The Economic Effects of Employment-Conditional Income Support Schemes for the Low-Paid: An Illustration from a CGE Model Applied to Four OECD Countries

Abstract

Problems of unemployment and low pay amongst the low skilled and those with little work experience are severe in many OECD countries. Employment-conditional schemes are policy instruments designed to increase the employment prospects of the low skilled as well as to support their living standard. In this paper a simple CGE model is developed to simulate the impact of the introduction of an employment-conditional scheme in four OECD countries. The simulated policy package is graduated on gross earnings with both "phase-in" and "phase-out" regions. The advantage of the CGE approach is to allow assessing the direct and indirect effects of the financing of the policy scheme on both labour demand and supply. The simulations suggest that employment effects on targeted households are significant while the impact on aggregate employment is modest. Furthermore, the cost-effectiveness of the policy package is found to depend crucially on the earnings distribution, the levels of taxes on labour and the existence of a severe unemployment trap.

JEL Classification: C68, H31, J22