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Earned Income Tax Credit in a Disaggregated Labor Market with Minimum Wage Contracts



An earned income tax credit is introduced in a dynamic CGE model with overlapping generations and imperfectly competitive labor market segments. The model is calibrated to a 10 percent sample of a register of all persons and workplaces in Denmark and scaled to the level of National Accounts. Each labor market segment is covered by a collective bargaining agreement, except one that is competitive. In all segments a distribution of workers with different productivity exists. A tax credit, which increases the net income of the poorest full-time employed workers in the economy by DKK 5000, reduces unemployment by 2.5 percentage points. Since the marginally employed have a productivity lower than the average worker, employment measured in productivity units increases only by approximately 1.5 percentage points. Women and younger generations tend to gain from the policy. The effect of the policy depends crucially on the initial level of unemployment because the productivity distributions are highly non-linear: if the initial level ofunemployment is halved to 5% so are the effects of unemployment and employment.

Suggested Citation

  • Lars Haagen Pedersen & Peter Stephensen, 1999. "Earned Income Tax Credit in a Disaggregated Labor Market with Minimum Wage Contracts," DREAM Working Paper Series 199901, Danish Rational Economic Agents Model, DREAM.
  • Handle: RePEc:dra:wpaper:199901
    Note: A short version of this paper is published in Harrison, Hougaard Jensen, Pedersen og Rutherford (ed.): Using Dynamic General Equilibrium Models for Policy Analysis, North-Holland 2000

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    Cited by:

    1. Toke Ward Petersen, 2001. "Interest Rate Risk over the Life-Cycle: A General Equilibrium Approach," DREAM Working Paper Series 200103, Danish Rational Economic Agents Model, DREAM.
    2. Toke Ward Petersen, 2001. "General Equilibrium Tax Policy with Hyperbolic Consumers," DREAM Working Paper Series 200101, Danish Rational Economic Agents Model, DREAM.
    3. Toke Ward Petersen, 2001. "The Optimal Level of Progressivity in the Labor Income Tax in a Model with Competitive Markets and Idiosyncratic Uncertainty," DREAM Working Paper Series 200104, Danish Rational Economic Agents Model, DREAM.
    4. Toke Ward Petersen, 2001. "Indivisible Labor and the Welfare Effects of Labor Income Tax Reform," DREAM Working Paper Series 200102, Danish Rational Economic Agents Model, DREAM.

    More about this item

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making


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