Welfare Reform in European Countries: A Micro-Simulation Analysis

Emmanuel Saez, Claus Kreiner, Henrik Kleven and Herwig Immervoll

No 4324, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-reg
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Citations: View citations in EconPapers (35)

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Related works:
Journal Article: Welfare reform in European countries: a microsimulation analysis (2007)
Working Paper: Welfare Reform in European Countries: A Microsimulation Analysis (2005)
Working Paper: Welfare Reform in European Countries: A Microsimulation Analysis (2005)
Working Paper: Welfare reform in European countries: a micro-simulation analysis (2004)
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