Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 20/2020: Interactions in Public Policies: Spousal Responses and Program Spillovers of Welfare Reforms

Julian Vedeler Johnsen (), Alexander Willén () and Kjell Vaage ()
Additional contact information
Julian Vedeler Johnsen: Center for Applied Research
Alexander Willén: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Kjell Vaage: University of Bergen

Abstract: Anticipating the labor market effects of welfare reforms is difficult due to public policy interactions across programs and among household members. Specifically, changes to one program may affect individual take-up of other programs, and individual participation in specific programs may generate labor market responses from other household members. This paper exploits an early retirement reform in Norway to provide new insights into these interactions. We first show that the reform had a substantial impact on the labor supply of those individuals who were directly affected by the reform, reducing the probability of employment by more than 30 percent. We then demonstrate that the increased take-up of early retirement had an offsetting effect on the take-up of alternative social security programs. Next, we reveal that the reform had a negative indirect impact on the labor supply of spouses of individuals directly affected by the reform, with an effect size of 5.5 percent. Finally, we show that the indirect effect on spousal labor force participation is accompanied by a significant increase in spousal take-up of disability insurance. We conclude that neglecting how public policies interact across both programs and household members can result in a miscalculation of the total impact of welfare reforms.

Keywords: Public Policy; Welfare Reform; Early Retirement

JEL-codes: H55; J14; J18; J26

74 pages, September 23, 2020

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