In-work Benefits in Belgium: Effects on Labour Supply and Welfare

The most famous and researched examples of in-work benefits are the US Earned Income Tax Credit (EITC) and the UK Working Tax Credit (WTC). Besides those two schemes, we also give some attention to the French PPE, which shares the feature of the Belgian WB of targeting benefits to individuals having low hourly earnings. Other IWB that received significant attention from academic researchers are the German Mini-jobs reform in 2003 and the Self-Sufficiency Project experiment in Canada in the 90’s. A detailed overview of IWB policies in OECD countries and a summary of research findings are available in Immervoll and Pearson (2009).

EITC The EITC, enacted in 1975 and still lasting, is a refundable tax credit for low- to moderate-income working individuals and couples. In this scheme, the amount of the benefit depends on a recipient’s earned income and number of children. Most studies indicate that the scheme has a positive effect on the labour force participation of single mothers (Crandall-Hollick, 2016).⁵ Regarding the impact on married secondary earners’ decisions to start working, research still is inconclusive. Looking at the intensive margin, most of the empirical evidence indicates the EITC has had a negligible to small effect on the number of hours unmarried people worked, while it has had a negative effect on the hours worked by secondary earners. Lastly, as the EITC was not primarily focused on childless adults, their opportunity sets are less affected and little information has been published regarding potential effects on their labour supply decisions.

WTC The ancestor of the current WTC was introduced in Britain in 1970, under the name Family Income Support.⁶ The WTC is similar to the EITC but is more generous and is based on net (rather than gross) family income. It has been shown consistently (see Brewer et al. (2006) for a discussion) across a number of studies that the scheme increased participation of single parents significantly. Moreover, it has been estimated that WFTC reduced labour supply of married women, both at the intensive and extensive margin, but that this was more than compensated by labour supply increases among married men.

PPE The PPE was introduced in 2001, reformed a couple of times in the later years, and lasted until 2015, where it was merged with an other IWB, the ‘‘RSA activité’’, into the ‘‘Prime d’activité’’. It’s value is lower than the EITC and WFTC schemes, culminating at a few hundreds of EUR per year. Eligibility is based on full-time equivalent earnings. The benefit also depends on the family situation, and the scaling with respect to working time is not linear, so that the scheme still creates a part-time premium. Almost all studies (see Sterdyniak (2007) and Arnaud et al. (2008) for a detailed overview) find positive but very small employment effects of less than 0.5 percentage points. Stancanelli (2008) even suggests employment losses among married women and no significant gains for non-married women.

To estimate our model, we use the Belgian database of the European Union Statistics on Income and Living Conditions (EU-SILC). This database is representative for the Belgian population and contains information on income, socio-demographic situation and various other dimensions related to labour supply. We assume preferences of individuals did not change over the time of the different EU-SILC surveys used (2006-2017) in our estimation.¹⁴ If preferences did indeed not change significantly over time, our method would increase the accuracy of the estimates on one hand because there are more observations, and on the other hand because people are observed in different tax-benefit contexts, helping for the identification of preferences. The tax-benefits system of the corresponding years are used to calculate the disposable incomes (section 4.3.), which are up-rated with consumer price indices to render them comparable.

We consider two types of households: singles workers (hereafter: singles) and couples of workers (hereafter: couples). Singles are defined as households with one adult person that is available to the labour market (i.e. aged between 16 and 64 years and not being sick, in education, disabled or (pre-)retired). Couples are households with 2 adult people that are available to the labour market, and those 2 people form a couple. All other types of households are dropped as their labour supply decision processes might differ too much from the typical cases (e.g. households with one parent and one child available to the labour market are excluded). We also exclude people declaring outlying (>70 h/week) numbers of weekly worked hours, and outlying wages (>60 EUR/h), as well as self-employed for whom information on labour income and worked hours might be less reliable. The percentage of labour market available individuals included in our sample varies from 64.9 $\%$ to 69.4 $\%$ , depending on the survey year. Descriptive statistics of the selected households are given in Table 2.

