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

Author

Listed:
  • 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.

Suggested Citation

  • Pertti Honkanen & Markus Jäntti & Jukka Pirttilä, 2007. "Alleviating unemployment traps in Finland: Can the efficiency-equity trade-off be avoided?," Discussion Papers 24, Aboa Centre for Economics.
  • Handle: RePEc:tkk:dpaper:dp24
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    File URL: http://www.ace-economics.fi/kuvat/dp024.pdf
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    References listed on IDEAS

    as
    1. 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, January.
    2. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
    3. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
    4. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
    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. 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.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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