Cash Transfers and Guaranteed Minimum Income Programs:
Research, Evaluation, and Policy
Prague, Czech Republic
September 9-10, 2024
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“Minimum Income Schemes and Work Incentives in EU-27”
Kateryna Bornukova, Joint Research Centre, European Comission
This study investigates the impact of minimum income (MI) reforms aimed at increasing adequacy and coverage on work incentives in the European Union (EU), utilising the EUROMOD microsimulation model and drawing on both EU-SILC and hypothetical household (HHoT) data. The research focuses on two key indicators of work incentives: Marginal Effective Tax Rates (METRs) and Net Replacement Rates (NRRs). These metrics capture the financial disincentives to work arising from the interaction between the tax and benefit systems.
The study begins by analysing the existing MI schemes in selected EU member states, establishing a baseline scenario to assess current work incentives. It then simulates various policy reforms, aimed at increasing the adequacy and coverage of MI benefits. The impact of these reforms on METRs and NRRs is evaluated using both EU-SILC and HHoT data. Reforms aimed at improve work incentives, such as introducing income disregards, and implementing benefit tapering are then considered.
Preliminary results indicate that increasing the adequacy of MI benefits can lead to strong disincentives to work, particularly at the intensive margin (i.e., the incentive to work more hours). This finding aligns with previous research suggesting that higher benefit levels can reduce the financial gain from working additional hours.
The study also finds that income disregard, which exempts a portion of earned income from the means test, can effectively increase work incentives at the intensive margin. By allowing individuals to keep more of their earnings, income disregard encourages them to work more hours and increase their income.
Furthermore, benefit tapering, which gradually reduces MI benefits as time in new employment passes, can incentivize individuals to enter the labour market (i.e., the extensive margin). However, this effect is primarily observed for low-wage earners, as higher-wage individuals already have strong incentives to work even without tapering.
By examining the complex relationship between MI schemes and work incentives, this study aims to inform policymakers in designing effective MI policies that balance poverty reduction with work incentives. The findings are relevant for countries seeking to improve adequacy of MI benefits while not worsening work incentives.