Redistribution policies

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Short-time work compensations and employment

Temporary government schemes can have a positive economic effect

10.15185/izawol.11 11 Cahuc, P

by Pierre Cahuc

Government schemes that compensate workers for the loss of income while they are on short hours (known as short-time work compensation schemes) make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements. Because the employers do not lay off these staff, the schemes help to maintain permanent employment levels during recessions. However, they can create inefficiency in the labor market, and might limit labor market access for freelancers and those looking to work part-time.

Equal pay legislation and the gender wage gap

Despite major efforts at equal pay legislation, gender pay inequality still exists in the developed economies. How can this be put right?

10.15185/izawol.16 16 Polachek, S

by Solomon W. Polachek

Despite equal pay legislation dating back 50 years, American women still earn 22% less than their male counterparts. In the UK, with its Equal Pay Act of 1970, and France, which legislated in 1972, the gap is 21% and 17% respectively, and in Australia it remains around 17%. Interestingly, the gender pay gap is relatively small for the young but increases as men and women grow older. Similarly, it is large when comparing married men and women, but smaller for singles. Just what can explain these wage patterns? And what can governments do to speed up wage convergence to close the gender pay gap? Clearly, the gender pay gap continues to be an important policy issue.

How responsive is the labor market to tax policy?

When applied to the most responsive segments of the labor market, tax policy can increase lifetime earnings and employment

10.15185/izawol.2 2 Blundell, R

by Richard Blundell

With aging populations and increased demands on government revenue, countries need to boost employment and earnings. Tax policy should focus on labor market entry and retirement. Those are the points where labor supply is most responsive to tax incentives, which can enhance the flow into work of people leaving school and women with young children and can prolong employment among older workers. Human capital policy has a complementary role in improving the payoff to work and ensuring that earnings hold up longer over a lifetime.

Does increasing the minimum wage reduce poverty in developing countries?

Whether raising minimum wages reduces—or increases—poverty depends on the characteristics of the labor market

10.15185/izawol.30 30 Gindling, T

by T. H. Gindling

Raising the minimum wage in developing countries could increase or decrease poverty, depending on labor market characteristics. Minimum wages target formal sector workers—a minority in most developing countries—many of whom do not live in poor households. Whether raising minimum wages reduces poverty depends not only on whether formal sector workers lose jobs as a result, but also on whether low-wage workers live in poor households, how widely minimum wages are enforced, how minimum wages affect informal workers, and whether social safety nets are in place.

Taxpayer effects of immigration

Reliable estimates of taxpayer effects are essential for complete economic analyses of the costs and benefits of immigration

10.15185/izawol.50 50 Smith, J

by James P. Smith

Taxpayer effects are a central part of the total economic costs and benefits of immigration, but they have not received much study. These effects are the additional or lower taxes paid by native-born households due to the difference between tax revenues paid and benefits received by immigrant households. The effects vary considerably by immigrant attributes and level of government involvement, with costs usually diminishing greatly over the long term as immigrants integrate fully into society.

Tuning unemployment insurance to the business cycle

Unemployment insurance generosity should be greater when unemployment is high—and vice versa

10.15185/izawol.54 54 Andersen, T

by Torben M. Andersen

High unemployment and its social and economic consequences have lent urgency to the question of how to improve unemployment insurance in bad times without jeopardizing incentives to work or public finances in the medium term. A possible solution is a rule-based system that improves the generosity of unemployment insurance (replacement rate, benefit duration, eligibility conditions) when unemployment is high and reduces the generosity when it is low.

Employment effects of minimum wages

When minimum wages are introduced or raised, are there fewer jobs? Global evidence says yes

10.15185/izawol.6 6 Neumark, D

by David Neumark

The potential benefits of higher minimum wages come from the higher wages for affected workers, some of whom are in poor or low-income families. The potential downside is that a higher minimum wage may discourage employers from using the low-wage, low-skill workers that minimum wages are intended to help. If minimum wages reduce employment of low-skill workers, then minimum wages are not a “free lunch” with which to help poor and low-income families, but instead pose a tradeoff of benefits for some versus costs for others. Research findings are not unanimous, but evidence from many countries suggests that minimum wages reduce the jobs available to low-skill workers.

