Welfare and Work Incentives: A North European Perspective.

• Author: Gitter, Robert J.

The issue of the labor market impact of welfare programs and the taxes necessary to finance them is growing in importance in the United States and much of the developed world. In Europe there is a paucity of evidence as to the existence and magnitude of these effects. In 1987 the Danish Rockwool Foundation commissioned a study of the state of knowledge in the field for Denmark and three neighboring nations; Germany, Sweden and the United Kingdom. This book is the summary of these studies. The reader will find the background information on the tax and transfer systems of interest as well as their effects.

Bjorn Gustafsson and N. Anders Klevmarken examine the effects of taxes and transfers in Sweden. In 1983, Sweden had marginal income tax rates for high income earners in excess of 80 percent (the current figure is about 50%.) Currently, some families find the reduction in ghild benefits from increased income, coupled with taxes result in marginal effective tax rates in excess of 100%. Further, the income tax of couples is calculated separately for each spouse. This separate taxation of income, coupled with family leave policies and generous child-related transfers, helps to explain the relatively small difference in the labor supply of the two sexes and an overall adult labor force participation rate in excess of 80 percent. Swedish wives contribute about one-third of family after-tax income, a figure three times that of Germany. In examining the effects of the transfer system, the authors conclude that; (1) higher rates of the sickness insurance compensation increase absentee rates, (2) increased potential pension payments reduce the labor supply of older workers and (3) generous child-care policies increase the rate of absence from the labor force by young mothers.

The maximum marginal income tax rate in the United Kingdom fell from 83% to 40% in the 1980s, while the basic rate fell from 33% to 25%. Richard Blundell used these changes to simulate the effects of changes in tax rates on labor supply. He concludes that increasing income tax rates might reduce the labor supply of wives a bit (a backward-bending supply curve) but that the reduced take-home pay of their husbands would result in increased hours by wives (an income effect.) The overall response for full-time workers appears to be small. A. B. Atkinson examines the effects of benefits and work incentives in Britain. He found that in some cases working families will face marginal...