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Welfare Benefits and Work Incentives. An Analysis of the Distribution of Net Replacement Rates in Europe using EUROMOD, a Multi- Country Microsimulation Model

  • Herwig Immervoll

    (University of Cambridge and European Centre for Social Welfare Policy and Research - Vienna)

  • Cathal O'Donoghue

    (University of Cambridge and National University of Ireland - Galway)

This paper considers the methodology of measuring replacement rates, comparing simulation based approaches, which simulate replacement rates for a representative sample of the population, with other approaches that simulate replacement rates for "typical" families or are entirely based on recorded household data. We emphasise the advantages of the first method. Utilising a cross-country microsimulation model for Europe, EUROMOD, we generate the distribution of replacement rates for four European countries, Denmark, France, Spain and the UK. In particular we show the important role of household composition and the presence of other household members' incomes in preserving the standard of living while out of work. We argue that, given this strong influence of primary incomes, replacement rates are not necessarily the best indicator of the impact of the taxbenefit system in this respect. To isolate the effects of the tax-benefit system on both work incentives and the degree of social protection for the out-of-work population, we therefore introduce a new measure, the “tax-benefit-to-earnings ratio”.

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Paper provided by EconWPA in its series Labor and Demography with number 0302001.

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Date of creation: 07 Feb 2003
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Handle: RePEc:wpa:wuwpla:0302001
Note: Type of Document - ; figures: included. EUROMOD web-site:
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  1. Sutherland, Holly, 2001. "EUROMOD: an integrated European benefit-tax model: final report," EUROMOD Working Papers EM9/01, EUROMOD at the Institute for Social and Economic Research.
  2. Snower, Dennis J., 1994. "Evaluating Unemployment Policies: What do the Underlying Theories Tell Us?," CEPR Discussion Papers 1081, C.E.P.R. Discussion Papers.
  3. Riphahn, Regina T., 2000. "Rational Poverty or Poor Rationality? The Take-up of Social Assistance Benefits," IZA Discussion Papers 124, Institute for the Study of Labor (IZA).
  4. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, March.
  6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  7. Berger, Frederic & Borsenberger, Monique & Immervoll, Herwig & Lumen, Julie & Scholtus, Bertrand & de Vos, Klaas, 2001. "The Impact of Tax-Benefit Systems on Low-Income Households in the Benelux Countries. A Simulation Approach Using Synthetic Datasets," EUROMOD Working Papers EM3/01, EUROMOD at the Institute for Social and Economic Research.
  8. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  9. Sutherland, Holly & Immervoll, Herwig & O'Donoghue, Cathal, 1999. "An introduction to EUROMOD," EUROMOD Working Papers EM0/99, EUROMOD at the Institute for Social and Economic Research.
  10. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  11. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  12. Immervoll, H., 2000. "Fiscal Drag - An Automatic Stabiliser?," Cambridge Working Papers in Economics 0025, Faculty of Economics, University of Cambridge.
  13. Tim Callan & Brian Nolan & Cathal O'Donoghue, 1996. "What Has Happened to Replacement Rates?," Papers WP076, Economic and Social Research Institute (ESRI).
  14. David Carey & Harry Tchilinguirian, 2000. "Average Effective Tax Rates on Capital, Labour and Consumption," OECD Economics Department Working Papers 258, OECD Publishing.
  15. FitzRoy, Felix R & Hart, Robert A, 1985. "Hours, Layoffs and Unemployment Insurance Funding: Theory and Practice in an International Perspective," Economic Journal, Royal Economic Society, vol. 95(379), pages 700-713, September.
  16. Aino Salom�ki & Teresa Munzi, 1999. "Net Replacement Rates of the Unemployed. Comparison of various approaches," European Economy - Economic Papers 133, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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