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IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: Although there is a large literature on employment effects of earned income tax credits (EITCs) and unemployment benefits, less is known about wage effects. In our model the impact is via the net (after-tax) replacement rate. Using a panel of individuals from Sweden, we find a positive relationship between the net replacement rate and wages with semi-elasticities in the range 0.2-0.4. This implies that a one percent reduction in the unemployment benefit level or a one percent increase in the net-of-tax rate is associated with a fall in the before-tax wage of 0.1-0.2 per cent. EITCs and unemployment benefit reductions are thus likely to induce wage moderation.

Keywords: Earned income tax credit; unemployment benefits; wage formation

JEL-codes: H24; J31; J38

29 pages, May 10, 2013

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Published as

Helge Bennmarker, Lars Calmfors and Anna Larsson Seim, (2014), 'Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden', IZA Journal of Labor Policy, vol 3, no 54, pages 1-20

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