The welfare dependence in the Czech Republic Martin Guzi TPAVF Prague, 2014
International evidence Mulligan (2012) explains that recently expanded welfare programs in the USA provide strong disincentives to work. Portugal and Addison (2008) identify disincentive effects of unempl. benefits on the exit rate from unemployment using Portuguese employment surveys between 1992 and 1997. Petrongolo (2009) finds that UK reform in 1996 was successful in moving unemployed individuals to the labour market through tighter search requirements for social benefits claimants. Van Ours and Vodopivec (2006) find that the job finding rate of the unemployed in Slovenia largely increased after 1998 when the benefit entitlement period was substantially shortened.
Simulation studies The tax and social security systems in the Czech Republic were assessed by several studies to generate a welfare trap for a wide range of households. These findings are typically based on the theoretical considerations for selected types of households. Prusa (2001), Jahoda (2004), Jurajda and Zubricky (2005). Jurajda and Münich (2002) find that social benefits increase the probability of long-term unemployment for families with more than three children and low-income (simulation). Galuscak and Pavel (2007) find that welfare benefits are distorting incentives to leave unemployment particularly among households with children (simulation).
Empirical studies Sorm and Terrel (2000) uses Czech micro data 1994-1998. Analyse individual characteristics as determinants of labour and conclude that labour market flows were efficient and the incidence and duration of unemployment were low. Schneider (2004) shows that the tax and social security systems in the Czech Republic heavily redistribute income towards low-income groups. He finds that when household income moves up from the bottom decile, taxes are rising and social benefits are withdrawn that creates strong disincentives for labour market participation. Guzi (2013) use Czech LFS 1995-2005 to confirm the evidence of welfare trap. Estimates imply that relatively high social benefits generate adverse incentives particulrly for the unemployed with lowearnings opportunities in the labour market.
Duration structure of unemployment.1.08 The share of labor force.06.04.02 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total unemployed Unemployed for 6+ months Source: Labor Force Survey 1995-2005, Czech Republic
Net replacement rate (NRR) NRR i social benefits potential net income from work Under non-working alternative, the household net income is approximated by the minimum guaranteed social support that household can collect. Under working alternative, the potential gross household income is estimated and the calculations of net income account for personal income tax, with social contributions and rules for means-tested social benefits applied.
Net Replacement Rate of different groups of long-term unemployed Year Total Men Women Childless Has Low High Spell Spell Spell children edu edu 0.5-1y 1-2y >2y 1995 0.74 0.67 0.77 0.61 0.79 0.76 0.63 0.72 0.73 0.80 1996 0.72 0.63 0.76 0.59 0.78 0.74 0.62 0.71 0.72 0.77 1997 0.70 0.63 0.74 0.59 0.77 0.73 0.62 0.70 0.68 0.76 1998 0.71 0.64 0.74 0.60 0.77 0.74 0.62 0.68 0.71 0.76 1999 0.71 0.65 0.75 0.61 0.77 0.75 0.61 0.68 0.71 0.76 2000 0.70 0.62 0.73 0.58 0.76 0.73 0.59 0.68 0.69 0.73 2001 0.69 0.61 0.73 0.59 0.75 0.71 0.61 0.66 0.69 0.71 2002 0.68 0.60 0.73 0.57 0.76 0.71 0.59 0.66 0.67 0.70 2003 0.67 0.58 0.71 0.55 0.74 0.69 0.57 0.64 0.66 0.69 2004 0.65 0.56 0.70 0.55 0.73 0.68 0.54 0.61 0.64 0.68 2005 0.64 0.54 0.69 0.54 0.71 0.67 0.54 0.63 0.62 0.66 average NRR 0.69 0.60 0.73 0.57 0.75 0.71 0.59 0.67 0.68 0.71 % NNR>0.8 0.21 0.17 0.23 0.10 0.28 0.26 0.03 0.15 0.19 0.28 Source: Guzi (2013) Note: Individuals with a low level of education are defined as those who have primary and lower secondary. Individuals with upper secondary and tertiary education are defined as a high level of education.
Estimated model P(E =1 X)=() NRR X i i i i The probability of transition from unemployment to employment is estimated. NRR is the measure of generosity of social benefits and X includes individual characteristics. Constraints on the demand side are approximated by local labor market characteristics (i.e. district unemployment rate and regional fixed effects). The equation is estimated by the standard Logit model.
Findings Determinants of transition from U to E: Women(-), Education(+), Age (hump shape), married(+), employed partner(+), young kids(-), duration(-), disability(-), maternity(-), local unemployment rate(-), search intensity (+) NRR(-), if NRR were to decrease from value 0.8 to 0.68 (a decrease by one standard deviation to the mean value), then there would be an associated change in transition probability from 8.7% to 9.2%.
Table: Estimates of NRR for different groups by gender Total Men Women Baseline -0.036 ** -0.043 * -0.059 ** (0.017) (0.026) (0.023) Childless -0.057 ** -0.040-0.077 ** (0.023) (0.036) (0.030) Has children -0.028-0.073-0.015 (0.036) (0.070) (0.043) Low edu -0.037 ** -0.028-0.078 *** (0.018) (0.026) (0.027) High edu 0.018-0.174 0.039 (0.052) (0.112) (0.062) Spell 0.5-1 years -0.049-0.116-0.047 (0.045) (0.074) (0.062) Spell 1-2 years -0.022 0.032-0.106 ** (0.036) (0.057) (0.049) Spell >2 years -0.045 ** -0.040-0.057 ** (0.019) (0.025) (0.027) Year 1995-2000 -0.018-0.031-0.023 (0.027) (0.041) (0.039) Year 2001-2005 -0.044 ** -0.043-0.088 *** (0.022) (0.034) (0.031) Note: Figures in the table are the estimates of NRR from separate regressions. All models have the same specification. Standard errors in parenthesis, *** significance level 1%, ** significance level 5%, * significance level 10%.
Conclusion Findings from literature are conclusive that the combination of tax and social security systems creates a welfare trap, i.e. social benefits are accepted as an alternative to low and insecure earnings. The decreasing trend in benefit generosity observed in the past mainly occurred due to relatively high (wage) inflation and a lack of indexation of social benefits. The better harmonization of tax and social security systems is necessary in order to ensure that the incentives to leave unemployment are not hampered by high social benefits.
Policy recommendations Taxes cut on labor provide strong incentive for lower-skilled people to work or alternatively allow unemployed workers to receive social benefits for some period while they are earning an income. Credit for hiring household help encourages demand for low-wage workers. All benefits become harder to qualify for and less generous. Improvements to monitoring and to the enforcement of job search.