Sub-project 3b: Impacts of reforms to the tax-benefit system on labour supply


We continue the analysis of work incentives in project 3a by focusing on a single country, Sweden, where ambitious redistribution has led to emergence of considerable poverty traps (situations where individuals see much of any increased earnings offset by the loss of transfer income), see e.g. Pirttilä and Selin (2011) and Mörk (2011). Following several OECD countries, Sweden has currently introduced both an earned income tax credit (EITC) as well as an earnings disregard for recipients of social assistance.

However, a closer examination of the leading surveys on the topic (e.g. Heckman (1993), Blundell (1995), Blundell and MaCurdy (1999) and Meghir and Phillips (2010)) suggests that we have little impression of the magnitude of extensive elasticities of labour supply (i.e. how participation in the labour market reacts to financial incentives) outside the UK and the US. In this project we will estimate labour supply elasticities primarily in Sweden by making use of institutional features and reforms to the tax- and transfer system. The empirical methods will relate to the so-called “sufficient statistics approach” in economics (Chetty 2009). This is a modern approach to public finance/labour economics that combines theoretical models with estimates of behavioural parameters obtained using quasi-experimental methods. In this way, estimates of labour supply elasticities obtained using credible and transparent identification strategies can be used to calibrate optimal tax rates for low income earners.

One example of a quasi-experiment that we will analyze is a reform to the system of housing allowances (HA) in 1997, which entailed large incentives for spouses who previously did not work to enter the labour market. A second source of variation that we will use is the introduction of an earnings disregard in the social assistance system (SA), which improved work incentives for some low-income workers in 2013. Both the HA reform and the SA reform allows us to construct treatment and control group in several dimensions. We will conduct a special analysis of SA recipients, by comparing how the HA and SA reforms affected the labour supply of individuals in this selected group.

Finally, related to the analysis of multidimensional inequality in Strand 1, we ask how the welfare state may affect the joint distribution of health and income by examining how heterogeneity in health interacts with the work incentives inherent in tax-benefit systems. It may be that financial incentives aimed at increasing labour market participation can mainly be utilised by healthy workers, who are also better off financially. This may strengthen the connection between health and income inequality, and may be a particular problem among elderly workers. We examine these issues by analysing heterogeneous responses (with respect to health) to recent reforms such as the tax reductions for over 65 year old workers in Sweden (for an analysis of overall programme effects, see Laun 2012), utilising register data with very detailed health information.


Professor Eva Mörk, Professor of Economics, Uppsala University,

Professor Jukka Pirttilä, Professor of Economics, University of Tampere,

Professor Kaisa Kotakorpi, Professor of Economics, University of Turku, ‪

Dr Spencer Bastani, Assistant Professor, Uppsala University,

Dr Håkan Selin, Associate Professor, Uppsala University,


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