samlet årgang - Økonomisk Institut - Københavns Universitet

Nationaløkonomisk Tidsskrift 143 (2005): 321-358
Labor Supply Behavior and the
Design of Tax and Transfer Policy
Henrik Jacobsen Kleven
University of Copenhagen, EPRU, and CEPR, E-mail: henrik.kleven@econ.ku.dk
Claus Thustrup Kreiner
University of Copenhagen, EPRU, and CESifo, E-mail: ctk@econ.ku.dk
SUMMARY: This paper argues that recent empirical evidence on labor supply behavior
– showing stronger participation responses than hours-of-work responses – has important
implications for the design of tax and transfer policy. Based on a review of recent
research in this field, we conclude the following: (i) Conventional ways of evaluating the
impact of tax-transfer reforms on economic efficiency have to be revised. (ii) Optimal
redistributional policies may well involve negative marginal tax rates at the bottom of
the earnings distribution. (iii) The introduction of the Earned Income Tax Credit (EITC)
in the United States in the mid-1970s and the large expansions of the credit during the
past two decades did not involve a trade-off between efficiency and equality as suggested
by previous estimates. Instead, the EITC has improved both equality and efficiency.
(iv) For most European countries, redistribution to the working poor involves a substantially
lower trade-off between efficiency and equality than traditional redistributional
policies targeted to those out of work.
1. Introduction
Redistribution to low-income individuals has grown significantly in European
countries and in the United States since World War II. Today, most of these countries
devote a sizeable amount of public spending to various low-income support programs.
These programs include unemployment insurance, social assistance, in-work benefits,
health insurance, food programs, housing programs, child care support, and disability
benefits for the disabled.
These transfer programs have been motivated by a desire to alleviate poverty and to
make the income distribution more equal. However, the presence of generous lowincome
support provided by the government may have adverse effects on the labor
This paper has been written on the occasion of Claus Thustrup Kreiner’s inaugural lecture as full Professor
at the University of Copenhagen on the 4th of February 2005. Parts of the paper draw heavily on recent,
joint work with Nada Eissa, Herwig Immervoll and Emmanuel Saez.