Empirical Economics

, Volume 40, Issue 3, pp 779–806 | Cite as

Subsidies on low-skilled workers’ social security contributions: the case of Belgium

  • John K. Dagsvik
  • Zhiyang Jia
  • Kristian Orsini
  • Guy Van Camp
Article

Abstract

In recent decades, many “Making Work Pay” policies have been implemented in OECD countries. These policies aim at improving the financial incentives for work, while maintaining high levels of social protection. Examples include the Earned Income Tax Credit in the USA and the Working Families’ Tax Credit in the UK. While these policies are proven to be quite effective with respect to poverty alleviation, many worry that they may discourage labor supply on the intensive margin. We consider an alternative measure implemented in Belgium: the Workbonus, which subsidizes social security contributions for low-skilled workers. This program differs from other measures in that the eligibility and the level of the subsidy are based on full-time equivalent earnings. The instrument therefore distinguishes between low skill and low effort and avoids the above-mentioned disincentive effect. We assess the effects of the Workbonus on labor supply using a particular discrete-choice labor supply model, in which individuals are assumed to choose among jobs belonging to individual-specific latent choice sets. In particular, we compare the Workbonus with a tax credit system temporarily implemented in Belgium in 2001–2004. Results show that both measures have a positive impact on labor supply. However, the Workbonus is more efficient in terms of cost per additional full-time equivalent position created and avoids the “part-time trap” implicit in the tax credit system.

Keywords

Tax and benefit systems Microsimulation Labor supply Structural modeling 

JEL Classification

H21 H24 H31 J22 

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Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  • John K. Dagsvik
    • 1
  • Zhiyang Jia
    • 1
    • 2
  • Kristian Orsini
    • 3
  • Guy Van Camp
    • 4
  1. 1.Research DepartmentStatistics NorwayOsloNorway
  2. 2.The Frisch Centre for Economic ResearchOsloNorway
  3. 3.European CommissionBrusselsBelgium
  4. 4.DG Strategy & Research, The Belgian Federal Public Service Social SecurityBrusselsBelgium

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