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An Empirical Analysis of Welfare Dependence in the Czech Republic

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  • Guzi, Martin

    ()
    (Masaryk University)

Abstract

Paper demonstrates the existence of a welfare trap in the Czech Republic, created by the tax and social security systems. Combining individual data from the Czech Labor Force Survey and the Czech Household Income Survey, the analysis exploits the difference between the available social benefits and the net household income when a person is employed. This information allows us to calculate the net replacement rate based on the parameters of the taxation system and rules for means-tested social benefits at the household level. Estimates imply the existence of a welfare trap, which means that individuals who receive relatively higher social benefits are also more likely to remain unemployed. It is shown that the most affected groups are those with low education and long unemployment spells. Furthermore, the paper documents the disadvantaged position of women in the Czech labor market. The estimates imply that women outflows to employment are particularly influenced by the high social benefits, and the existence of a welfare trap persists even when the job-search intensity is controlled. This finding contributes to the discussion on the persistent and large unemployment gender gap in the Czech Republic. The results of the analysis support policy improvements towards low-income households. A better harmonization of tax and social security systems is necessary in order to ensure that the incentives to leave unemployment are not hampered by high social benefits.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7478.

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Length: 28 pages
Date of creation: Jun 2013
Date of revision:
Publication status: forthcoming in: Czech Journal of Economics and Finance
Handle: RePEc:iza:izadps:dp7478

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Keywords: net replacement rate; welfare trap; labour supply;

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References

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  1. Boeri, Tito, 2000. "Structural Change, Welfare Systems, and Labour Reallocation: Lessons from the Transition of Formerly Planned Economies," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198293651, October.
  2. Jan C. van Ours & Milan Vodopivec, 2006. "How Shortening the Potential Duration of Unemployment Benefits Affects the Duration of Unemployment: Evidence from a Natural Experiment," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 24(2), pages 351-378, April.
  3. Kamil Galuscak & Jan Pavel, 2007. "Unemployment and Inactivity Traps in the Czech Republic: Incentive Effects of Policies," Working Papers, Czech National Bank, Research Department 2007/9, Czech National Bank, Research Department.
  4. Hilmar Schneider & Arne Uhlendorff, 2005. "Transitions from Welfare to Employment: Does the Ratio between Labor Income and Social Assistance Matter?," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 125(1), pages 51-61.
  5. Sorm, Vit & Terrell, Katherine, 2000. "Sectoral Restructuring and Labor Mobility: A Comparative Look at the Czech Republic," Journal of Comparative Economics, Elsevier, Elsevier, vol. 28(3), pages 431-455, September.
  6. M Arellano & Costas Megir & Mary Silles, 1990. "Female Labour Supply and On-the-Job Search: An Empirical Model Estimated using Complementary Data Sets," CEP Discussion Papers, Centre for Economic Performance, LSE dp0009, Centre for Economic Performance, LSE.
  7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  8. Alena Bicakova, 2010. "Gender Unemployment Gaps: Evidence from the New EU Member States," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp410, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  9. Pedro Portugal & John T. Addison, 2008. "Six Ways To Leave Unemployment," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 55(4), pages 393-419, 09.
  10. Ondřej Schneider, 2004. ": Who Pays Taxes and Who Gets Benefits in the Czech Republic," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 68, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  11. Kamil Galuscak & Daniel Munich, 2005. "Structural and Cyclical Unemployment: What Can We Derive from the Matching Function?," Working Papers, Czech National Bank, Research Department 2005/02, Czech National Bank, Research Department.
  12. Mulligan, Casey B., 2012. "The Redistribution Recession: How Labor Market Distortions Contracted the Economy," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199942213, October.
  13. Lehmann, Hartmut & Muravyev, Alexander, 2009. "How Important Are Labor Market Institutions for Labor Market Performance in Transition Countries?," IZA Discussion Papers, Institute for the Study of Labor (IZA) 4673, Institute for the Study of Labor (IZA).
  14. Jurajda, Stepan, 2003. "Gender wage gap and segregation in enterprises and the public sector in late transition countries," Journal of Comparative Economics, Elsevier, Elsevier, vol. 31(2), pages 199-222, June.
  15. Vladislav Flek & Jiøí Veèerník, 2005. "The Labor Market in the Czech Republic: Trends, Policies, and Attitudes (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 55(1-2), pages 5-24, January.
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