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Employment Effects of Welfare Reforms: Evidence from a Dynamic Structural Life-Cycle Model

  • Haan, Peter

    ()

    (DIW Berlin)

  • Prowse, Victoria L.

    ()

    (Cornell University)

  • Uhlendorff, Arne

    ()

    (CREST)

In this paper we develop a dynamic structural life-cycle model of labor supply behavior which fully accounts for the effect of income tax and transfers on labor supply incentives. Additionally, the model recognizes the demand side driven rationing risk that might prevent individuals from realizing their optimal labor supply state, resulting in involuntary unemployment. We use this framework to study the employment effects of transforming a traditional welfare state, as is currently in place in Germany, towards a more Anglo-American system in which a large proportion of transfers are paid to the working poor.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3480.

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Length: 48 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:iza:izadps:dp3480
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