Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
Work incentives
1. Olli Kärkkäinen
Seminar on Making work pay
25 May 2016, Brussels
Work incentives and
unemployment traps
– is there an easy cure?
2. OUTLINE
• Measuring work incentives
• Work incentives in Finland 1990─2015
• Three different ways to remove unemployment traps
• Basic income – a miracle cure for work disincentives?
• Basic income experiment in Finland
• What about bureaucracy as a work disincentive?
5. Work incentives in Finland
• ”Making work pay” has been a goal of all Finnish governments
since the 1990’s
• Focus on unemployment traps
• Main reasons for unemployment traps in Finland
– Housing benefit
– Social assistance
– Earnings-related unemployment benefit
7. Participation tax rates in Finland: 2011−2015
2011 2015 Change (ppt:s)
Unemployment → Full Time 59,4 % 62,9 % +3,5 %
Unemployment → Part Time 64,2 % 59,7 % – 4,5 %
Part Time → Full Time 54,6 % 66,2 % +11,6 %
Main reasons:
• ↑ Unemployment benefits & housing benefits (2012) =
↓ Work incentives
Source: Kotamäki & Kärkkäinen 2014
8. Participation tax rates in Finland: 2011−2015
2011 2015 Change (ppt:s)
Unemployment → Full Time 59,4 % 62,9 % +3,5 %
Unemployment → Part Time 64,2 % 59,7 % – 4,5 %
Part Time → Full Time 54,6 % 66,2 % +11,6 %
Main reasons:
• ”Protected portion” -reform (2014–2015)
• First 300 €/month of labour income don’t reduce
unemployment benefits or the housing benefit
• Increased work incentives: Unemployment → Part Time
• Reduced work incentives: Part Time → Full Time
Source: Kotamäki & Kärkkäinen 2014
10. Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓
+ ”Easy” way of increasing work incentives (cut down costs)
– Poverty, inequality
11. Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓
+ ”Easy” way of increasing work incentives (cut down costs)
– Poverty, inequality
2. Increase disposable income at part-time work
+ Cost effective way of increasing part-time work incentives
– Decrease work incentives: part-time full-time
12. Three ways to remove unemployment traps
1. Cut social security: disposable income as unemployed ↓
+ ”Easy” way of increasing work incentives (cut down costs)
– Poverty, inequality
2. Increase disposable income at part-time work
+ Cost effective way of increasing part-time work incentives
– Decrease work incentives: part-time full-time
3. Increase disposable income of all low-wage workers
+ Increases part-time AND full-time work incentives
– High costs
14. Universal basic income and work incentives
• Basic income
– Unconditional
– Same sum for every adult (regardless of f.e. housing costs)
• Full basic income replaces all current social security benefits
• Partial basic income replaces only some benefits
– f.e. housing benefits and/or earnings related unemployment
benefits would stay in addition to basic income
15. Universal basic income and work incentives
• Full basic income
– Would remove all unemployment traps and make work pay
(depending on the income tax rate)
– Problem: Very high costs (UBI 1500 €/month: income tax rate ≈ 80 %)
or lower social security level
– Compared with current benefits a full basic income would either be
a lot less generous or a lot more expensive
16. Universal basic income and work incentives
• Full basic income
– Would remove all unemployment traps and make work pay
(depending on the income tax rate)
– Problem: Very high costs (UBI 1500 €/month: income tax rate ≈ 80 %)
or lower social security level
– Compared with current benefits a full basic income would either be
a lot less generous or a lot more expensive
• Partial basic income
– Main reasons for unemployment traps remain →
unemployment traps remain
– A budget neutral partial basic income -reform does not increase work
incentives
17. Basic income experiment in Finland
• Government's programme: implementation of a universal
basic income experiment
• Research working group (consisting of f.e. Finnish Social
Insurance Insitution, Research Institutes, Universities)
• Preliminary report (March 2016)
– Compared different basic income models
(and negative income models)
– Suggests trying out an partial basic income (550 ─750 €/month)
– Budget neutral partial basic income reforms would not remove
unemployment traps or work disincentives
18. Basic income experiment in Finland
• Based on the preliminary report, the Finnish Government will
decide on how to proceed with the experiment (Spring 2016)
• Final report of the research working group: November 2016
• Experiment (2017─2018)
– Randomized nationwide sample AND a regional sample to study
externalities
– Sample size depends on the budget
20. Bureaucracy traps
• Non-financial disincentives of work
– Working while unemployed requires a lot of paperwork
– Complicated social security systems make things harder
– Uncertainty about how welfare benefits respond to labour
income
• Automating and simplifying the tax-/benefit -system can remove
bureaucracy traps f.e.
– Basic Income
– Universal Credit (UK)
– Universal income registry (Finland 2019)
21. CONCLUSIONS
• Work incentives have increased in Finland since the 1990’s mostly due to
in-work tax credits
• Removing unemployment traps requires either cutting down the level of
social security or very costly tax cuts/social security reforms
• Universal basic income is not a miracle cure for unemployment traps
• Simplifying and automating social security can reduce “bureaucracy traps”