An histogram of the hours worked, by gender, is displayed in Figure 2. The hours worked are those declared by the surveyed individuals, when asked how much hours per week they work on average (including overtime) in their main and complementary jobs. It is important to note that in our sample, overtime workers (that we define as workers working more than 40 hours per week, as will be explained in 4.3.) represent 19% of the population. This is substantially more than what is observed in administrative data, where overtime hours are due to people combining different jobs and represent less than 2% of situations.¹⁵ While self-reported data is known to be vulnerable to exaggeration or biases,¹⁶ we believe that this discrepancy reveals that many workers work more than contractual (or legal) hours, what may lead to different estimations of hourly wages, that are computed as gross earnings divided by worked hours. Our assumption is that people working more than contractual hours are generally compensated by a higher wage (in other words, they accept a job that is expected to necessitate frequent overtime, if this job provides a consequential salary). This assumption seems supported by the fact that people working overtime declare higher monthly earnings. In this regard, using survey data might bring an insightful and more accurate estimation of hourly wages, especially when used as a proxy for earning capacity. Moreover, as tax-benefit reforms might alter the relative attractiveness of such over-time opportunities (see sub-section 5.2.), including them more accurately in the opportunity sets of individuals will provide a more complete picture of likely behavioural changes. The profiles of those overtime workers are detailed in Table 3.

Figure 2

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Let $U_{ij}(d_j,l_j,{ϵ}_{ij})$ denote the utility of an individual i choosing a job j, and $U_i(d_j^m+d_k^f,l_j^m,l_k^f,{ϵ}_{ijk})$ denote the utility function of couple i choosing jobs $j$ and $k$ , where ${\displaystyle i}$ is the disposable income, $l$ the weekly hours of leisure (equal to time endowment minus the number of working hours required for the job opportunity) and $ϵ$ a taste shifter corresponding to the job choice(s). Superscripts m (male) and f (female) represent the respective variables of the members of a couple. The utility function is assumed to be decomposable into a deterministic function and the random taste shifter that represents utility derived from unobserved (by the researcher) attributes of a job. This taste shifter is assumed to be i.i.d. distributed across job combinations and households according to a Gumbel distribution with location parameter $0$ and scale parameter $1$ .

The deterministic part of the utility function is assumed to have the following Box-Cox structural specification¹⁷ for singles (Equation 3), where the parameters are allowed to differ for single males and single females, and couples (Equation 4), for which a cross-leisure term is added:

We allow for heterogeneity in the marginal rates of substitution between leisure and income by introducing covariates related to age, number of children in different age-categories, region and education linearly into the leisure parameters ( ${\alpha }_l$ , ${\alpha }_l^m$ , ${\alpha }_l^f$ ):

where X are vectors of covariates.

We assume hourly wages are drawn from a log-normal distribution $g_1(w)$ and are independent of hours worked.

where $\sigma$ and the vector γ are parameters. $X_w$ is a vector of covariates that might affect the median of the wage distribution: education, gender, (potential) experience and survey year.

Average weekly working hours of job opportunities are assumed to be drawn from a uniform-with-peaks distribution, where the peaks are chosen to correspond to typical part-time regimes as well as the full-time regime, and where parameters allow to calibrate their height. Peak height can differ only by gender, reflecting the fact that part-time jobs are mostly available in female-dominated sectors of activity (Meulders and O’Dorchai, 2009): health and social work, other community, social and personal service activities, private households with employed persons and also, although to a lesser extent, education. The domain $H$ represents the possible values, and is assumed to range from $0$ to $70$ .

In addition, a number of ‘‘out-of-market’’ job opportunities can be available to the individuals. The intensity of job offers relative to out-of-market opportunities is allowed to vary across individuals, according to the gender and a set of covariates.

where $X_o$ is the vector of covariates that includes region, education level and group-specific unemployment rate. The group-specific unemployment rate corresponds to the unemployment rate per gender-education group, taken from Eurostat. Those rates vary across years and are assumed to be inversely related to the number of suitable jobs accessible to those groups of individuals at a particular point in time. The inclusion of this variable therefore could improve the identification of job-offer intensities.

For each job opportunity requiring an amount of hours h, the gross wage is computed as the multiplication of required hours h and the hourly wage w. EUROMOD then allows to calculate the disposable income corresponding to the job choice: it takes gross income values as an input and determines,¹⁸ based on the socio-demographic characteristics of the households, the amount of taxes and benefits they are subject and eligible to, which are respectively subtracted and added to the gross income. This transformation is denoted $d_i(l,w)$ .

