Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2013:12: Earned income tax credits, unemployment benefits and wages: empirical evidence from Sweden

Helge Bennmarker (), Lars Calmfors () and Anna Larsson Seim ()
Additional contact information
Helge Bennmarker: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: P O Box 513, SE-751 20 Uppsala, Sweden
Lars Calmfors: Institute for International Economics Study, Stockholm University, Postal: SE-106 91 Stockholm , Sweden
Anna Larsson Seim: Department of Economics, Stockholm University, Postal: SE-106 91 Stockholm , Sweden

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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