Employment Effects of Welfare Reforms: Evidence from a Dynamic Structural Life-Cycle Model

48 Pages Posted: 23 May 2008

See all articles by Peter Haan

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Victoria L. Prowse

Purdue University - Department of Economics; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

Arne Uhlendorff

IZA Institute of Labor Economics

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Abstract

In this paper we develop a dynamic structural life-cycle model of labor supply behavior which fully accounts for the effect of income tax and transfers on labor supply incentives. Additionally, the model recognizes the demand side driven rationing risk that might prevent individuals from realizing their optimal labor supply state, resulting in involuntary unemployment. We use this framework to study the employment effects of transforming a traditional welfare state, as is currently in place in Germany, towards a more Anglo-American system in which a large proportion of transfers are paid to the working poor.

Keywords: life-cycle labor supply, involuntary unemployment, in-work credits

JEL Classification: J22, J64, C35, C61

Suggested Citation

Haan, Peter and Prowse, Victoria L. and Uhlendorff, Arne, Employment Effects of Welfare Reforms: Evidence from a Dynamic Structural Life-Cycle Model. , Vol. , pp. -, . Available at SSRN: https://ssrn.com/abstract=1136281 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Victoria L. Prowse

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Arne Uhlendorff

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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