samlet årgang - Økonomisk Institut - Københavns Universitet

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NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
market. In particular, since eligibility in most welfare programs is directly related to
the size of income, individuals have an incentive to reduce or under-report earnings so
as to qualify for welfare payments. For example, some people may want to reduce
hours of work or effort on the job, or they may choose to opt out of the labor market
entirely. There is convincing empirical evidence that welfare programs do, in fact, induce
labor supply responses of this sort, Moffitt (2002). Moreover, taxes collected from
middle- and high-income earners to finance low-income support leads to additional
negative effects on labor supply and employment, Blundell and MaCurdy (1999).
The negative effects on labor supply implied by taxes and transfers create a loss of
efficiency in the economy. In other words, policy makers face a trade-off between efficiency
and equality, since more distributional equity generated by government programs
implies lower efficiency. The size of this trade-off depends on the generosity
and on the design of welfare programs. If the programs are inappropriately designed,
they will be costly in terms of lost efficiency implying that the feasible amount of
redistribution is lower. By contrast, if the programs are designed to minimize the adverse
effects on labor supply, then we can redistribute more.
An important choice in the design of low-income support is whether it should apply
to the poor or to the working poor. This policy choice has varied over time and across
countries. In continental Europe and in Scandinavia, welfare programs tend to be
aimed at guaranteeing a minimum level of consumption for all individuals, including
those without a job (redistribution to the poor). By contrast, Anglo-Saxon countries
tend to spend large amounts on in-work benefit programs targeted to the working poor.
In the United States, for example, the so-called Earned Income Tax Credit (EITC) has
become the single largest cash transfer program for lower-income families at the federal
level. Eligibility for the EITC is conditional on having a low income and on having
a job. The program attempts to achieve the dual goal of redistributing income to lowincome
earners and avoiding some of the adverse effects on the labor market mentioned
above. In particular, by making the transfer conditional on employment, the EITC
aims at increasing labor market participation for the eligible population.
A program similar to the EITC was introduced in the United Kingdom in the 1988
and expanded substantially in the late 1990’s. Moreover, a number of continental
European countries (including Denmark) have recently experimented with in-work
benefit programs, although on a very small scale. In other words, the introduction and
further expansion of in-work benefits targeted to the working poor is high on the agenda
when discussing welfare reforms in Europe. Since the expansion of such programs –
at the expense of traditional welfare programs – would represent a fundamental change
in the approach to income redistribution, it is important to understand their implications
for distribution and the labor market.