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Welfare Reform in European Countries: A Microsimulation Analysis

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  • Herwig Immervoll
  • Henrik Jacobsen Kleven
  • Claus Thustrup Kreiner
  • Emmanuel Saez

Abstract

This paper estimates the welfare and distributional impact of two types of welfare reform in the 15 (pre-enlargement) member countries of the European Union. The reforms are revenue neutral and financed by an overall and uniform increase in marginal tax rates on earnings. The first reform distributes the additional tax revenue uniformly to everybody (traditional welfare) while the second reform distributes tax proceeds uniformly to workers only (in-work benefit). We build a simple model of labour supply encompassing responses to taxes and transfers along both the intensive and extensive margin. We then use EUROMOD to describe current welfare and tax systems in European Union countries and use calibrated labour supply elasticities along the intensive and extensive margins to analyze the effects of the two welfare reforms. We quantify the equity-efficiency trade-off for a range of elasticity parameters. In most countries, because of large existing welfare programmes with high phase-out rates, the uniform redistribution policy is undesirable unless the redistributive tastes of the government are extreme. The inwork benefit reform, on the other hand, is desirable in a very wide set of cases. We discuss the practical policy implications for European welfare policy. Ce document évalue l’impact sur les transferts sociaux et la répartition des revenus de deux types de réforme de la protection sociale dans 15 pays membres (avant élargissement) de l’Union européenne. Ces réformes n’ont pas d’incidence sur les recettes publiques et elles sont financées par un relèvement général et uniforme du taux d’imposition marginal des gains. La première réforme distribue uniformément entre tous les citoyens le surcroît de recettes fiscales (protection sociale traditionnelle), alors que la seconde distribue uniformément les recettes fiscales uniquement entre les travailleurs (prestations liées à l’emploi). On construit un modèle simple de l’offre de main-d’œuvre prenant en compte les réactions aux prélèvements fiscaux et aux transferts tant à la marge intensive et qu’à la marge extensive. On applique alors le modèle EUROMOD pour décrire les systèmes d’aide sociale et d’imposition actuellement en place dans tous les pays de l’Union européenne et on utilise les élasticités calibrées de l’offre de main-d’œuvre aux marges extensive et intensive pour analyser les effets des deux réformes de la protection sociale. On évalue de manière quantitative le compromis équité-efficacité pour une série de paramètres d’elasticité. Dans la plupart des pays, du fait de l’existence d’importants programmes de protection sociale dont les taux de réduction progressive des prestations sont élevés, la stratégie de redistribution uniforme n’est, en général, pas souhaitable à moins que les pouvoirs publics n’aient une préférence très marquée pour les mesures de redistribution. La réforme des prestations liées à l’emploi, en revanche, est souhaitable dans un très grand nombre de cas. Nous examinons les implications pratiques pour l’action des pouvoirs publics de la politique européenne d’aide sociale.

Suggested Citation

  • Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," OECD Social, Employment and Migration Working Papers 28, OECD Publishing.
  • Handle: RePEc:oec:elsaab:28-en
    DOI: 10.1787/873766824646
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    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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