The effect of early retirement schemes on youth employment

Keeping older workers in the workforce longer not only doesn’t harm the employment of younger workers, but might actually help both

10.15185/izawol.70 70 Böheim, R

by René Böheim

The fiscal sustainability of state pensions is a central concern of policymakers in nearly every advanced economy. Policymakers have attempted to ensure the sustainability of these programs in recent decades by raising retirement ages. However, there are concerns that keeping older workers in the workforce for longer might have negative consequences for younger workers. Since youth unemployment is a pressing problem throughout advanced and developing countries, it is important to consider the impact of these policies on the employment prospects of the young.

Flat-rate tax systems and their effect on labor markets

Despite their theoretical benefits, flat taxes have been tried only in a few formerly socialist countries

10.15185/izawol.61 61 Peichl, A

by Andreas Peichl

The potential economic outcomes resulting from a flat rate of income tax have been the subject of an ongoing academic and political debate. Many observers have suggested that the introduction of a flat tax would be beneficial for a country’s economy, having a positive influence on the labor market and the gross domestic product by enhancing incentives to work, save, invest, and take risks. A flat tax also significantly simplifies income taxation which increases tax compliance and reduces tax planning, avoidance, and evasion. However, despite flat taxes being on the political agenda in many countries, in practice their implementation has mostly been restricted to the transition economy countries of Eastern Europe. There is no one single flat tax system in place in these countries though; one rate does not fit all.

Tax evasion, labor market effects, and income distribution

Market adjustments to tax evasion alter factor and product prices, which in turn determine the true impact and beneficiaries of tax evasion

10.15185/izawol.91 91 Alm, J

by James Alm

To determine the full effects of taxation on income distribution, policymakers need to consider the impacts of tax evasion. In the standard analysis of tax evasion, all the benefits are assumed to accrue to tax evaders. But tax evasion has other impacts that determine its true effects. As factors of production move from tax-compliant to tax-evading (informal) sectors, changes in relative prices and productivity reduce incentives for workers to enter the informal sector. At least some of the gains from evasion are thus shifted to the consumers of the output of tax evaders, through lower prices.

Impact of privatization on employment and earnings

Workers and policymakers may fear that privatization leads to job losses and wage cuts, but what’s the empirical evidence?

10.15185/izawol.93 93 Earle, J

by John S. Earle

Conventional wisdom and prevailing economic theory hold that the new owners of a privatized firm will cut jobs and wages. But this ignores the possibility that new owners will expand the firm’s scale, with potentially positive effects on employment, wages, and productivity. Evidence generally shows these forces to be offsetting, usually resulting in small employment and earnings effects and sometimes in large, positive effects on productivity and scale. Foreign ownership usually has positive effects, and the effects of domestic privatization tend to be larger in countries with a more competitive business environment.

Perverse effects of two-tier wage bargaining structures

Two-tier wage bargaining fails to link wages more closely to productivity and increases allocative inefficiencies

10.15185/izawol.101 101 Boeri, T

by Tito Boeri

Debate over labor market flexibility focuses mainly on firing costs, while largely ignoring wage determination and the need for collective bargaining reform. Most countries affected by the euro debt crisis have two-tier bargaining structures in which plant-level bargaining supplements national or industrywide (multi-employer) agreements, taking the pay agreement established at the multi-employer level as a floor. Two-tier structures were intended to link pay more closely to productivity and to allow wages to adjust downward during economic downturns, while preventing excessive earning dispersion. However, these structures seem to fail precisely on these grounds.

Is unconditional basic income a viable alternative to other social welfare measures?

Countries give basic education and health care to everyone, and for good reasons—why not basic income?

10.15185/izawol.128 128 Colombino, U

by Ugo Colombino

Automation and globalization have brought about a tremendous increase in productivity, but also accelerated job destruction, systemic risks, and greater income inequality. Current social policies may not be adequate for achieving the goals of redistributing the gains from automation and globalization, providing efficient buffers against economic shocks, and advancing the reallocation of jobs and skills. Under certain circumstances, an unconditional basic income might be a better alternative for achieving those goals. It is simple, transparent, and has low administrative costs, though it may require higher taxes.

