Taking the European view: A selection of new research and analysis using EUROMOD

Taking the European view A selection of new research and analysis using EUROMOD

01

Contents 03 What makes 04 EUROMOD special?

A lost decade?

06 Decomposing the effect of 2001-11 tax-benefit policy Introduction from the EUROMOD Director

changes on the income distribution in EU countries

08 Credit crunched: single 10 parents, Universal Credit and the struggle to make T he effectiveness of policies at tackling child poverty

work pay in the UK

12 The trade-off between 14 equity and work incentives across EU countries EUROMOD 16 national teams Accessing 18 EUROMOD EUROMOD 19 team members P overty and social policy in times of crisis: the case of Greece

What is EUROMOD? EUROMOD is the tax-benefit microsimulation model for the EU. It is based on micro-data from the EU-SILC and Family Resources Survey for the UK. EUROMOD calculates tax liabilities and benefit entitlements for existing tax-benefit systems and reforms to them, estimating the effects on income inequality and poverty, government budgets and work incentives.

Introduction from the EUROMOD Director It is 10 years since EUROMOD made its home in ISER and in that time it has been transformed into a widely used and respected tool for comparative research and analysis on the effects of fiscal and social policies and policy reforms This publication celebrates this achievement by showcasing some recent findings from work by ISER researchers using EUROMOD, as well as explaining how it is a unique research resource used for scientific research and to inform policymaking, and setting out some of our plans for the next 10 years.

Examples of analysis which uses EUROMOD for single countries are provided for the UK on the effect of the new Universal Credit on single parent incentives to work and for Greece, on the effect of the crisis on poverty and the social policy response. Examples of multi-country analysis include, first, a comparison of the effects of policy changes on income poverty and inequality over the period 2001-11 for seven countries, disentangling the policy effect from other changes happening in this period. The second multicountry analysis puts the performance of the UK taxbenefit system in reducing child poverty in comparative European perspective. It shows

how the UK benefit system achieves the most out of all 27 countries in terms of reducing the child poverty rate, but has the second hardest job to do, if child poverty before the operation of taxes and benefits is considered. The third comparison focuses on the incentive to do paid work longer or harder, and considers the cross-country relationship between such work incentives and the reduction in income inequality, given the tax-benefit systems and labour market situation in each of the EU-27 countries.

I would like to acknowledge the support we have received both for maintaining and developing EUROMOD and for carrying out research using it. I am particularly grateful to DG-EMPL of the European Commission which had the foresight six years ago to finance EUROMOD’s expansion to cover the whole EU and which continues to support its development and annual updating. Research using EUROMOD by ISER

researchers has been supported by, among others, the ESRC Research Centre on MicroSocial Change (MiSoc), the European Commission FP6 and FP7 research programmes, the Social Situation Monitor, IWTFlanders, Eurostat (NetSILC and NetSILC2), the UK Low Pay Commission, UNICEF and Gingerbread.

I am enormously proud of the team of people working on EUROMOD in ISER and what they have achieved working in collaboration with the network of 28 national teams who contribute to the annual update and dissemination of the work. The wider ‘EUROMOD community’ also includes a growing number of users who have been taught to use EUROMOD through our regular training courses and the developers of spin-off models in non EU countries.

I look forward to exciting developments in the next 10 years in terms of research collaborations, extensions in policy scope, widening access and improving usability.

Holly Sutherland Research Professor and Director of EUROMOD, ISER, University of Essex 03

What makes EUROMOD special?

Holly Sutherland Research Professor and Director of EUROMOD, ISER, University of Essex Holly Sutherland

EUROMOD is unique in two important ways that make it one of the most widely used microsimulation models in the world First it covers many countries in a comparable and consistent manner. Secondly, it is made available generally for not-forprofit use and is not private to its developers, which is usually the case with microsimulation models. This is particularly important in countries where there are no other models, and in some it has been adopted for official (or sometimes informal) government use e.g. in Austria, Slovakia and Greece. It is also relevant in the UK where, even though there are a number of tax-benefit models owned and maintained by Government and independent organisations and individuals, EUROMOD is the only regularly maintained model that is generally accessible.

EUROMOD currently covers 27 EU countries (with Croatia, the 28th on the way) and has been extended to also operate for some non-EU countries in the Balkans and southern Africa as well as Russia and Australia.

It uses special-purpose taxbenefit modelling software and the user interface has been designed to handle the complexity of the many options on offer in a transparent and user-friendly way. With funding from the European Commission, policy rules and input data are updated regularly. Keeping the model up-to-date is of course

04

necessary for policy monitoring and analysis purposes; it is also very useful if academic research using EUROMOD is to have policy relevance and impact.