We assume that people opting for an out-of-market opportunity apply for means-tested social assistance. In practice, people not working are eligible to unemployment benefits under the condition that they have a sufficient work-history and are involuntarily unemployed. When, on the contrary, an employee voluntarily quits his job, he can be subject to a penalty of some weeks (from 4 to 52) before being eligible to unemployment benefits. If the employee leaves his job with the intention of relying on unemployment benefits on the long run, he can even be sanctioned indefinitely. Those not eligible to unemployment benefits can apply for social assistance. In that case a thorough means-test, encompassing also means of relatives and assets owned, can be expected. Those being ineligible or not applying to those two schemes (due to stigmatization for example) probably rely on some types of private transfers, personal savings, informal work, mendicancy, etc., as basic needs have to be fulfilled. It is difficult to infer from the data in which of those situations workers opting for an out-of-market opportunity would end up, due to limited information on their preferences and financial situation. For those that are observed not working the same assumption is made, even tough some report unemployment benefits. The reason is that it would be difficult to consider those benefits, that are observed at one point in time, as representative of the level of revenue those individuals (expected to) receive when not working, as such benefits decrease importantly over time.

Considering means-tested social assistance benefits as the out-of-labour income is therefore a simplification needed to compensate the lack of information and an approximation of a consumption floor for survival. An additional argument could be that, especially since the reform of 2012,¹⁹ the declining unemployment benefits come near (and even drop below, for cohabitants) social assistance benefit levels in the long-term (see Galand and Termote, 2014), and that our assumption thus does not misrepresent too much the evaluation of out-of-market opportunities by forward-looking agents with reasonably low discount rates counting on unemployment benefits.

Let’s define ${\mathrm{\Psi }}_i(h,w)=exp(V_i(d_i(T-h,w),T-h))=exp(V_i(d_i(l,w),l))$ . The likelihood that an individual i will choose a particular job offer requiring labour time $h=T-l$ , and paying a wage w, can, given our assumptions on the random utility term, will be written (Dagsvik and Strøm, 1992):

and

in case of an out-of-market opportunity.

In practice, we do not observe the set of wage and time regimes offers. We therefore draw a set of offers for each individual, denoted $D_i$ , from a prior density function, denoted ${\displaystyle \mathbb{S}}$ , conditional on the observed choice being included.²⁰ The probability to observe a given choice, conditional on this choice being in the drawn set of offers, is therefore given respectively by:

for market opportunities, and

for out-of-market opportunities.

As we know the probability an individual works a given amount of hours, given his characteristics and given parameters, we can compute the likelihood that our observed sample was indeed observed, by multiplying those probabilities over all observations. We then look for the parameters that maximize the log-likelihood by using the Broyden–Fletcher–Goldfarb–Shanno (BFGS) optimization algorithm (Broyden, 1970; Fletcher, 1970; Goldfarb, 1970; Shanno, 1970), a quasi-Newton method for solving unconstrained nonlinear optimization problems. The estimated parameters are in Appendix A (Tables A1–A4). Table 4 summarizes the covariates used in the different building blocks of the model, which are similar to those used in Capéau et al. (2016), with the exception of the year-dummies in the wage-offers. For a discussion regarding the identification of RURO models, see for example Capéau et al. (2016) or Aaberge et al. (1999).

We simulate 3 hypothetical scenarios that increase the generosity of the work-bonus, named respectively reform $1$ , $2$ and $3$ .²⁵ Those scenarios do not change the structure of the scheme, but only its generosity, in terms of base amount and/or in terms of eligibility thresholds, and are calibrated to have the same budgetary cost before behavioural changes, set at 300M EUR yearly. The first scenario consists of increasing the maximum amount of the reduction (parameter $A$ ), thereby further decreasing the participation tax rate for low earning capacity workers. The second scenario consists of increasing both the maximum amount and the thresholds proportionally (parameters $A$ , ${\theta }_1$ and ${\theta }_2$ ), which, besides further decreasing participation tax rates, also extends the scheme to higher earning capacity workers. Finally, in the third scenario the maximum amount is kept constant, but the eligibility range is increased (parameters ${\theta }_1$ and ${\theta }_2$ ).²⁶

