Welfare Reform in European Countries: A Micro-Simulation Analysis

61 Pages Posted: 3 May 2004

See all articles by Herwig Immervoll

Herwig Immervoll

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division; World Bank, Europe and Central Asia; IZA Institute of Labor Economics; ISER Institute for Social and Economic Research; University of Canberra - National Centre for Social and Economic Modelling (NATSEM); United Nations - European Centre for Social Welfare Policy and Research

Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU)

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2004

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 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 all European Union countries (except Sweden) and use calibrated labour supply elasticities along the intensive and extensive margins to analyse 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 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 in-work 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.

Keywords: Welfare reform, redistribution, labour supply

JEL Classification: H20

Suggested Citation

Immervoll, Herwig and Immervoll, Herwig and Kleven, Henrik Jacobsen and Kreiner, Claus Thustrup and Saez, Emmanuel, Welfare Reform in European Countries: A Micro-Simulation Analysis (March 2004). Available at SSRN: https://ssrn.com/abstract=536222

Herwig Immervoll (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division ( email )

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University of Canberra - National Centre for Social and Economic Modelling (NATSEM) ( email )

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AUSTRALIA

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United Nations - European Centre for Social Welfare Policy and Research ( email )

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Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU) ( email )

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Copenhagen K., DK-1353
Denmark
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Claus Thustrup Kreiner

University of Copenhagen - Department of Economics ( email )

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+45 35 32 30 00 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Emmanuel Saez

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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