Over the last 10 years the use of EUROMOD as a tool for academic research that is published in well-respected journals has grown enormously.

There are many different types of applications across social science disciplines. Focussing particularly on cross-country comparative research there are several ways in which it has been informative. One is in disentangling the effects of policy from other factors affecting income inequality and poverty, especially differences across countries or changes through time. Another is in quantifying the labour supply implications of tax-benefit systems. A third is in measuring the automatic stabilisation effects of tax-benefit policies.

And of course the ability of EUROMOD to assess the effect of changes to policies adds to the possibilities, and is particularly relevant for considering options for EU fiscal integration or different approaches to meeting common objectives such as poverty reduction.

However, perhaps the most dramatic transformation over the last 10 years has been the

increasing acceptance and recognition of EUROMOD as a tool for policy analysis by international organisations.

This has been most obvious in the case of the Directorate General for Employment, Social Affairs and Inclusion (DG-EMPL) of the European Commission (EC) who now regularly include analysis using EUROMOD in their Annual Report on Employment and Social Development and their EU Employment and Social Situation Quarterly Review, as well as in their bilateral discussions with Member States as part of the European Semester. Other EC policy Directorates such as Taxation and Customs Union (DGTAXUD), Economic and Financial Affairs (DG-ECFIN) and Justice (DG-JUST) also make use of EUROMOD analysis in a wide range of areas such a housing taxation and gender equality in their own regular publications and special reports.

Two areas of work in particular are becoming integral parts of DG-EMPL’s evidence base. The first is the use of EUROMOD simulations to ‘nowcast’ the current risk of poverty, given the two to three year time lag before estimates based on contemporary microdata become available.1 The second is an assessment of the distributional effects of policy reforms each year, especially in countries that have remained affected by the recent economic crisis, but also those in recovery, since policy changes aiming for fiscal consolidation and those aiming to relax fiscal constraints each have distributional consequences.2 A third area – that of the design

and stabilisation properties of potential social and fiscal policies integrated at EU or EMU level – is of growing interest.

Organisations beyond the EC have also made use of EUROMOD analysis. The IMF included EUROMOD estimates of the distributional effects of austerity measures, as well as evidence from five other EUROMOD papers in its review of Fiscal Policy and Income Inequality.3 The World Bank has drawn on our work on nowcasting and extensions of EUROMOD to the Balkan countries. UNICEF has highlighted EUROMOD work on benefits targeted on children4 and a recent OECD report on Greece made intensive use of EUROMOD analysis for that country.5 Building on these successes and looking forward to the next 10 years, there are many directions in which to develop EUROMOD. Among them are extensions in policy scope (e.g. to include indirect taxes or childcare policies) and extensions to the functionality of the model (e.g. to add a state-of-the art model family analysis facility) as well as linkage to macro-economic and other types of empirical model.

At the UK level there is potential to build on our open access policy by developing a web-based simplified version of EUROMOD-UK, for use by civil society organisations or indeed anyone (as has already been pioneered in Austria and Flanders), and to link the model to Understanding Society in order to exploit the panel design of the data.

Over the last 10 years the use of EUROMOD as a tool for academic research that is published in wellrespected journals has grown enormously

1 See for example Navicke N., O. Rastrigina and H. Sutherland, 2013, “Nowcasting indicators of poverty risk in the European Union: a microsimulation approach”, Social Indicators Research, http://dx.doi. org/10.1007/s11205-013-0491-8 2 See for example De Agostini P., A. Paulus, H. Sutherland and I. Tasseva, 2014, ‘The effect of tax-benefit changes on income distribution in EU countries since the beginning of the economic crisis, Social Situation Monitor RN 2013/2 http://ec.europa.eu/social/main.jsp?catId=1049&langId=en 3 www.imf.org/external/np/pp/eng/2014/012314.pdf 4 Levy H., M. Matsaganis and H. Sutherland, 2014 ‘Simulating the costs and benefits of a Europewide basic income scheme for children’ UNICEF Child Poverty Insights www.unicef.org/socialpolicy/ index_71776.html 5 Koutsogeorgopoulou V., M. Matsaganis, C. Leventi and J. D. Schneider, 2014, ‘Fairly Sharing the Social Impact of the Crisis in Greece’, OECD Economics Department Working Papers No 1106 www.oecd-ilibrary. org/economics/fairly-sharing-the-social-impact-of-the-crisis-in-greece_5jzb6vwk338x-en

05

A lost decade?

