Welfare Reform in European Countries: A Micro-Simulation Analysis

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 03.05.2005, 12:15 - 13:30

   

Presentation by 

Herwig Immervoll (OECD)
   

Abstract:

This paper estimates the welfare and distributional impact of two types of welfare reform in 14 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 labor 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 labor supply elasticities along the intensive and extensive margins to analyze the effects of the two welfare reforms. We quantify the equitye ciency trade-off for a range of elasticity parameters. In most countries, because of the large existing welfare programs with high phase-out rates, the uniform redistribution policy is, in general, 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.

   
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