Do works councils raise or lower firm productivity?

Works councils can have a positive impact on firm productivity, but only when specific conditions are in place

10.15185/izawol.137 137 Hübler, O

by Olaf Hübler

The German model of co-determination 
(Mitbestimmung) with works councils, in which workers are involved in the management of a company, was a role model for other countries for many years. However, since the 1990s the appeal of works councils has been declining, to the extent that now even employees are sometimes voting against representation. This was recently demonstrated by workers at the Volkswagen factory in Chattanooga, Tennessee, who voted against union representation. An important question for firms and for policymakers is whether the adoption of a works council has a positive influence on a firm’s productivity and what the consequences are for a firm’s profits.

Relative deprivation and individual well-being

Low status and a feeling of relative deprivation are detrimental to health and happiness

10.15185/izawol.140 140 Chen, X

by Xi Chen

People who are unable to maintain the same standard of living as others around them experience a sense of relative deprivation that has been shown to reduce feelings of 
well-being. Relative deprivation reflects conditions of worsening relative poverty despite striking reductions in absolute poverty. The effects of relative deprivation explain why average happiness has been stagnant over time despite sharp rises in income. Consumption taxes on status-seeking spending, along with official and traditional sanctions on excess consumption and redistributive policies may lessen the negative impact of relative deprivation on well-being.

Pension reform and couples’ joint retirement decisions

The success of policies raising the retirement age depends on people’s responsiveness to changes in pension eligibility

10.15185/izawol.142 142 Hospido, L

by Laura Hospido

Rising life expectancy and the growing fiscal insolvency of public pension systems have prompted many developed countries to raise the pension entitlement age. The success of such policies depends on the responsiveness of individuals to such changes. Retirement has increasingly become a decision made jointly by a couple rather than individually by one partner. The empirical evidence indicates that almost a third of dual-earner couples in Europe and the US coordinate their retirement decision despite age differences between partners. This joint determination of retirement has important implications for policies intended to reduce the burden of pension costs.

Wage compression and the gender pay gap

Wage-setting institutions narrow the gender pay gap but may reduce employment for some women

10.15185/izawol.150 150 Kahn, L

by Lawrence M. Kahn

There are large international differences in the gender pay gap. In some developed countries in 2010–2012, women were close to earnings parity with men, while in others large gaps remained. Since women and men have different average levels of education and experience and commonly work in different industries and occupations, multiple factors can influence the gender pay gap. Among them are skill supply and demand, unions, and minimum wages, which influence the economywide wage returns to education, experience, and occupational wage differentials. Systems of wage compression narrow the gender pay gap but may also lower demand for female workers.

Happiness as a guide to labor market policy

Happiness is key to a productive economy, and a job is key to individual happiness

10.15185/izawol.149 149 Ritzen, J

by Jo Ritzen

Measures of individual happiness, or well-being, can guide labor market policies. Individual unemployment, as well as the rate of unemployment in society, have a negative effect on happiness. In contrast, employment protection and unemployment benefits can contribute to happiness—though when such policies prolong unemployment, the net effect on national happiness is negative. Active labor market policies that create more job opportunities increase happiness, which in turn increases productivity. Measures of individual happiness should therefore guide labor market policy more explicitly.

The minimum wage versus the earned income tax credit for reducing poverty

Enhancing the earned income tax credit would do more to reduce poverty, at less cost, than increasing the minimum wage

10.15185/izawol.153 153 Burkhauser, R

by Richard V. Burkhauser

Minimum wage increases are not an effective mechanism for reducing poverty. And there is little causal evidence that they do so. Most workers who gain from minimum wage increases do not live in poor (or near-poor) families, while some who do live in poor families lose their job as a result of such increases. The earned income tax credit is an effective way to reduce poverty. It raises only the after-tax wage rates of workers in low- and moderate-income families, its tax credit increases with the number of dependent children, and evidence shows that it increases labor force participation and employment in these families.

Can hiring subsidies benefit the unemployed?