Decomposing the effect of 2001-11 tax-benefit policy changes on the income distribution in EU countries John Hills Professor of Social Policy and Director of the Centre for Analysis of Social Exclusion (CASE), London School of Economics Alari Paulus Research Fellow, ISER, University of Essex Holly Sutherland Research Professor and Director of EUROMOD, ISER, University of Essex Iva Valentinova Tasseva Senior Research Officer, ISER, University of Essex

The Lisbon Strategy in 2000 set about achieving sustainable economic growth and increased social cohesion in the EU by 2010 However, what is known about the period since the early 2000s shows a mixed experience across EU countries in terms of changes to the risk of poverty rate and levels of income inequality. The hoped

for comprehensive “decisive impact on the eradication of poverty” (European Council, 2000)6 has not occurred and poverty and inequality levels in some countries have risen, not fallen.

In light of these developments, the need to understand how policy changes made by EU Member States governments since Lisbon have affected poverty and inequality is the departing point of this paper.

Although a wide range of factors influence the income distribution, many of these, such as demographic change or the distribution of work across households, are not under the direct control of policy makers or

Were the policy changes in the past decade povertyand inequality-reducing?

6 European Council (2000). Lisbon European Council Presidency Conclusions 23-24 March 7 Bargain, O. and T. Callan (2010). Analysing the effects of tax-benefit reforms on income distribution: A decomposition approach. Journal of Economic Inequality, 1–21

06

amenable to short-term public policy intervention. It is the tax and benefit policies which are the most relevant factors that policy makers are able to control and it is therefore important to isolate their impact on the income distribution. We examine the structure and generosity of systems of cash income protection and the structure and parameters of direct personal taxes and social contributions in European countries, seeking to answer the question whether the policy changes in the past decade were poverty- and inequality-reducing. We separate the effects of tax-benefit policy from all the other factors that pushed in either direction at the same time. Our analysis considers separately the precrisis period of growth (200107) and the period that included the onset of the Great Recession (2007-11).

We estimate the effect of policy changes on the income distribution following the decomposition framework formalised in Bargain and Callan (2010).7 We use the EU tax-benefit microsimulation model EUROMOD to compare the effects of 2007 policies with those of 2001 and 2011 policies when they are applied to a fixed population, based on representative samples of micro-data from seven diverse countries: Belgium, Bulgaria, Estonia, Greece, Hungary, Italy and the United Kingdom. We extend the decomposition framework by distinguishing

between structural policy changes, where systems were reformed in some way, and indexation effects, resulting from the ways that benefit amounts and tax thresholds are changed over time.

We use two benchmarks against which to compare how systems were actually indexed: growth in market incomes and change in the price level.

Using the former, indexation of benefits faster than market incomes will, for instance, show as poverty-reducing (allowing progress against a relative, or ‘floating’ poverty line) as well as inequality-reducing. Using the latter, indexation of benefits faster than prices will show as poverty-reducing against a constant real (or ‘anchored’) poverty line.

Several key findings emerge from our historical and international comparison. We find that the effect of policy changes on both poverty and inequality often depends on the choice of counterfactual indexation against which policies are assessed.

Nevertheless, our robust findings are that compared to the 2001 system, the 2011 policy system is more effective in reducing the risk of poverty in Belgium, Estonia and the UK, and, hence, this was not a ‘lost decade’ for these countries.

However, policy changes have resulted in increased poverty against an anchored poverty line in Greece and against a floating poverty line in

Hungary. Irrespective of the indexation comparison, policy reforms contributed to income inequality reduction in Estonia and the UK both before and after 2007, but in the other countries the results vary by time period.

Exploring the nature of the reforms, we find that – aside from structural changes – benefit amounts and tax thresholds were mostly increased by more than growth in prices and, during the crisis, also stayed ahead of growth in market incomes (as it lagged behind price increases in this period). Hence, the ‘indexation effect’ was typically more effective in alleviating poverty and inequality than changes to the structure of policies. In fact, most of the structural changes that governments introduced, especially in the 2007-11 crisisonset period, had a poverty and inequality-increasing effect.

Finally, our findings show that in most of the countries, policies since the crisis achieved less in terms of poverty reduction than before it. This suggests the need for governments to achieve more under favourable economic conditions in order to be better prepared for more challenging economic periods.

John Hills

Alari Paulus

Holly Sutherland

Iva Valentinova Tasseva

Hills J., Paulus A., Sutherland H. and Tasseva I. (2014) A lost decade? Decomposing the effect of 2001-11 tax-benefit policy changes on the income distribution in EU countries, ImPRovE WP 14/03 07

The effectiveness of policies at tackling child poverty Holguer Xavier Jara Tamayo Senior Research Officer, ISER, University of Essex Chrysa Leventi Senior Research Officer, ISER, University of Essex Holguer Xavier Jara Tamayo

Chrysa Leventi

08

The UK based charity Child Poverty Action Group (CPAG) commissioned ISER to produce a comparison of the effect of the 2012 tax-benefit systems on child poverty across the EU27 Child poverty is defined as the percentage of children (i.e. individuals aged under 18) living in households with equivalised disposable income below the national poverty threshold.