The base case policy is represented on Figure 8 together with the 3 reform scenarios. The continuous line represents the level of the existing WB granted to a full-time worker, in function of his gross monthly wage. The dotted lines represent the 3 hypothetical reform scenarios. The domain starts at the level of the minimum wage, and one can observe that the phase-out area starts soon after, as explained in Section 3. It can also be seen that reforms 1 and 3 will change the withdrawal rate of the policy, respectively to 29.2 $\%$ and 16.9 $\%$ , while reform 2 keeps this rate unchanged at 21.9 $\%$ . Lastly, the bars represent the distribution of monthly FTE gross wages across the population, and show that our reforms will change the budget set of a significant number of individuals.

Figure 8

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Two effects can arise when changing the shape of the budget constraint of an individual working for a given hourly wage. If in the reform scenario, for a given amount of hours, income increases, a person working that amount of hours will feel richer and might reduce his labour supply in order to have more leisure time with an income higher or equal to the initial one. This effect is called the income effect, and is stronger when the marginal utility of income is relatively small, at the condition that leisure is a normal good. On the other hand, a reform of in-work benefits will also change the marginal return to work (corresponding to the slope of the budget constraint). An increase in the marginal return to work means that ‘‘not working’’ (or ‘‘leisure’’) implicitly costs more in terms of foregone wages. People facing a higher (lower) marginal return to work will therefore have a stronger incentive to work more (less). Those effects are called substitution effects. Note that besides those two effects, occurring on a budget constraint for a given wage, workers can also opt for jobs paying different wages.

The change in budget constraint is illustrated for reform 1, for a single individual working at the minimum wage, on Figure 9. The dotted and continuous black lines represent the disposable incomes in the base and reform 1 scenarios, which is decomposed into different components in the reform case. We see that the reform renders many in-work options more attractive. The reason of the flat part on the left is that for small numbers of hours worked the benefit of the reform is offset by lower means-tested social assistance benefits. Then come part-time and full-time job situations where the reform has a strong and increasing (with labour supply) effect, which is straightforward given the design of the scheme. The benefit will start decreasing when working overtime. This result comes from the fact that the FTE wage, used for the determination of the WB level, is calculated by dividing gross earnings by contractual hours of work. People that have accepted a better paid job requiring frequent (informal) overtime, thus see their hourly wage over-estimated in that calculation.²⁷ The option to work less and by doing so become eligible to the WB therefore becomes relatively more attractive. This third effect is not detectable with administrative data, where informal overtime is not taken into account. Lastly, note that for higher levels of hourly wages, the reform would have less impact, as the WB phases gradually out with hourly wages. Our reforms might thus incentivize individuals to switch to lower-paid jobs, that become relatively more attractive.

Figure 9

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In summary, we can say that the options that become relatively more attractive following a WB increase are those that pay low wages, and that require hours that are not too low (as the means-tested benefits will offset the WB), nor too high (as the hourly wage will be overestimated in case of frequent overtime work).

We use a procedure proposed by Duncan and Weeks (1998) to simulate the behavioural changes resulting from our tax-benefit reforms. The procedure is essentially a Monte Carlo method relying on repeated random sampling of the random utility term. The different steps of this procedure are detailed next.

The first step of the procedure consists of, for each household, drawing a set of $k$ opportunities (market and out-of-market) from the estimated hours and wage distributions, conditionally on the observed opportunity being included. For each opportunity, we calculate the corresponding disposable income in the base and reform scenarios with the arithmetic micro-simulation model EUROMOD, of which the parameters are adapted in the case of the reform scenario. This allows to calculate the deterministic part of the utility function for each opportunity.

We then draw a vector of random utility terms from a Gumbel distribution in a way that guarantees that the total utility will be the highest for the observed choice, following a procedure proposed in Bourguignon et al. (2001). This operation is repeated $m$ times to get $m$ vectors of random Gumbel draws that predict choices that correspond to the observed choice.

