpaper:1803
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    Cited by:

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    2. Torry, Malcolm, 2021. "Feasibility study: A Basic Income pilot project for Wales. A response to the report "Piloting a Basic Income in Wales"," FRIBIS Discussion Paper Series 02-2021, University of Freiburg, Freiburg Institute for Basic Income Studies (FRIBIS).
    3. Charlotte Bartels & Cortnie Shupe, 2023. "Drivers of participation elasticities across Europe: gender or earner role within the household?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(1), pages 167-214, February.
    4. Torry, Malcolm, 2020. "Evaluation of a Recovery Basic Income, and of a sustainable revenue neutral Citizen’s Basic Income, with an appendix relating to different Universal Credit roll-out scenarios," EUROMOD Working Papers EM7/20, EUROMOD at the Institute for Social and Economic Research.
    5. Holly Sutherland, 2018. "Quality Assessment of Microsimulation Models The Case of EUROMOD," International Journal of Microsimulation, International Microsimulation Association, vol. 11(1), pages 198-223.

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