Hiring subsidies can be a very cost-effective way of helping the unemployed, but only when they are carefully targeted

10.15185/izawol.163 163 Brown, A

by Alessio J. G. Brown

Long-term unemployment can lead to skill attrition and have detrimental effects on future employment prospects, particularly following periods of economic crises when employment growth is slow and cannot accommodate high levels of unemployment. Addressing this problem requires the use of active labor market policies targeted at the unemployed. In this context, hiring subsidies can provide temporary incentives for firms to hire unemployed workers and, when sensibly targeted, are a very cost-effective and efficient means of reducing unemployment, during both periods of economic stability and recovery.

Collective bargaining in developing countries

Negotiating work rules at the firm level instead of the industry level could lead to productivity gains

10.15185/izawol.183 183 Lamarche, C

by Carlos Lamarche

Because theoretical arguments differ on the economic impact of collective bargaining agreements in developing countries, empirical studies are needed to provide greater clarity. Recent empirical studies for some Latin American countries have examined whether industry- or firm-level collective bargaining is more advantageous for productivity growth. Although differences in labor market institutions and in coverage of collective bargaining agreements limit the generalizability of the findings, studies suggest that work rules may raise productivity when negotiated at the firm level but may sometimes lower productivity when negotiated at the industry level.

Should the earned income tax credit rise for childless adults?

The earned income tax credit raises income and work incentives among low-income parents but little goes to adults without children

10.15185/izawol.184 184 Holzer, H

by Harry J. Holzer

The earned income tax credit provides important benefits to low-income families with children in the US. At an annual cost of about $60 billion, it increases the incomes of such families while encouraging parents to work more by subsidizing their incomes. But low-income adults without children and non-custodial parents receive only very low payments under the program, providing them with little income benefits or work incentives. Many of these adults are low-income young men whose wages and employment rates have been declining for years and who might benefit substantially from expanded eligibility for the earned income tax credit.

The effects of wage subsidies for older workers

Wage subsidies to encourage employers to hire older workers are often ineffective

10.15185/izawol.189 189 Boockmann, B

by Bernhard Boockmann

Population aging in many developed countries has motivated some governments to provide wage subsidies to employers for hiring or retaining older workers. The subsidies are intended to compensate for the gap between the pay and productivity of older workers, which may discourage their hiring. A number of empirical studies have investigated how wage subsidies influence employers’ hiring and employment decisions and whether the subsidies are likely to be efficient. To which groups subsidies should be targeted and how the wage subsidy programs interact with incentives for early retirement are open questions.

Should unemployment insurance cover partial unemployment?

Time-limited benefits may yield significant welfare gains and help underemployed part-time workers move to full-time employment

10.15185/izawol.199 199 Ek Spector, S

by Susanne Ek Spector

A considerable share of the labor force consists of underemployed part-time workers: employed workers who, for various reasons, are unable to work as much as they would like to. Offering unemployment benefits to part-time unemployed workers is controversial. On the one hand, such benefits can strengthen incentives to take a part-time job rather than remain fully unemployed, thus raising the probability of obtaining at least some employment. On the other hand, these benefits weaken incentives for part-time workers to look for full-time employment. It is also difficult to distinguish people who work part-time by choice from those who do so involuntarily.

How are minimum wages set?

Countries set minimum wages in different ways, and some countries set different wages for different groups of workers

10.15185/izawol.211 211 Dickens, R

by Richard Dickens

The minimum wage has never been as high on the political agenda as it is today, with politicians in Germany, the UK, the US, and other OECD countries calling for substantial increases in the rate. One reason for the rising interest is the growing consensus among economists and policymakers that minimum wages, set at the right level, may help low-paid workers without harming employment prospects. But how should countries set their minimum wage rate? The processes that countries use to set their minimum wage rate and structure differ greatly, as do the methods for adjusting it. The different approaches have merits and shortcomings.

Do minimum wages stimulate productivity and growth?

Minimum wage increases fail to stimulate growth and can have a negative impact on vulnerable workers during recessions

10.15185/izawol.221 221 Sabia, J

by Joseph J. Sabia

Proponents of minimum wage increases have argued that such hikes can serve as an engine of economic growth and assist low-skilled individuals during downturns in the business cycle. However, a review of the literature provides little empirical support for these claims. Minimum wage increases redistribute gross domestic product away from lower-skilled industries and toward higher-skilled industries and are largely ineffective in assisting the poor during both peaks and troughs in the business cycle. Minimum wage-induced reductions in employment are found to be larger during economic recessions.