The latter is set at 60% of the country’s median disposable income.

Figure 1 shows how taxes and benefits affect child poverty across the EU27. In its press release, the CPAG has stated: “While child poverty is responsive to, and requires, many different types of intervention, international evidence shows that the taxbenefit system is an essential tool for reducing it. UK has the second highest child poverty rate before taxes and transfers in the EU27. As a result, our benefits system has to do a lot more heavy lifting than it does in many other countries... if we cut social security without

taking effective action to bring down our pre-tax and transfer child poverty rate, we potentially leave millions more children exposed to poverty.

But even in countries with more propitious starting points than the UK, social security remains an essential policy tool for reducing child poverty.”

As can be seen in Figure 2, the research estimated that the redistributive effect of the UK benefits system is the highest in the EU27, followed by Ireland and France. Means-tested benefits have a greater impact on reducing child poverty in the UK than non means-tested benefits. They also account for a larger percentage of the country’s GDP in 2012. The benefit system that seems to be having the weakest effect on reducing child poverty is the one of Greece, followed by Poland and Bulgaria.

These estimates take approximate account of the non-take-up of some means-tested benefits, where this makes a big difference to incomes: in Belgium, Estonia, Greece, Ireland and the UK. In Italy, Greece and Bulgaria, tax evasion is also taken into account. But generally, it is assumed that the legal rules are universally adhered to.

This analysis makes use of EUROMOD version G1.4. The underlying micro-data used for the simulations in most countries comes from 2010 European Union Statistics on Income and Living Conditions (EU-SILC).

Jara H.X. and Leventi C. (2014) A note on EU27 child poverty rates, Research Note prepared for Child Poverty Action Group http://www.cpag.org.uk/sites/ default/files/ISER%20note%20 on%20EU27%20child%20 poverty%20rates.pdf

Means-tested benefits child poverty in the

This table missing an axis label here

50

Original income (i.e. before taxes and benefits

Figure 1 Child poverty rates before and after taxes and benefits (2012)

Disposable income (i.e. before taxes and benefits)

45 40 35 30 25

Notes: Countries are ordered according to child poverty rates before taxes and benefits are taken into account. EU refers to the EU27 average.

Source: EUROMOD version G1.4.

20 15 10 5

Absolute change in child poverty rates (in ppts)

Ireland

United Kingdom

Lithuania

Romania

Hungary

Spain

Bulgaria

Latvia

less non means-tested benefits

France

Portugal

EU

Estonia

Slovakia

Malta

Luxembourg

Poland

less means-tested benefits

Italy

Belgium

Austria

Cyprus

Czech Republic

Germany

Disposable income

Greece

Finland

Sweden

Slovenia

Netherlands

35

Denmark

0

Figure 2 Redistributive effect of benefits, absolute change in child poverty rates (2012)

less all benefits

30 25 20 15 10 5 Romania

Lithuania

Spain

Latvia

Bulgaria

Greece

Italy

Poland

Portugal

Ireland

Hungary

EU

Estonia

Malta

Slovakia

United Kingdom

Germany

Netherlands

Austria

Sweden

Czech Republic

France

Luxembourg

Cyprus

Finland

Slovenia

Belgium

Denmark

0

Notes: The poverty threshold is 60% of the median equivalised household disposable income. It is kept fixed after the extraction of each benefit component. Countries are ordered according to child poverty rates after taxes and benefits are taken into account.

EU refers to the EU27 average.

Source: EUROMOD version G1.4.

have a greater impact on reducing UK than non means-tested benefits

09

Credit crunched Single parents, Universal Credit and the struggle to make work pay in the UK Mike Brewer Director of MiSoC, ISER, University of Essex Paola De Agostini Senior Research Officer, ISER, University of Essex

Universal Credit is a new social security benefit which combines the current means-tested support for adults of working age and children into one benefit It will be introduced gradually between 2013 and 2017 while all the current means-tested benefits (Income Support, income-based Job Seeker’s Allowance, income-based Employment and Support Allowance, Housing Benefit) and tax credits (Child Tax Credit and Working Tax Credit) will be abolished.

It is the biggest and most significant UK welfare reform in a generation and it has been designed with two core policy objectives: to simplify a complex system; and to make work pay.

Single parents, who face some of the biggest barriers to work and high rates of in-work poverty, might be expected to be among its prime beneficiaries.

Children in single parent families are twice as likely to live in poverty as those in couple families, and are at far greater risk of living in a workless household. Supporting single parents into work that pays is vital to address this.

