Making work pay evidence from serbia
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Making work pay: evidence from Serbia. S. Randjelović, M. Vladisavljević, S. Vujić, & J. Žarković-Rakić. EUROMOD 2nd Research Workshop Bucharest, 10-12 October 2012. Outline. Motivation Impact of tax & benefit systems on work decisions In-work benefits (IWB): intro Aim of the paper

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Making work pay evidence from serbia

Making work pay: evidence from Serbia

S. Randjelović, M. Vladisavljević,

S. Vujić, & J. Žarković-Rakić

EUROMOD 2nd Research Workshop

Bucharest, 10-12 October 2012


Outline

Outline

  • Motivation

  • Impact of tax & benefit systems on work decisions

  • In-work benefits (IWB): intro

  • Aim of the paper

  • Policy design: WTC in Serbia

  • Methodology

  • Results

  • Conclusions


Motivation

Motivation

  • High inactivity rate of 40.3%

  • High informal employment rate of 17.8% (in 2007)

  • Inactivity rates particularly high among:

    • low-educated individuals

    • those with low skills

    • women

      Inactivity rates by educational level and gender, 2011


Motivation1

Motivation

  • These groups have low earnings capacity → financial payoffs from staying in or seeking employment are often limited

  • Incentive problems are aggravated by high tax burdens on labour income and by social benefits design

  • Those taking up low-paid employment see that large part of their gross earnings is consumed by income taxes, social contributions or reduced social benefits

  • => Need incentives to make (formal) work pay


Tax wedge progressivity in serbia

Tax Wedge & Progressivity in Serbia


In work benefits purpose

In-Work Benefits - Purpose

  • In-work benefits (or making work pay policies) = Means-tested transfers given to individuals conditional on their employment status, designed to:

    • Create a significant gap between the incomes of people in and out of work

    • Encourage entry into the labour market

    • Ensure higher living standard and help reduce poverty of low-income people

    • Encourage formality

  • Literature:

    • Figari (2010)

    • Figari (2011)

    • Bargain & Orsini (2006)

    • Orsini (2005)


Wftc in serbia policy design 1

WFTC in Serbia – Policy Design (1)

  • British Working Family Tax Credit (WFTC) as a role model

    • Why? Effectiveness and comparability with results of studies for other Med. countries

    • Fiscal effect=0.34% of GDP

    • ignoring special elements (disability, 50+ years, child care, etc.)

  • Three family based and one individual WTC scheme:

    • Family WFTC 1 – single person working full time

    • Family WFTC 2 – lone parents and couples working part time (16/30 hrs)

    • Family WFTC 3 – lone parents and couples working full time

    • Individual WTC – individual working at least 16 hrs


Wftc in serbia policy design 2

WFTC in Serbia – Policy Design (2)


Aim of the paper

Aim of the Paper

  • The most of empirical studies on IWB evaluation focus on developed countries

    • ...lack of such studies for transition economies (effects might not be the same since it depends on the structural features of economy)

  • Aims of the paper:

    • Contribute to empirical literature on labor supply and redistribution effects of IWB in transition economy

      • Simulating the effects of introduction of British WTC scheme in Serbia

      • The first analysis of that kind in Serbia

    • Analyze the performances of IWB in transition compared to developed economies with the similar labor market structure


Methodology

Methodology

  • Steps of the estimation of labor supply and redistribution effects of WTC in Serbia:

    • Estimating wage equation and imputing wages for those who are not working (Heckman 2-step estimator)

    • Discrete labor choice: 0, 20 or 40 hrs per week, typical household

    • SRMOD: computing household disposable income (9 combinations)

    • Estimating preferred labor/leisure – consumption combination by means of utility function

    • Introduction of WFTC (in SRMOD) – back to step 3, 4 and 5


Methodology1

Methodology

  • SRMOD

    • Tax and benefit micro-simulation model for Serbia

    • Static model: individual behaviour (employment, childcare, saving, etc. are all assumed to be exogenous to the tax-benefit system)

    • Baseline fiscal system: 2007

    • Data: Living standards Measurement Survey from 2007 (5,535 hh/17,335 individuals)

  • Labour Supply Model (LSM)

    • Is fully integrated with the static model

    • Used to derive the budget sets under the baseline and reformed scenarios

    • Impose revenue neutrality conditions taking into account the behavioural reactions

