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The pro-poor impact of an in-work benefit on low income earners in Spain European Meeting of the International Microsimulation Association, Dublin, May 17-19 2012 María Milagros Paniagua Luis Ayala 1. Introduction 2. In-work benefits 1. Definition 2. Previous experiences 3. Methodology 1. Model 2. Data 3. Simulation 4. Measurement 4. Conclusions 1. Introduction Spain is one of the European countries with a higher proportion of lowincome workers 25,000.00 20,000.00 15,000.00 European Union (27 countries) European Union (15 countries) Euro area (15 countries) 10,000.00 Spain 5,000.00 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Statistics database on line. Earnings (labour market) http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database 1. Introduction Tax-benefit system and government budget Total general government revenue % of GDP Social Social Total tax receipts Total tax receipts Social benefits Social Total general protection % protection % % of GDP (sin % of GDP con (other than social protection government of GDP of GDP impuestos s/ el impuestos s/ el transfers in kind) % % of GDP expenditure % of GDP (Prestaciones (Prestaciones (TOTAL) capital) capital) of GDP dinerarias) en especie) (1) (2) (3) (4) (5) (6) (7) (8) 2005 39,7 36,32 36,8 38,44 11,61 20,07 13,00 7,07 2006 40,72 37,19 37,68 38,35 11,45 19,98 12,82 7,16 2007 41,13 37,58 38,08 39,21 11,65 20,17 12,91 7,26 2008 36,96 33,67 34,12 41,45 12,56 21,62 13,83 7,79 2009 35,09 31,84 32,24 46,26 14,67 24,64 16,16 8,48 2010 36,23 33,15 33,54 45,58 15,31 -- Trade-off between out-of-work and IN-WORK support Can in-work benefits help the Spanish low income earners be better off? 2. In-work benefits 1. Definition Employment conditional benefits Dependent children also considered Aim at low income families – low wage earners Target: increase labour supply and redistribute income towards low income families (poverty reduction) Different ways of designing IWBs – depending on the target group 2. In-work benefits 1. Definition According to Saez (2002) the optimal IWB has the following form: 2. In-work benefits 2. Previous experiences Long tradition in Anglo-saxon countries Other OECD countries start to implement IWB Spain has little history regarding IWBs and we want to apply the experience of US and UK Implementation of an IWB similar to the EITC in terms of design and for same individuals as the Spanish working mother tax credit (child age requirements enlarge to 16 years of age) 3. Methodology: model and data EUROMOD v4.26 as the microsimulation tool to calculate disposable income, before and after the new in-work benefit. Data from EU_SILC 2006 (income from 2005) 3. Methodology: simulation New biw_s calculated for parents (female or male without partner) with children under 16 with positive income from work (employee or selfemployed) 150 100 150 400 450 3. Methodology: results Not many changes in terms of poverty reduction. What if we analyse severe poverty? Before IWB After IWB GE(2) (all values) 0,17131 0,17076 Gini (all values) 0,30013 0,29954 p90/p10 (all values) 4,233 4,203 p90/p50 (all values) 1,9 1,9 p50/p10 (all values) 2,227171492 2,212389381 A(0,5) (positive values) 0,07458 0,07416 A(1) (positive values) 0,15512 0,1539 A(2) (positive values) 0,54988 0,54754 Poverty line 558,13 558,13 At-risk-of poverty rate (FGT 0) 0,1947 0,194408 At-risk-of poverty rate (FGT 1) 0,060573 0,059821 3. Methodology: results Better results 60% median Before IWB 30% median After IWB 558,13 Before IWB 279,07 After IWB Poverty line 558,13 279,07 At-risk-of poverty rate (FGT 0) 0,1947 0,194408 -0,149974319 0,038076 0,036958 -2,936232798 At-risk-of poverty rate (FGT 1) 0,060573 0,059821 -1,241477226 0,018452 0,01769 -4,129633644 3. Methodology: results Gainers by income decile 350000 300000 250000 200000 150000 100000 50000 0 1 2 3 4 5 6 Gainers by income decile 7 8 9 10 3. Methodology: results Gainers by hh type 300000 250000 200000 150000 100000 50000 0 Gainers by hh type 3. Methodology: results Increment of income (%) by decile 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1 2 3 4 5 6 7 Increment of income (%) by decile 8 9 10 3. Methodology: results Differences between income percentiles (percentil after reform percentil before reform) 6 5 4 3 2 1 0 d1 d4 d7 d10 d13 d16 d19 d22 d25 d28 d31 d34 d37 d40 d43 d46 d49 d52 d55 d58 d61 d64 d67 d70 d73 d76 d79 d82 d85 d88 d91 d94 d97 Differences between income percentiles (percentil after reform - percentil before reform) 3. Methodology: results 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 1 2 3 recipients of in-work benefit by income decile 4 5 6 7 recipients of working mother tax credit by income decile 8 9 10 recipients of both by income decile 4. Conclusions The new benefit apparently doesn’t have high distributive effects BUT can be very progressive within the first income decile. When benefits are means-tested, low-income families are the most favoured by the reform. The cost of the program is 182 million euros – if severe poverty is alleviated it can be worthwhile. Will this new IWB encourage low-income earners to work? Thank you for attending this session. Comments are welcome ! [email protected]