Empirica

, Volume 40, Issue 2, pp 259–285 | Cite as

Wage subsidies, work incentives, and the reform of the Austrian welfare system

Original Paper

Abstract

We analyze the employment and income effects of a needs-based minimum benefit system (“Bedarfsorientierte Mindestsicherung”) which has recently been introduced in Austria. The aim of this reform was to reduce poverty as well as to increase work incentives for recipients of social assistance. On the basis of a behavioral microsimulation model we show that this new system slightly increases employment but reduces incomes for the poorest households remaining unemployed. As an alternative, we analyze a budgetary neutral reform proposal which reduces financial incentives for marginal employment and provides a wage subsidy rewarding working longer hours. This alternative reform would yield larger positive employment effects, but more households would suffer from income losses. Overall, income inequality and poverty are affected little, however, both under the new social welfare system and the alternative reform proposal.

Keywords

Work incentives Wage subsidies Income support Employment effects Microsimulation 

JEL Classification

H31 I38 J22 

Notes

Acknowledgments

We thank two anonymous referees as well as participants at the 2010 meeting of the Austrian Economic Association (NOEG) in Vienna, the 2010 meeting of the Public Economics group of the Association of German-Speaking Economist (Verein fuer Socialpolitik) in Budapest, and of a research seminar at the Vienna University of Economics for helpful suggestions on a previous version of this paper. Financial support by the German Science Foundation (DFG) under the project “Work Incentives, Earnings-Related Subsidies and Employment in Low-Wage Labor Markets—Empirical Analysis and Policy Simulations for Germany” (Ste 681/5-3) is gratefully acknowledged.

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Department of EconomicsFree University BerlinBerlinGermany
  2. 2.Gesellschaft für Angewandte Wirtschaftsforschung mbhInnsbruckAustria
  3. 3.University of LinzLinzAustria

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