10

This research examined the likely impact of Universal Credit on the incomes of single parent families and work incentives of single parents, comparing it with the current system of benefits and tax credits.

In doing so, it used the UK component of EUROMOD and micro-data from the Family Resources Survey. The research showed that: • Once transitional protection expires, working single parents will be worse off, on average, compared to the current system, and by more so than any other household type.

• Universal Credit will make work pay a little more for some out of work single parents, particularly those who currently have very weak incentives to enter paid work.

• However, single parents will still face some of the weakest incentives to work at all, and weak incentives to progress in work compared to other

household types, which could trap many in low paid jobs.

Given these findings, the research also investigated the impact of potential reforms to different aspects of Universal Credit, and assessed their potential impact on single parents’ incomes and the work incentives they would faces. The three changes that were modelled, along with an indication of who would gain and lose and the impact on work incentives are summarised in the table that follows on the next page.

These initial calculations indicate that there are important reforms to Universal Credit that could improve work incentives for single parents.

And such changes could lead to benefits to the Exchequer: our research shows that if the employment rate of lone parents were to rise by five percentage points, the Exchequer would benefit by around £430 million a year which corresponds to about 25 per cent of projected additional cost of Universal Credit.

Brewer M. and De Agostini P. (2013) Credit crunched: single parents, universal credit and the struggle to make work pay, Gingerbread report www.gingerbread.org.uk/ content.aspx?CategoryID=1933

Increase Universal Credit basic allowance

Increase earnings disregard

Cut withdrawal rate

Who gains?

All on Universal Credit, especially poorest

Those in work and on Universal Credit

Those in work and on Universal Credit, largest monetary gain for richest

Impact on work incentives?

Minimal

Strengthens gains to working at all

Strengthens gains to earning more and to working fulltime/higher wage

Memo: equivalent to what in current system?

Higher Income Support and Working Tax Credit, Child Tax Credit

Higher Working Tax Credit or higher disregard in Housing Benefit

Lower taper in Working Tax Credit/ Child Tax Credit and Housing Benefit

Mike Brewer

Initial calculations indicate that there are important reforms that could improve work incentives for single parents

Paola De Agostini

11

Poverty and social policy in times of crisis: the case of Greece Chrysa Leventi Senior Research Officer, ISER, University of Essex Manos Matsaganis Associate Professor, Department of International & European Economic Studies, Athens University of Economics & Business

The severe economic crisis affecting Greece since 2009 is having an unprecedented impact in terms of job and income losses, and is widely perceived to have significant distributional effects Our research attempts to estimate poverty trends in Greece under current conditions of deep and prolonged recession. We use the European tax-benefit model EUROMOD, enhanced with additional adjustments needed to capture changes in the employment characteristics of the population, to monitor how the income distribution has evolved since 2009.

Our most important findings can be summarised as follows.

The number of persons living in households with income below the standard poverty threshold (60 per cent of median) has crept up by almost three percentage points: from 19.4 per cent in 2009 to 22.3 per cent of population in 2013.

However, if a fixed poverty threshold is applied (60 per cent of the 2009 median in 12

real terms), the proportion of those who would have been considered poor before the crisis has now risen sharply to over 44 per cent in 2013.

Worryingly enough, if the poverty threshold is set equal to the cost of a basket of goods limited to basic necessities consistent with dignified living, the proportion of population living in extreme poverty because they are unable to purchase this basic basket of goods has skyrocketed from 2.2 per cent in 2009 (one in 45 persons) to 14 per cent (one in seven persons) in 2013. The results of this research show that extreme poverty rates are significantly higher than average for children, home renters, dwellers of Athens and, chiefly, unemployed workers.

Coverage gaps in Greece’s social safety net preceded the

crisis, but were made worse by the slow and inadequate policy reaction. The 2013–2014 spending review provided for massive savings in social expenditure, to the tune of five per cent of GDP in 2013 and 2.25 per cent in 2014.

On the other hand, it also allowed some limited scope for policies to strengthen the social safety net. Specifically, the government introduced two new benefits in 2013 (a means-tested child benefit and an unemployment insurance benefit for the self-employed), broadened eligibility conditions for the unemployment assistance benefit and voted for a pilot minimum income scheme to be implemented in two local areas in 2014.

A careful analysis of these measures suggests that, although welcome, they suffer from design faults and insufficient funding. The balance of ‘retrenchment’ versus ‘expansionary’ policy changes remains overwhelmingly tilted towards the former. For each €100 saved as a result of cuts in pensions and other social benefits under the 2013–14 Spending Review,

Given that big gaps in coverage remain a key feature of the social safety net in Greece, the sharp rise in unemployment threatens to drag entire families into (often extreme) poverty

less than €5 was ‘re-invested’ in the above-mentioned policies improving social provision. In this context, the Public Employment Service, responsible for unemployment benefits, failed to respond to the prolonged recession by temporarily relaxing the eligibility conditions for the unemployment insurance benefit, and/or by extending its duration, as happened in several other European countries. As a result of that in December 2013 only 12.7 per cent of unemployed workers received unemployment insurance.

