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An Empirical Analysis of Welfare Dependence in the Czech Republic

  • Guzi, Martin

    ()

    (Masaryk University)

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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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: published in: Czech Journal of Economics and Finance, 2014, 64(5), 407-431, Open Access ).
Handle: RePEc:iza:izadps:dp7478
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  1. John Ham & Jan Svejnar & Katherine Terrell, 1998. "Unemployment and the Social Safety Net During Transitions to a Market Economy: Evidence from the Czech and Slovak Republic," William Davidson Institute Working Papers Series 169, William Davidson Institute at the University of Michigan.
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  6. štìpán Jurajda & Daniel Münich, 2003. "Understanding Long-Term Unemployment in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(1-2), pages 11-30, January.
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  8. 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 dp0009, Centre for Economic Performance, LSE.
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  10. Jurajda, Stepan, 2003. "Gender wage gap and segregation in enterprises and the public sector in late transition countries," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 199-222, June.
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  14. Boeri, Tito, 2000. "Structural Change, Welfare Systems, and Labour Reallocation: Lessons from the Transition of Formerly Planned Economies," OUP Catalogue, Oxford University Press, number 9780198293651, March.
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