  • SRMOD + LSM=> Behavioural tax and benefit model


Making work pay evidence from serbia

Descriptives (Working Age Pop 15-64)


Making work pay evidence from serbia

Descriptives (Working Age Pop 15-64)

1Conditional on being salaried employee

2Heckman sample (age 18-64)

3Heckman sample (age 18-64) + Conditional on being unemployed or “other inactive“


Step 1 wage imputation heckman 2 step estimator

Step 1. Wage ImputationHeckman 2-Step Estimator

  • Because working may be systematically correlated with unobservables that affect the wage offer, using only working people might produce biased estimators of the parameters in the wage offer equation:

    • Endogenous sample selection (OLS is biased and inconsistent)

  • For people who are in the labour force, we observe the wage offer as the current wage

  • For those currently out of the workforce, we do not observe the wage offer

  • We want to know how different factors, such as education, work experience, number of children, etc. affect the wage an individual could earn in the labour force


Step 2 simulating discrete choice labor decisions

Step 2. Simulating Discrete Choice Labor Decisions

  • Imputing household gross income corresponding to a discrete set of working time alternatives (inactivity (0h), part-time (20h) and full-time (40h))

  • Use tax and benefit micro-simulation model for Serbia (SRMOD) in order to compute the corresponding set of disposable incomes

  • With combinations of 0, 20 and 40 hours worked, we generated 9 scenarios for couples and 3 scenarios for singles


Three scenarios for singles descriptives

Three Scenarios for Singles: Descriptives


Step 3 preferences estimations 1 intro

Step 3. Preferences Estimations (1)- Intro -

  • Discrete labour supply model (Van Soest, 1995)

  • In order to estimate preference parameters in the utility function, we apply simulated maximum-likelihood estimation on a conditional or logit function (McFadden, 1974)

    • ...we will do the same with mixed logit function

  • Direct estimation of preferences over hours and income

  • Sample: 1,467 females and 2,595 males


Step 3 preferences estimations 2 utility function specification

Step 3. Preferences Estimations (2)- Utility Function Specification -

  • A person chooses the number of hours of work in order to maximize the utility Uij (derived by individual i from making choice j) on the basis of ‘preferences’ over hours and income:

  • The likelihood for a sample of observed choices can be derived from that expression and maximized s.t. a budget constraint to estimate the parameters of function U.

  • We assume quadratic specification of the deterministic part of the utility function as in Blundell et al. (2000):


Making work pay evidence from serbia

Step 3. Preference Estimates (clogit) - Results

Notes: Tertiary education is omitted category. Children = dummy variable for having children 0-6 years. Income divided by 10,000.


Results discrete choice of ls

Results: Discrete Choice of LS

Observed and Predicted Freq.

Labor Supply (Own Wage) Elasticities


Making work pay evidence from serbia

Pref. Est. (clogit): Without Disp.Inc. = 0

Notes: Tertiary education is omitted category. Children = dummy variable for having children 0-6 years. Income divided by 10,000.


Results discrete choice of ls dispy 0

Results: Discrete Choice of LS, DispY=0

Observed and Predicted Freq.

Labor Supply (Own Wage) Elasticities


Results effects of witc on labor supply and employment singles 15 64

Results: Effects of WITC on Labor Supply and Employment (Singles 15-64)


Forthcoming steps

Forthcoming Steps

  • Estimating preferences for the couples

  • Simulation of effects of WFTC

  • Comparison of the results with other countries

    • Portugal, Spain, Italy and Greece?

      • Figari (2010) – WITC performs better in terms of labor supply, but worse in terms of inequality than WFTC

      • The same indication in Serbia (Gini, EMTR)?

    • CEE?

  • Formulating final conclusions


Instead of conclusion questions for discussion

Instead of Conclusion:Questions for Discussion

  • Imputing wages for inactive and unemployed separately?

  • Taking into account informality (tax evasion)?

  • Comparability of WTC scenarios with British WTC dependent on the fiscal size of the programs?

  • Utility function specification improvement?

  • Trade off between including/not including disposable income = 0 (better fit or more reasonable elasticties)?

  • When modelling individuals, using individual or hh income (at the moment – individual)?


Making work pay evidence from serbia

Thank you for your attention!


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