Lastly, in each of the $m$ cases we predict which would be the ‘‘reform opportunity’’ chosen by the household by adding those random utility terms to the deterministic utilities under the reform scenario. This gives rise to a probability distribution over the set of opportunities of each household under the new tax-benefit system. This probability distribution then allows to calculate the expected hours of labour supply after the reform as well as expected income, tax and benefit amounts. Our simulations are run on the 2017 SILC dataset, which has income reference year 2016, and we set $k=50$ and $m=10$ .

All 3 reforms predict labour supply increases when measured in participation. Reform 3 however, predicts a labour supply decrease when measured in FTE. An interesting complementary statistic for the parsimonious policy makers that see in-work benefits mainly as a labour market activation policy is the average net cost to increase labour supply by a FTE or alternatively, by a participant. Note however, that the denominator of this indicator can be close to $0$ in reforms that create positive and negative labour supply changes that on average almost compensate each other, as in our reform 3, and to a lesser extent, reform 2, resulting in high numbers.

We obtain costs per additional FTE ranging from 368.5 thousand EUR in reform 1 to 1660.1 thousand EUR in reform 2 . In reform 3 the ratio is not calculated as number of FTE decreases. Other studies on relatively similar schemes find lower numbers for Belgium. For example Orsini (2006b) and Dagsvik et al. (2011), estimate costs per FTE to be located respectively between 136.0 and 204.1 and between 35.5 and 171.3 thousand EUR depending on the in-work benefit structure and structural model used.³⁴ Regarding neighbour countries, Orsini (2006b) estimates costs per FTE in the the order of 272.1 thousand EUR for the WFTC, 231.3 thousand EUR for the German Mini-Jobs tax reform and 163.2 thousand EUR for the French PPE.

Costs per new participant are estimated in our simulation to lie between 121.1 and 560.7 thousand EUR, corresponding respectively to reforms 1 and 3 (Table 10). Only Dagsvik et al. (2011) gives numbers for Belgium, located between 18.8 and 36.3 thousand EUR. For Other European countries, Bargain and Orsini (2006) estimate it to vary from 88.9 for France and 127.1 for Germany to 234.4 thousand EUR for Finland. Compared to previous studies and simulations of in-work benefits, we thus estimate rather high costs per FTE and per new participant.

An important difference with some previous research (for example, Orsini (2006a); Orsini (2006b) and Bargain and Orsini (2006)) is that our simulation allows people to not only change worked hours, but also opt for lower paid jobs (with preferable attributes). In section 5.4 we showed that this would make the reform more costly, as people opt for lower-paid jobs, which mechanically decreases tax and social security contribution revenues of the government. This consequently increases the overall cost/additional worker of the reform. Particular attention should therefore be paid to this effect, especially when analyzing reforms that significantly change the relative attractiveness of jobs offering low wages, as is the case of the Belgian WB.

Those differences might also be explained by a modelling decision regarding how overtime workers are taken into account. It is common when using survey data to exclude people declaring ‘‘unrealistic’’ amounts of hours and it is necessary to round the observed values to values in the choice set when using a discrete hours choice model (in Orsini (2006a) and Orsini (2006b) people working >80h/week are excluded from the sample and the hours of those working between 45 and 80 hours are rounded to 50 hours), while in administrative data informal overtime workers are not detected, (as in Dagsvik et al. (2011)). Those limits result in potentially underestimated intensive margin elasticity estimations, as one do only take into account overtime workers reducing their labour supply to a limited extent.

As suggested by Decoster and Vanheukelom (2019) about the proposed Flemish WB extension, higher costs per additional FTE or participant might also be explained by decreasing marginal utility of income, meaning that further increasing in-work benefits will probably not have effects of the same magnitude as the initial introduction of those benefits. Along the same line, it could be explained by the purchasing power increases (following real wage increases) over the last decades that decreased marginal utility of income at a given labour supply level.

Finally, those estimate differences are probably partly explained by differing initial situations and reforms simulated: an in-work benefit is more likely to have a positive impact on employment in situations where more people are jobless. On the contrary, in an economy with full employment, the benefit will be costly and mainly create negative income effects.

Note that flexibilization can concern wage regulations, hours regulations, conditions of dismissal,... and that less regulation is not necessarily synonym of more jobs: there is for example, no unanimity about the effect of minimum wages on employment (Neumark and Wascher, 2006)

Other measures in this category consist for example of lowering unemployment benefits or rendering them decreasing over time.

