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


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.


Tax and benefit systems Microsimulation Labor supply Structural modeling 

JEL Classification

H21 H24 H31 J22 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bargain O, Orsini K (2006) In-work policies in Europe: killing two birds with one stone. Labour Econ 13: 667–698CrossRefGoogle Scholar
  2. Bingley P, Walker I (1997) The labour supply, unemployment and participation of lone mothers in in-work transfer programmes. Econ J 107: 1375–1390CrossRefGoogle Scholar
  3. Bloemen H (2008) Job search, hours restrictions, and desired hours of work. J Labor Econ 26: 137–179CrossRefGoogle Scholar
  4. Bloemen H, Kapteyn A (2008) The estimation of utility consistent labor supply models by means of simulated scores. J Appl Econom 23(4): 395–422CrossRefGoogle Scholar
  5. Blundell R, MaCurdy T (1999) Labor supply: a review of alternative approaches. In: Ashenfelter O, Card D (eds) Handbook of labor economics, vol 3A. Elsevier/North Holland, Amsterdam, pp 1559–1695Google Scholar
  6. Blundell R, Duncan A, McCrae J, Meghir C (2000) The labour market impact of the working families tax credit. Fiscal Stud 21: 75–104CrossRefGoogle Scholar
  7. Bonin H, Kempe W, Schneider H (2002) Household labor supply effects of low-wage subsidies in Germany. IZA Discussion Paper No. 637Google Scholar
  8. Dagsvik J, Jia Z (2006) Labor supply as a choice among latent job opportunities: a practical empirical approach. Statistics Norway Discussion Paper No. 491Google Scholar
  9. Dagsvik J, Jia Z (2008) An alternative approach to labor supply modelling, emphasizing job-type as choice variable. Statistics Norway Discussion Papers No. 550Google Scholar
  10. Dagsvik J, Røine Hoff S (2009) Justification of functional from assumptions in structural models: applications and testing of invariance measurement axioms. Theory Decis. doi: 10.1007/s11238-009-9160-4
  11. Dagsvik J, Strøm S (2004) Sectoral labor supply, choice restrictions and functional form. Statistics Norway Discussion Paper No. 338Google Scholar
  12. Dagsvik J, Strøm S (2006) Sectoral labour supply, choice restrictions and functional form. J Appl Econom 21: 803–826CrossRefGoogle Scholar
  13. De Callataÿ E (2002) Réforme et conservatisme: analyse critique de la réforme de l’impt des personnes physiques en belgique. Bull Doc Minist Finance 63: 205–215Google Scholar
  14. Duncan A, Giles C (1996) Labour supply incentives and recent family credit reforms. Econ J 106: 142–155CrossRefGoogle Scholar
  15. Eissa N, Hoynes H (2004) Taxes and the labor market participation of married couples: The earned income tax credit. J Public Econ 88: 1931–1958CrossRefGoogle Scholar
  16. Eissa N, Liebman J (1996) Labor supply response to the earned income tax credit. Q J Econ 111: 605–637CrossRefGoogle Scholar
  17. Haan P (2006) Much ado about nothing: conditional logit vs. random coefficient models for estimating labour supply elasticities. Appl Econ Lett 13(4): 251–256CrossRefGoogle Scholar
  18. Haan P, Steiner V (2005) Distributional effects of the German tax reform 2000: a behavioral microsimulation analysis. Schmollers Jahrbuch J Appl Soc Sci Stud 125: 39–49Google Scholar
  19. Hausman JA, Ruud P (1984) Family labor supply with taxes. Am Econ Rev 74: 242–253Google Scholar
  20. Hotz VJ, Scholz JK (2008) Can administrative data on child support be used to improve the EITC? Evidence from Wisconsin. Natl Tax J 61: 189–203Google Scholar
  21. Maag E (2005) Low-income parents and the use of paid tax preparers, no. B-64 in Series. New Federalism: National Survey of America’s Families. The Urban Institute, WashingtonGoogle Scholar
  22. Nelissen JH, Fontein PF, Van Soest A (2005) The impact of various policy measures on employment in the Netherlands. Jpn J Soc Secur Policy 4(1): 17–32Google Scholar
  23. Orsini K (2006a) Is Belgium ‘making work pay?’ CES Discussion Paper No. 06-05Google Scholar
  24. Orsini K (2006b) Tax and benefit reforms and the labour market: what can we learn? CES Discussion Paper no. 06-06Google Scholar
  25. Stancanelli EG (2008) Evaluating the impact of the French tax credit on the employment rate of women. J Public Econ 92: 2036–2047CrossRefGoogle Scholar
  26. Van Soest A (1995) Structural models of family labor supply: a discrete choice approach. J Hum Resour 30: 63–88CrossRefGoogle Scholar
  27. Van Soest A, Das M, Gong X (2002) A structural labour supply model with flexible preferences. J Econom 107:345–374CrossRefGoogle Scholar
  28. Vermandere C, Stevens E (2002) Een volgende aflevering in het datawarehouse-feuilleton.... Over-Werk No. 1–2, pp 78–86Google Scholar

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

Personalised recommendations