Given that big gaps in coverage remain a key feature of the social safety net in Greece, the sharp rise in unemployment threatens to drag entire families into (often extreme) poverty. This is Greece’s ‘new social question’. Dealing with it effectively, in today’s adverse conditions, will require a radical shift in policy and a fundamental re-think of priorities.

Chrysa Leventi

Manos Matsaganis

This research was published as part of the Newsletter Series of the Policy Analysis Research Unit (www.paru.gr). The Unit is an informal group of staff and students at the Athens University of Economics and Business, co-ordinated by Manos Matsaganis. The Newsletter Series is financially supported by the EUROMODupdate2 project.

13

The trade-off between equity and work incentives across EU countries Holguer Xavier Jara Tamayo Senior Research Officer, ISER, University of Essex Alberto Tumino Senior Research Officer, ISER, University of Essex Holguer Xavier Jara Tamayo

Alberto Tumino

14

From a policy perspective, governments often face a trade-off between reducing income inequality and maintaining work incentives In this sense, the great variety of tax-benefit systems in the European Union (EU) can be considered as the expression of different ways to balance these two objectives.

The aim of our research is to study the effect of tax-benefit systems on income inequality and work incentives across 27 Member States of the EU using EUROMOD, the EU-wide taxbenefit microsimulation model.

We measure income inequality using Gini coefficients of household disposable income and incentives to work longer or harder using Marginal Effective Tax Rates (METRs). The latter represent the share of an increase in earnings lost through higher tax and social insurance contributions and/or lower benefit entitlement. The main findings of our research follow.

Tax-benefit systems have a significant effect in reducing income inequality, although to different degrees across EU countries, with the largest

reduction in Hungary and the smallest in Cyprus and Latvia.

Public pensions play a primary role in reducing inequalities arising from original income.

Excluding pensions, the component contributing the most to income redistribution in most countries is income taxes.

UK and Ireland are characterised by the importance of meanstested benefits in reducing income inequality.

METRs vary widely between EU countries, with the median value ranging from 55 per cent in Belgium to 20 per cent in Cyprus.

The extent to which METRs vary within countries also differs considerably.

The increase in tax liabilities is, on average, the most important component of METRs in all countries; however, benefit withdrawal is important at lower incomes in countries with substantial means-tested programmes. In the Baltic countries, for example, a small proportion of the working

population faces METRs above 50 per cent, and they are concentrated at the bottom of the income distribution. The opposite happens in countries with relative high income tax rates like Denmark, Belgium and Germany, where high METRs are more common among high income workers.

The presence of a negative and significant relationship between income inequality (measured

by Gini coefficients) and work incentives (measured by METRs) is confirmed, both when we consider a specific point in time, 2007, and when we look at changes in the indicators due to tax-benefit changes in the period 2007–10, which is illustrated in the chart on the following page.

Some notable exceptions are Bulgaria and Denmark, both inequality and the average METR decreased due to policy changes in this period, and Germany, where work incentives improved without substantial changes in inequality.

The observed trade-off between equity and work incentives should be the subject of further research. In particular, policy changes in some countries, such as the UK,

Policy changes in some countries... appear to have allowed income inequality to be reduced without significantly weakening work incentives Difference in METRs (2010-2007)

1

-10

-5

0

5

10

HU PL EL

CZ

MT

DE

AT BG

LT BG

FI

SK IT

LU BE NL UK

SI

CY

IT PT

Notes: Differences in GINI and METRs expressed in percentage points. Source: EUROMOD version F6.20

FR

RO

EE

IE

-3

Difference in GINI (2010-2007) -2 -1

0

SE

-4

LV

appear to have allowed income inequality to be reduced without significantly weakening work incentives.

The results of this research highlight the great degree of heterogeneity in tax-benefit systems across EU Member States and the differences that this generates in terms of both

income redistribution and work incentives. Highlighting these differences emphasises the challenges to be faced when considering the possibilities for the harmonisation of tax-benefit systems across EU countries.

It also represents a starting point for future research aimed at evaluating the potential for

Figure 3 Relationship between changes in GINI and changes in mean METR due to taxbenefit policy changes 2007-10

BE Belgium BG Bulgaria CZ Czech Republic DK Denmark DE Germany EE Estonia IE Ireland ES Greece ES Spain FR France IT Italy CY Cyprus LV latvia LT Lithuania LU Luxembourg HU Hungary MT Malta NL The Netherlands AT Austria PL Poland PT Portugal RO Romania SI Slovenia SK Slovakia FI Finland SE Sweden UK United Kingdom

harmonisation, should this rise higher up the EU political agenda.