Note that this measure is not the same as the “Federale Jobkorting”, the name given to an increase in the amount of deductible professional expenses.

The measure was accused to discriminate people working in Flanders but living outside Flanders, as those would not have the right to the jobkorting.

Other measures part of this tax shift include: decreases of the personal income taxes through expansions of the brackets and the abolition of the 30-% bracket, decreases of the social security contributions for employers and self-employed, the introduction of an increased and uniform tax free amount, etc.

See also the reworked version Vandelannoote and Verbist (2019).

The amount of the basic reduction is slightly different for blue and white collar workers. Since it is not possible to distinguish between these types based on SILC data, only the amount forwhite collar workers is given here and simulated in EUROMOD.

We use the data as different cross-sections (we abstract from the fact that a share of individuals might appear in different surveys).

Estimated based on figures 2 and 3 in Dagsvik et al. (2011). Note also that there are very specific situations where for technical and organizational reasons the law authorizes derogations to the 38 (to 40) hours week, but those should mostly be compensated by periods of rest in a way that average weekly hours do not exceed the legal working week.

As the social desirability bias (a tendency of survey respondents to answer questions in a manner that will be viewed favorably by others) that could for example result from individuals desiring to be seen as hard-working.

We abandon i, j and k subscripts for clarity.

EU-wide arithmetic tax-benefit model widely used by the European commission for policy analysis and developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex.

Arrêté royal du 23 Juillet 2012 modifiant l’arrêté royal du 25 novembre 1991 portant la réglementation du chômage dans le cadre de la dégressivité renforcée des allocations de chômage, Moniteur belge, 30 Juillet 2012. (Royal decree of 23 July 2012 modifying Royal decree of 25 November 1991 relating to unemployment benefits in the context of the reinforcement of degressivity of unemployment benefits)

We use uniform distributions for the hours (from 0 to 70) and hourly wages (from 0 to 60). The prior probability to draw an out-of-market offer is set at 0.10.

Estimated at 15 for low educated individuals (ISCED levels 0,1,2), 19 of middle educated individuals (ISCED levels 3,4,5), and 23 for high educated individuals (ISCED level 6).

The exception in our eyes that could be significant is the case of unemployed finding no suitable job offer. In that case the unemployed might be desiring to find a good job, which provides a feeling of accomplishment, even if it would not be associated with an income increase. Also, young workers could be desiring to work many hours, even without additional salary, to build human capital and increase future utility.

Note that the number of men that stop working after a wage increase is slightly positive. This seemingly counter-intuitive result is due to the fact disposable income does not always increase monotonically with labour income due to discontinuities in certain means-tested benefits (for example due to a yearly 250EUR exemption in the means-test for social assistance).

We use the adjective married to refer to members of the couples. Those can also be in a consensual union.

Note that we use 2016 as reference scenario, even though the workbonus has (very) slightly and gradually been augmented during the 2015-2019 tax-shift.

Note that in the reference scenario, the WB cannot exceed social security contributions due, and the FWB cannot exceed 640 EUR/year. In our reforms we allow the WB and FWB to be refundable benefits in case they would outreach those limits.

As an illustration, imagine a low-level manager earning a gross wage of 2500 EUR per month for a job that requires on average 200 hours of work monthly (of which some informal overtime). This person’s hourly wage equals 12,5 EUR/hour. However, as the legal or contractual working week counts 38 hours (about 165 per month), his earning capacity in the eyes of the fiscal authority will be estimated at more than 15 EUR/hour, excluding him from the WB scheme.

Not all workers are included in our simulation sample (see section 4.1.). Our filtering procedure keeps 64.9% of individuals who are labour market available, for that dataset. If one would be interested in having the absolute changes in labour supply for the whole population, a possibility would be to divide the predictions of the model in Table 7 by 64.9%, which would be relatively accurate if people excluded from the sample have comparable reactions to the reforms on average.

We use the term equivalized income to denote the income divided by an equivalence scale, in order to take into account economies of scale in household expenses.

