work incentives
TRANSCRIPT
Olli KärkkäinenSeminar on Making work pay 25 May 2016, Brussels
Work incentives and unemployment traps – is there an easy cure?
OUTLINE• Measuring work incentives
• Work incentives in Finland 1990─2015
• Three different ways to remove unemployment traps
• Basic income – a miracle cure for work disincentives?
• Basic income experiment in Finland
• What about bureaucracy as a work disincentive?
Measuring work incentives
Extensive margin
• Unemployment → employment• Participation tax rate (PTR)
• Unemployment trap: PTR > 80 %
• Also: “Bureaucracy trap”
Intensive margin
• Increasing work hours• Effective marginal tax rate (EMTR)
• Low-income trap: EMTR > 70 %
WORK INCENTIVES IN FINLAND
Work incentives in Finland
• ”Making work pay” has been a goal of all Finnish governments since the 1990’s
• Focus on unemployment traps
• Main reasons for unemployment traps in Finland– Housing benefit– Social assistance– Earnings-related unemployment benefit
Participation tax rates in Finland: 1995−2007
• Average participation tax rate – 1995: 77,2 %– 2007: 62,4 %– Change (2007-1995): -14,8 percentage points
• Reasons– In-work tax credits (main reason)– Changes to unemployment benefit legislation
Source: Kotamäki & Kärkkäinen 2014
Participation tax rates in Finland: 2011−2015
2011 2015 Change (ppt:s)
Unemployment → Full Time 59,4 % 62,9 % +3,5 %Unemployment → Part Time 64,2 % 59,7 % – 4,5 %Part Time → Full Time 54,6 % 66,2 % +11,6 %
Main reasons:• ↑ Unemployment benefits & housing benefits (2012) =
↓ Work incentives
Source: Kotamäki & Kärkkäinen 2014
Participation tax rates in Finland: 2011−2015
2011 2015 Change (ppt:s)
Unemployment → Full Time 59,4 % 62,9 % +3,5 %Unemployment → Part Time 64,2 % 59,7 % – 4,5 %Part Time → Full Time 54,6 % 66,2 % +11,6 %
Main reasons:• ”Protected portion” -reform (2014–2015)
• First 300 €/month of labour income don’t reduce unemployment benefits or the housing benefit
• Increased work incentives: Unemployment → Part Time
• Reduced work incentives: Part Time → Full TimeSource: Kotamäki & Kärkkäinen 2014
HOW CAN WE REMOVE UNEMPLOYMENT TRAPS?
Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓+ ”Easy” way of increasing work incentives (cut down costs)– Poverty, inequality
Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓+ ”Easy” way of increasing work incentives (cut down costs)– Poverty, inequality
2. Increase disposable income at part-time work + Cost effective way of increasing part-time work incentives– Decrease work incentives: part-time full-time
Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓+ ”Easy” way of increasing work incentives (cut down costs)– Poverty, inequality
2. Increase disposable income at part-time work + Cost effective way of increasing part-time work incentives– Decrease work incentives: part-time full-time
3. Increase disposable income of all low-wage workers+ Increases part-time AND full-time work incentives– High costs
IS UNIVERSAL BASIC INCOME A MIRACLE CURE?
Universal basic income and work incentives
• Basic income– Unconditional– Same sum for every adult (regardless of f.e. housing costs)
• Full basic income replaces all current social security benefits
• Partial basic income replaces only some benefits– f.e. housing benefits and/or earnings related unemployment
benefits would stay in addition to basic income
Universal basic income and work incentives
• Full basic income– Would remove all unemployment traps and make work pay
(depending on the income tax rate)– Problem: Very high costs (UBI 1500 €/month: income tax rate ≈ 80 %)
or lower social security level– Compared with current benefits a full basic income would either be
a lot less generous or a lot more expensive
Universal basic income and work incentives
• Full basic income– Would remove all unemployment traps and make work pay
(depending on the income tax rate)– Problem: Very high costs (UBI 1500 €/month: income tax rate ≈ 80 %)
or lower social security level– Compared with current benefits a full basic income would either be
a lot less generous or a lot more expensive
• Partial basic income– Main reasons for unemployment traps remain →
unemployment traps remain– A budget neutral partial basic income -reform does not increase work
incentives
Basic income experiment in Finland
• Government's programme: implementation of a universal basic income experiment
• Research working group (consisting of f.e. Finnish Social Insurance Insitution, Research Institutes, Universities)
• Preliminary report (March 2016)– Compared different basic income models
(and negative income models)– Suggests trying out an partial basic income (550 ─750 €/month)– Budget neutral partial basic income reforms would not remove
unemployment traps or work disincentives
Basic income experiment in Finland
• Based on the preliminary report, the Finnish Government will decide on how to proceed with the experiment (Spring 2016)
• Final report of the research working group: November 2016
• Experiment (2017─2018)– Randomized nationwide sample AND a regional sample to study
externalities– Sample size depends on the budget
BUREAUCRACY TRAPS
Bureaucracy traps
• Non-financial disincentives of work– Working while unemployed requires a lot of paperwork– Complicated social security systems make things harder– Uncertainty about how welfare benefits respond to labour
income
• Automating and simplifying the tax-/benefit -system can remove bureaucracy traps f.e.– Basic Income– Universal Credit (UK)– Universal income registry (Finland 2019)
CONCLUSIONS• Work incentives have increased in Finland since the 1990’s mostly due to
in-work tax credits
• Removing unemployment traps requires either cutting down the level of social security or very costly tax cuts/social security reforms
• Universal basic income is not a miracle cure for unemployment traps
• Simplifying and automating social security can reduce “bureaucracy traps”
Thank you!Olli Kärkkä[email protected]