Incentives to enter the labour market in Latvia

Publication type

Conference Paper


New Challenges of Economic and Business Development – 2016, May 12–14, 2016, Riga, University of Latvia


Publication date

May 2, 2016


The aim of this paper is to analyse a number of reforms of the labour tax system – introduction of the regressive non-taxable minimum, increase in the amount of the allowance for dependents, solidarity tax charged on high salaries – that came into force since January 2016 with respect to their effect on the changes in incentives to enter the labour market. The participation tax rate (PTR) is used as the indicator of the incentive to work. Using the European Union tax-benefi t microsimulation model (EUROMOD) and the European Union Statistics on Income and Living Conditions (EU-SILC) survey microdata, PTRs are computed in two different ways. At fi rst, PTRs are computed only for those in work, while another way of the calculation takes into consideration both employed and unemployed. Heckman two stage estimation method is used to predict the hypothetical wage rates for those actually not working on the basis of the observed workers’ wage rates. The results suggest that implemented reforms slightly reduces PTRs for low-income earners, nonetheless high PTRs in the lowest deciles suggests a particularly strong disincentive for low-income persons to participate in the labour market. Solidarity tax charged on high salaries could slightly increase the PTRs of high-income earners.





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