Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

A Profile of Financial Incentives to Work in Ireland

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

A Profile of Financial Incentives to Work in Ireland

Article excerpt

1. INTRODUCTION

Tax and benefit systems have to strike a balance between the goals of providing an adequate safety net income to those who need it (2) and maintaining suitable incentives to take up employment and to increase earnings. Okun (1975) in an often referenced paper termed this "the big tradeoff' between equity and efficiency. The strength of this trade-off has been questioned in recent cross-country work at the IMF, by Berg and Ostry (2011) and Ostry et al. (2014). What is clear, however, is that there is a trade-off in the design of tax-transfer systems between the level of income support provided, the rate at which this is withdrawn, and the level of taxation required to finance it. (3) The consequences of differing levels of financial work incentives depend on a number of factors, including:

* Dynamic considerations, as wages depend inter alia on accumulated experience and skills acquired on the job. Thus individuals may choose to remain in employment because this has longer-term gains, even if the short-term financial incentive to work is low

* Variations across individuals and across employments in the non-monetary rewards from employment, as discussed in Callan et al. (2013)

In this paper we focus exclusively on static or "snapshot" measures of the financial incentive to work, and how these are affected by the tax and welfare systems. Identifying these effects is a major task in itself, but we recognise that other factors, such as dynamic considerations and non-financial incentives, come into play when assessing the impact of current policies and potential changes.

Ireland has seen substantial changes to direct taxes, and in welfare payments, during recent years. In this paper we take stock of the implications for the structure of financial incentives to work in Ireland, using SWITCH, the ESRI tax-benefit model. (4) This information on the level and structure of financial incentives to work implicit in the current system is an essential ingredient for an informed debate about reforms to the system.

We look at two key aspects of labour supply: financial incentives to take up or remain in employment commonly measured by replacement rates and/or participation tax rates (5)--and financial incentives to move from part-time to full-time employment--measured by marginal effective tax rates, which take account of the withdrawal of benefits as well as explicit direct taxes. (6) We show that financial incentives to work are strong for most individuals, and help to identify the characteristics of individuals and of the tax/transfer system that contribute to weaker financial work incentives. The analysis here provides evidence on the financial incentives implicit in the current tax and welfare system across a number of critical transitions, including:

* Transitions from unemployment to full-time employment

* Transitions from unemployment to part-time employment

* Transitions from a combination of part-time employment and an unemployment payment to full-time employment

The use of SWITCH, which is based on the nationally representative Survey of Income and Living Conditions (SILC), allows us to assess the strength of the financial work incentives faced by a nationally representative sample. We can also identify the frequency with which strong disincentives to work occur, and the characteristics of the individuals or households most likely to face these disincentives. We also assess the balance of financial incentives as between taking up part-time employment and moving from part-time to fulltime employment.

The paper is laid out as follows. In Section 2, we discuss the measures used to assess the financial incentive to work at all (section 2.1) and the financial incentive to progress in employment (section 2.2). One of the key components of measuring the financial incentive to work is predicting the wages that unemployed individuals would receive if they took up employment. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.