Jara H.X. and Tumino A. (2013) Tax-benefit systems, income distribution and work incentives in the European Union, International Journal of Microsimulation, 6(1) pp. 27-62 15

EUROMOD National teams 01 Belgium

16 Luxembourg

02 Bulgaria

17 Hungary

University of Antwerp, K.U. Leuven University of National and World Economy (UNWE)

03 Czech Republic

Center for Economic Research and Graduate Education – Economics Institute (CERGE-EI)

TÁRKI Social Research Institute

18 Malta

Ministry of Finance, the Economy and Investment

19 Netherlands

04 Denmark

CentERdata

05 Germany

European Centre for Social Welfare Policy and Research

Bent Greve

Deutsches Institut für Wirtschaftsforschung (DIW Berlin)

06 Estonia

PRAXIS Center for Policy Studies

07 Ireland

Maastricht University

08 Greece

Centre for Economic Research and Environmental Strategy (CERES)

09 Spain

Instituto de Estudios Fiscales (IEF)

10 France

Université de la Méditerranée, Marseille

11 Croatia

20 Austria

Centro de Investigação sobre Economia Portuguesa

Baltic International Centre for Economic Policy Studies (BICEPS)

15 Lithuania

Institute for Social Research, Lithuania and at University of Antwerp, Belgium

France

23 Romania

National Scientific Research Institute in the field of Labour and Social Protection (INCSMPS)

24 Slovenia

Inštitut Za Ekonomska Raziskovanja (IER)

25 Slovakia 26 Finland

14 Latvia

28

22 Portugal

12 Italy

University of Cyprus

United Kingdom

Centre for Economic Analysis (CenEA)

Ministry of Finance of the Slovak Republic

13 Cyprus

Ireland

21 Poland

Institute of Public Finance, Zagreb Centre for Industrial Studies (CSIL)

16

CEPS/INSTEAD

Research Department of the Social Insurance Institution of Finland (Kela)

27 Sweden

Ministry Of Health and Social Affairs

28 United Kingdom Institute for Social and Economic Research (ISER)

Portugal

22

Spain

09

Finland

26 27

Sweden

06 Estonia

14 Latvia

Denmark

04

Lithuania

15

21 Netherlands

01 Belgium Luxembourg

05

19 07 16

Poland Germany

03 Czech Republic

20 12

Slovakia

17

Austria

24 Slovenia

25

11

Hungary

23

Romania

Croatia

10 02 Italy

Bulgaria

Greece

08

18

13

Malta Cyprus

17

How to access EUROMOD The latest public version of EUROMOD The latest public version of EUROMOD covers all EU-27 countries and policies up to 2013. For information about accessing EUROMOD and training in its use see www.iser.essex.ac.uk/euromod/ resources-for-euromod-users/accessing-euromod or email us at euromod@essex.ac.uk

The EUROMOD Working Paper series Most analysis using EUROMOD is published in the EUROMOD Working Paper series.

See www.iser.essex.ac.uk/euromod/working-papers

The EUROMOD newsletter To subscribe to the EUROMOD newsletter email us at euromod@essex.ac.uk or you can find archived copies at www.iser.essex.ac.uk/euromod/newsletters

INSTITUTE FOR SOCIAL AND ECONOMIC RESEARCH

SUMMER JULY 2014 2012

EUROMODNEWS EUROMOD is a tax-benefit microsimulation model for the European Union (EU) that enables researchers and policy analysts to calculate, in a comparable manner, the effects of taxes and benefits on household incomes and work incentives for the population of each country and for the EU as a whole.

As well as calculating the effects of actual policies it is also used to evaluate the effects of tax-benefit policy reforms and other changes on poverty, inequality, incentives and government budgets.

EUROMOD is a unique resource for cross-national research, designed to produce results that are comparable across countries and meaningful when aggregated to the EU level.

EUROMOD is managed, maintained, developed and updated by a team of researchers in ISER. This is done in collaboration with national experts.

The current version of EUROMOD represents the accumulation of technical developments and expertise over a number years and involving a large team of people.

For more information on the design and development of EUROMOD click here. www.iser.essex.ac.uk/euromod

Click on any red circle

18

for more information

ISER

The tax-benefit microsimulation model for the European Union

University of Essex, home of the Institute for Social and Economic Research

Understanding Changes in Income Inequality in the Austerity Period Workshop Registration is now open for this workshop at the University of Essex UK, on 15-16 September 2014, jointly organised by the ESRC Research Centre on Micro-Social Change and the EUROMOD Project, both based at the Institute for Social and Economic Research (ISER) The workshop will provide the opportunity for academics to discuss different aspects of inequality in economic outcomes (household income, consumption, wealth, earnings, employment) in developed societies and to assess how welfare states are responding, or might respond to economic shocks such as the recent financial and economic crisis.

