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Alleviating unemployment traps in Finland: Can the efficiency-equity trade-off be avoided?

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Author Info

  • Pertti Honkanen

    ()
    (The Social Security Institution of Finland)

  • Markus Jäntti

    ()
    (Åbo Akademi University)

  • Jukka Pirttilä

    ()
    (Labour Institute for Economic Research)

Abstract

Using a new comprehensive tax-benefit model, JUTTA, this paper examines how labour supply incentives – both to participate in the labour force (the “extensive” margin) and to supply extra hours of work (the “incentive” margin) – have changed in Finland in 1995-2007. The results reveal that the average participation tax rate has decreased by 10 percentage points to 62 per cent. Despite the significant improvement in incentives, some of the unemployed who have children, especially single parents, are still in an unemployment trap, i.e. the disposable family income does not significantly increase if the person is employed. We therefore present simulations where the social security system is reformed, without reducing minimum benefits, so that the income dependence of some of the benefits is reduced. This reform redistributes income to the poor and, at the same time, improves the incentives to participate in the labour force. We also compare the effects of this policy with those of a set of more traditional type of policies, consisting of across-the-board tax cuts and increases in income support.

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Bibliographic Info

Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 24.

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Length: 35
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:tkk:dpaper:dp24

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Related research

Keywords: microsimulation; labour supply; extensive margin; efficiency-equity trade-off;

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  1. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
  2. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  3. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2007. "Welfare reform in European countries: a microsimulation analysis," Economic Journal, Royal Economic Society, vol. 117(516), pages 1-44, 01.
  4. Bargain, Olivier & Orsini, Kristian, 2006. "In-work policies in Europe: Killing two birds with one stone?," Labour Economics, Elsevier, vol. 13(6), pages 667-697, December.
  5. Bargain, Olivier & Orsini, Kristian, 2006. "Beans for Breakfast? How Exportable Is the British Workfare Model?," IZA Discussion Papers 2025, Institute for the Study of Labor (IZA).
  6. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  7. Eissa, Nada & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2008. "Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 795-816, April.
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