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Financial Incentives to Work Decomposed: The Finnish Case

Author

Listed:
  • Mauri Kotamäki

    (Tela)

  • Joonas Ollonqvist

    (University of Turku)

Abstract

This paper analyses financial incentives to work in Finland from three perspectives. First, the financial incentives to work are quantified i.e. the participation tax rate (PTR) levels are calculated with numerous classifications. Second, a question of how different parts of the tax and social security system affect work incentives is answered; the PTR is decomposed so that the quantitative contribution of different tax and social security components is given. Third, subgroup decomposition method is applied to explain how variation in PTR is explained by various characteristics of individuals. We found that taxation and unemployment benefits account the largest shares of the mean PTR. Another finding is that PTRs vary substantially and the benefit side and length of unemployment explain this variation quite well. However, the majority of the variation cannot be explained.

Suggested Citation

  • Mauri Kotamäki & Joonas Ollonqvist, 2018. "Financial Incentives to Work Decomposed: The Finnish Case," Discussion Papers 119, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp119
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    References listed on IDEAS

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    More about this item

    Keywords

    microsimulation; work incentives; labor supply; taxes; benefits;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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