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Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden

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Author Info

  • Bennmarker, Helge

    ()
    (IFAU - Institute for Evaluation of Labour Market and Education Policy)

  • Calmfors, Lars

    ()
    (Institute for International Economics Study, Stockholm University)

  • Larsson Seim, Anna

    ()
    (Department of Economics, Stockholm University)

Abstract

Although there is a large literature on employment effects of earned income tax credits (EITCs) and unemployment benefits, less is known about wage effects. In our model the impact is via the net (after-tax) replacement rate. Using a panel of individuals from Sweden, we find a positive relationship between the net replacement rate and wages with semi-elasticities in the range 0.2-0.4. This implies that a one percent reduction in the unemployment benefit level or a one percent increase in the net-of-tax rate is associated with a fall in the before-tax wage of 0.1-0.2 per cent. EITCs and unemployment benefit reductions are thus likely to induce wage moderation.

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Bibliographic Info

Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2013:12.

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Length: 29 pages
Date of creation: 10 May 2013
Date of revision:
Handle: RePEc:hhs:ifauwp:2013_012

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Keywords: Earned income tax credit; unemployment benefits; wage formation;

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  1. Robert Shimer & Ivan Werning, 2006. "Reservation Wages and Unemployment Insurance," NBER Working Papers 12618, National Bureau of Economic Research, Inc.
  2. Martin Feldstein & James M. Poterba, 1984. "Unemployment Insurance and Reservation Wages," NBER Working Papers 1011, National Bureau of Economic Research, Inc.
  3. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
  4. Jesse Rothstein, 2008. "The Unintended Consequences of Encouraging Work: Tax Incidence and the EITC," Working Papers 1049, Princeton University, Department of Economics, Center for Economic Policy Studies..
  5. Leigh, Andrew, 2010. "Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms," IZA Discussion Papers 4960, Institute for the Study of Labor (IZA).
  6. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 40-59, Spring.
  7. Bloemen, Hans G & Stancanelli, Elena G F, 2001. "Individual Wealth, Reservation Wages, and Transitions into Employment," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 400-439, April.
  8. Berg, G.J. van den, 1987. "Nonstationarity in job search theory," Research Memorandum 242, Tilburg University, Faculty of Economics and Business Administration.
  9. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics 2006:12, Stockholm University, Department of Economics.
  10. Herwig Immervoll & Mark Pearson, 2009. "A Good Time for Making Work Pay? Taking Stock of In-Work Benefits and Related Measures across the OECD," OECD Social, Employment and Migration Working Papers 81, OECD Publishing.
  11. Anders Forslund & Nils Gottfries & Andreas Westermark, 2008. "Prices, Productivity and Wage Bargaining in Open Economies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 169-195, 03.
  12. Lynch, Lisa M, 1983. "Job Search and Youth Unemployment," Oxford Economic Papers, Oxford University Press, vol. 35(0), pages 271-82, Supplemen.
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