Wage coordination in new and old EU member states

Stronger wage coordination and higher union density are associated with lower unemployment and higher inflation

10.15185/izawol.222 222 Rovelli, R

by Riccardo Rovelli

Aside from employment protection laws, which have been converging, other labor market institutions in new and old EU member states, such as wage bargaining coordination and labor union density, still differ considerably. These labor market institutions also differ among the new EU member states, with the Baltic countries being much more liberal than the others. Research that pools data on old and new EU member states shows that wage coordination mechanisms can improve a country’s macroeconomic performance. Stronger wage coordination and higher union density reduce the response of inflation to the business cycle.

Do skills matter for wage inequality?

Policies to tackle wage inequality should focus on skills alongside reform of labor market institutions

10.15185/izawol.232 232 Broecke, S

by Stijn Broecke

Policymakers in many OECD countries are increasingly concerned about high and rising inequality. Much of the evidence (as far back as Adam Smith’s The Wealth of Nations) points to the importance of skills in tackling wage inequality. Yet a recent strand of the research argues that (cognitive) skills explain little of the cross-country differences in wage inequality. Does this challenge the received wisdom on the relationship between skills and wage inequality? No, because this recent research fails to account for the fact that the price of skill (and thus wage inequality) is determined to a large extent by the match of skill supply and demand.

The effects of minimum wages on youth employment and income

Minimum wages reduce entry-level jobs, training, and lifetime income

10.15185/izawol.243 243 Kalenkoski, C

by Charlene Marie Kalenkoski

Policymakers often propose a minimum wage as a means of raising incomes and lifting workers out of poverty. However, improvements in some young workers’ incomes as a result of a minimum wage come at a cost to others. Minimum wages reduce employment opportunities for youths and create unemployment. Workers miss out on 
on-the-job training opportunities that would have been paid for by reduced wages upfront but would have resulted in higher wages later. Youths who cannot find jobs must be supported by their families or by the social welfare system. Delayed entry into the labor market reduces the lifetime income stream of young unskilled workers.

Do in-work benefits work for low-skilled workers?

To boost the employment rate of the low-skilled trapped in inactivity is it sufficient to supplement their earnings?

10.15185/izawol.246 246 Van der Linden, B

by Bruno Van der Linden

High risk of poverty and low employment rates are widespread among low-skilled groups, especially in the case of some household compositions (e.g. single mothers). “Making-work-pay” policies have been advocated for and implemented to address these issues. They alleviate the above-mentioned problems without providing a disincentive to work. However, do they deliver on their promises? If they do reduce poverty and enhance employment, can we further determine their effects on indicators of well-being, such as mental health and life satisfaction, or on the acquisition of human capital?

Corporate income taxes and entrepreneurship

The type, quality, and quantity of entrepreneurship are influenced significantly by corporate income taxes—though only slightly

10.15185/izawol.257 257 Block, J

by Jörn Block

Corporate income taxation influences the quantity and type of entrepreneurship, which in turn affects economic development. Empirical evidence shows that higher corporate income tax rates reduce business density and entrepreneurship entry rates and increase the capital size of new firms. The progressivity of tax rates increases entrepreneurship entry rates, whereas highly complex tax codes reduce them. Policymakers should understand the effects and underlying mechanisms that determine how corporate income taxation influences entrepreneurship in order to provide a favorable business environment.

Income inequality and social origins

Promoting intergenerational mobility can make societies more egalitarian

10.15185/izawol.261 261 Cappellari, L

by Lorenzo Cappellari

Income inequality has been rising in many countries. Is this bad? One way to decide is to look at the change in incomes across generations (intergenerational mobility) and, more generally, at the extent to which income differences among individuals are traceable to their social origins. Inequalities that reflect factors largely out of one’s control—such as local schools and communities—require attention in order to reduce income inequality. Evidence shows a negative association between income inequality and intergenerational mobility. The debate on whether community effects exert additional effects is still open.