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TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU

Explore the impact of tax reforms on employment & growth, efficiency of policies, role of bargaining institutions, and more in EU countries. Understand how tax and benefit systems influence labor market institutions.

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TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU

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  1. TAX-BENEFIT SYSTEMS AND EMPLOYMENT IN THE EU Aino Salomäki DG ECFIN European Commission TAXBEN PROJECT CEPS 27 November 2006

  2. Statistical analysis of LM institutions(PRAXIS) • The role of tax and benefit systems • What theory predicts seems to hold better in NMS-8 than EU-15 • Tax wedge has a negative impact on participation, employment, hours worked , part-time empl (NMS) • Negative correl. betw. high METRs and empl. rate • Explained by the bargaining system • NMS-8: market determined wages ( a more homogeneous group) • EU-15: bargained wages (to different degrees) • NMS: tax wedge > EU-15 average; low UI benefits

  3. Efficiency of policies reg. employment and growth I = inefficient, N = neutral, E = efficient

  4. Tracking Reforms:LABREF

  5. Tracking Reforms:LABREF

  6. Tax wedge on low-wage (Single - 67% of average wage ) (14 MSs>=40%)

  7. Unemployment trap(Single earner- 67% of average wage ) 12 MSs METR>=80%

  8. FR vs. UK: role of unemployment benefit schemes • UK: min wage + flat rate UB • FR: min. wage + earnings-related UB -> UK institutions superior; FR UR 15 -> 8% • Suggesting that minimum wages and ER UB not a good mix of LM institutions • Due to high inefficient unemployment (Uin) • Why the removal of minimum wages would not be efficient? (FR UR 15 -> 18%; Uin 7 -> 12%) • Suggesting thatmore job offers would be at min. wage • Why would the reservation wages guide more wage offers? • What would be the role of bargaining institutions?

  9. FR :Payroll tax subsidies • Found to be welfare enhancing • Are there restrictions under which this finding holds? • UB and wage bargaining systems taken for granted? • Given that: • Min wage > reservation wage; high UB • Subsidy for 1 – 1.33 x min wage • Workers covered in 1995: 38%, 1998: 45% • Compressed wage distribution at the lower end of the wage scale • Costly policy • Questions: • Would another policy be less costly and more effective? • What role for wage bargaining systems? • Long-term effects on wage distribution?

  10. WHAT TO LEARN? • Effect of tax-benefit reforms depends on bargaining institutions • General tax reductions not very effective • Better results could be obtained from benefit reforms • Tax reforms should be combined with benefit reforms • Actual reform efforts in contrast with the conclusions • What role for distributional concerns? • Don’t we understand the preconditions for reforming LM institutions? What works and what doesn’t? • Should recommendations be more specific reg. LM institutions? One-size-does-not-fit-all not enough? • How Member States can improve their policies?

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