Normative analysis in a framework of heterogeneous preferences poses the difficult problems of comparability and aggregation of individual utilities (due to an incompatibility between two sets of axioms, one related to the respect of individual preferences and one related to interpersonal comparability, see Fleurbaey and Trannoy (2003)), that are often neglected (e.g. when simply aggregating compensating variations). One way to address these problems is to use a reference preference ordering (or a reference agent/household). The disadvantage of this choice is, however, that it would create an inconsistency between the positive part of our analysis, where household heterogeneity plays a role in the decision process, and the normative part of our analysis, where this heterogeneity is set aside. Fleurbaey (2006), and Fleurbaey (2007) propose another way to escape this incompatibility problem, by restricting (but retaining maximally) preference heterogeneity to what they call Subset Dominance. It is argued that giving priority to respecting preferences is less arbitrary and allows to shed light on the ethical priors used (and thus the cut between personal and social responsibility) when selecting the subsets: The rent-criterion for example gives maximal protection for people who give importance to leisure, and renders them minimally responsible for their aversion to work. The FT-criterion on the contrary treats industrious individuals (i.e. those having less distaste for work) more favourably.

For a detailed overview of the normative foundations of the three most popular approaches to measure well-being in a multidimensional setting: the capability approach, the subjective well-being approach and the equivalent income approach, see Decancq et al. (2015). For a discussion on welfare analysis applied to Random Utility Models of Labour Supply, see Decoster and Haan (2010).

In the lowest decile, individuals have an education level below average. Our estimates suggests that this results in stronger preferences for leisure and less job opportunities. Moreover, in the lowest decile, couples have more children than the average, which also contributes to higher preferences for leisure.

This is done by running EUROMOD iteratively and adapting tax-benefit parameters at each loop in order to approach a pre-defined budget deficit (300M EUR). We used a tolerance level of 1% (3M EUR).

Numbers from their publications are transformed in 2016 EUR with CPI indices to be comparable with ours. Orsini (2006a) database is from 2000, Dagsvik et al. (2011) from 2001 and Bargain and Orsini (2006) from 1998.

An unemployment trap is a situation in which a generous social security scheme (relatively to wages) lowers the financial difference between working and being inactive.

Or equivalently, using “full-time equivalent” (FTE) labour income, the gross salary an employee would receive if he worked full-time at his gross hourly wage.

However this wide consensus among economists has recently been affected by new study of Henrik Kleven showing that employment increases align closely with the confounding effects of welfare reforms and a booming macro-economy. He concludes that the case for sizable extensive margin effects of the EITC is fragile (Kleven, 2019).

The scheme changed a couple of times, and its name changed successively to Family Credit and Working Families Tax Credit, before its final name Working Tax Credit (combined with Child Tax Credit). Most of the evaluations of employment effects refer to the period where the IWB was named WFTC, and was significantly increased.

Loi du 20 Décembre 1999 visant à octroyer [un bonus à l’emploi sous la forme d’] une réduction des cotisations personnelles de sécurité sociale aux travailleurs salariés ayant un bas salaire [et à certains travailleurs qui ont été victimes d’une restructuration].

Loi du 10 Août 2001 portant réforme de l’impôt des personnes physiques.

Below tables give an overview of parameter estimates. The Log-Likelihood at the maximum found is -29450.05. Note that for education covariates, "Middle education" is the reference, and for region covariatas, "Flanders" is the reference, meaning that the effects of those covariates are measured comparatively to middle-educated Flemish people.

This work was supported by UCLouvain Saint-Louis Bruxelles, FSR grant (fonds spécial de recherche).

I am grateful to André Decoster, Tom Truyts, Bruno Van der Linden, Gilles Grandjean, Koen Declercq, Toon Vanheukelom, Sebastiaan Maes, Bart Capéau, Liebrecht De Sadeleer and David Sonnewald for their introduction into and/or discussions about micro-simulation, RURO-modelling and labour economics literature, as well as their regular feedback and comments. The usual disclaimer applies.

The results presented here are based on EUROMOD version I2.0+. EUROMOD is maintained, developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex, in collaboration with national teams from the EU member states. We are indebted to the many people who have contributed to the development of EUROMOD. The process of extending and updating EUROMOD is financially supported by the European Union Programme for Employment and Social Innovation "EaSI" (2014-2020). The results and their interpretation are the author’s responsibility.

1. Version of Record published: April 30, 2021 (version 1)

© 2021, de Mahieu

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