The keynote speaker will be Professor Richard Blundell (UCL and Institute for Fiscal Studies).

Other speakers include Philippe Van Kerm (CEPS/INSTEAD, Luxembourg) on ‘Household income mobility during Great Recession years in Europe’ and Rolf Aaberge (Statistic Norway): ‘The ins and outs of top income mobility’; Mathias Dolls (ZEW), Karina Doorley (IZA), Alari Paulus (University of Essex) and Hilmar Schneider (CEPS/INSTEAD) on ‘Decomposing changes in the income distribution in Europe in 2030’; Anne-Catherine Guio (CEPS/INSTEAD),

Click for our Facebook page

Eric Marlier (CEPS/INSTEAD) and Marco Pomati (University of Bristol) on ‘Evolution of material deprivation during the crisis’.

On the second day there will also be presentations from Andreas Peichl (ZEW) on ‘Crisis, austerity and automatic stabilisation’; Daniel Waldenström (Uppsala University) and Jacob Lundberg (Uppsala University) on ‘Wealth inequality and the Great Recession: Evidence from Sweden’; Rachel Griffith (IFS), Martin O’Connell (IFS) and Kate Smith (IFS) on ‘Shopping around? Households’ ability to maintain nutritional quality over the Great Recession’; and Marianne E. Page (University of California, Davis) and Xiaohan Zhang (University of California, Davis) entitled ‘The Kids Will Be Alright: Long Term Effects of ‘Growing Up’ During a Recession’.

The programme and online registration form as well as details about the workshop can be found here.

Click for our Twitter feedwww.iser.essex.ac.uk Click for our website

EUROMOD team members Core team members

National team members (2014)

Silvia Avram ISER

Adiego Estella Elina Ahola Olivier Bargain Slavko Bezeredi Venelin Boshnakov Laurence Bouvard María Jesús Burgos Prieto Lidia Ceriani Silvia Cojanu Mitja Cˇok André Decoster Klaas de Vos Desislava Dimitrova Dragomir Draganov Carlos Farinha Rodrigues Rita Figueiras Carlo Fiorio Michael Fuchs Patricia Gallego-Granados Katrin Gasior Anne-Sophie Genevois Bent Greve Peter Haan Eduard Hagara Péter Hegedu”s Pertti Honkanen Tine Hufkens Joakim Hussénius Nizamul Islam Viginta Ivaškaite˙-Tamošiu‐ne˙ Vítor Manuel Junqueira Klára Kalíšková Alexandros Karakitsios Christos Koutsampelas Nataša Kump Michal Kundera Romas Lazutka Philippe Liégeois Klas Lindström Boris Majcen Manos Matsaganis Godwin Mifsud Stephanie Mifsud Eva Militaru Daniel Münich Michal Myck Mateusz Najsztub

Paola De Agostini ISER Francesco Figari University of Insubria, Italy ISER Holguer Xavier Jara Tamayo ISER Chrysa Leventi ISER Christine Lietz Institute for Advanced Studies, Vienna Kostas Manios ISER Cara McGenn ISER Jekaterina Navicke Vilnius University ISER Alari Paulus ISER Olga Rastrigina ISER Holly Sutherland ISER Iva Tasseva ISER Alberto Tumino ISER

Tom Nilstierna Richard Ochmann Monika Oczkowska Cathal O’Donoghue María Milagros Paniagua San Martín Panos Pashardes Jan Pavel Teresa Pérez Barrasa Alexandros Polycarpou Jan Remeta Lina Salanauskaite Pauline Saliba Kevin Spiritus Katarina Strizencova Christine Stroe Péter Szivós Jussi Tervola Issam Tiar Ekaterina Tosheva Alain Trannoy Panos Tsakloglou Ivica Urban Maria Valaste Alf Vanags Toon Vanheukelom Josefine Vanhille Pieter Vanleenhove Gerlinde Verbist Andres Võrk Anna Zasova Anna Zdanovica

19

Acknowledgements The process of extending and updating EUROMOD is financially supported through the PROGRESS programme by the Directorate General for Employment, Social Affairs and Equal Opportunities of the European Commission.

Some of the research projects featured here were supported by the ESRC Research Centre on Micro-Social Change, which is based at Institute for Social and Economic Research at the University of Essex, and funded by the Economic and Social Research Council.

Š EUROMOD/ISER/MISOC September 2014 20