Policy Analyses at IZA

Hilmar Schneider

IZA IDSC Scientific Advisory Board Meeting, Bonn, May 29, 2009

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Fields of Evidence Based Policy Analysis at IZA

► Evaluation of Active Labor Market Policy ► Simulation of Reform Proposals► Laboratory Experiments► Comparative Institutional Analyses

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Evaluation Projects at IZA

► The Impact of the Labor Market Reform in Germany on the Effectiveness and Efficiency of Training Programs (BMAS)

► Evaluation of the Active Labor Market Program "Beautiful Serbia" (UNDP)► Promotion of Self-Employment (IAB)► Vouchers and Case-Workers in Public Training Programs► The Effect of Active Labor Market Programs on Not-Yet Treated

Unemployed Individuals

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Example: Effectiveness of training programs

Source: Schneider et al. (2006)

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

0 6 12 18 24 30 36 42 48

Monate seit Programmeintritt

Dif

fere

nz

der

Bes

chäf

tig

un

gsw

ahrs

chei

nlic

hke

it

Start of training program before 01.01.2003

Start of training program after 01.01.2003

month since program entry

diff

eren

ce o

f e

mpl

oym

ent

prob

abi

lity

betw

een

part

icitp

ants

and

non

-pa

rtic

ipa

nts

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Example: Reform effect of training programs

Source: Schneider et al. (2006)

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

0 6 12 18 24 30 36 42 48

Monate seit Programmeintritt

Dif

fere

nz

der

Bes

chäf

tig

un

gsw

ahrs

chei

nlic

hke

it

difference of differences of employment probabilities of participants and non-participants before and after the reform

diff

eren

ce o

f e

mpl

oym

ent

prob

abi

lity

month since program entry

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Simulation Projects at IZA

► Potential Employment Effects of a dual wage subsidy in the low wage sector (MAGS NRW)

► Impact Assessment of a wage subsidy proposed by the German Council of Economic Advisors (SVR)

► Employment Impact and Fiscal Impact of the IZA Workfare Model► Employment Impact and Fiscal Impact of the Bofinger/Walwei-Concept

(BMF) ► Employment Impact and Fiscal Impact of the Althaus Proposal for a Basic

Income► Employment Impact and Fiscal Impact of the Workfare Concept Proposed

by the Federal Ministry of Economics (BMWi)

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Simulation Models

► Policy simulations can be interpreted as quasi-experiments to ex-ante analyze reform proposals

► Map the complex tax benefit system and provide a tool to answer "what if" questions about different reform options

► Predict the impacts of policy changes on individuals (gains and losses, income distribution, labor supply), the government budget and key aggregated economic indicators (e.g. growth, employment, prices, consumption)

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Microsimulation (MSM)

► Model structural characteristics of individual micro units within a particular system

► Great flexibility regarding the mapping of the complex tax benefit system► Simulate first round effects (no behavioral responses) and second round

labor supply effects ► Partial equilibrium models that do not consider the broader economic

environment in which the micro units are acting

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IZAψMOD: Status Quo

► Static behavioral microsimulation model► Data: GSOEP = representative panel survey of private households► Tax benefit calculator: direct taxes, social insurance contributions and cash

benefits► Structural discrete choice household labor supply model Econometric ⇒

estimation of labor supply elasticities

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IZAψMOD: Structure Currently under construction

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Example: Comparison between Workfare and Basic Income

► Debate about reform to boost employment of low-wage / low-skilled workers► Several reform proposals with different flavors of some kind of negative income tax

concept (low wage subsidies, basic income)► Illustration of application of IZAψMOD by comparing two extreme scenarios: basic

income vs. workfare► IZA workfare concept (IZA):

– Receipt of social benefit for people capable of work is conditioned on (fulltime) participation requirement

– This concept sets negative incentives for people not working► Althaus’ basic income (ABI):

– Unconditional receipt of universal basic income (800 € per month including health insurance)

– Taper rate of income: 50% until 1600 €, above 1600€: flat income tax of 25%– Concept of negative income tax with the idea of setting positive labour supply

incentives

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Application: Results IEmployment Effects: Participation Rates by Household Types

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Single Men Single Women Single Parents Couples with oneflexible Partner

Couples: Men Couples: Women Total

Pa

rtic

ipa

tio

n r

ate

(in

pe

rce

nt)

IZA ABI Reference Scenario 2007

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Application: Results IIOverall Employment Effects

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Participation Effect Full Time Equivalent (FTE)

Ad

dit

ion

al l

ab

or

su

pp

ly (

in p

ers

on

s)

IZA ABI

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Application: Results IIIBudget Effects

-250

-200

-150

-100

-50

0

50

100

150

200

Expenditure Revenue Total Expenditure Revenue Total Expenditure Revenue Total

Ch

ang

es in

bu

dg

et c

om

par

ed t

o r

efer

ence

sce

nar

io 2

007

(in

bill

ion

Eu

ro)

IZA ABI

First Round Effects(no Behavioral Responses)

Second Round Effects(due to Behavioral Responses)

Overall Effects

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Application: Results IV

a) IZA Workfare (IZA)► Large employment effects: about 1.4 million individuals additionally supply positive

working hours compared to the reference scenario 2007 (slightly less in full time equivalent)

► Positive budget effects: increase in net revenue of about 25 billion euros (including second round effects) compared to the reference scenario 2007 (first round effect: about 2.5 billion Euro)

► In the medium-term, about 500,000 workfare jobs are needed within the framework of this concept which leads to additional costs

b) Althaus’ Basic Income (Althaus)► Sizeable positive employments effects: more than 400,000 individuals entering the

labor market compared to the reference scenario (619,000 in full time equivalent)► However, there are massive negative budget effects: in the medium term, the budget

will be burdened by about 220 billion Euros (and even 230 billion without accounting for behavioral responses)

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Conclusions and Outlook

► Access to micro data is an important pre-condition for reliable policy analysis

► Heterogeneity on the micro level is a key for the identification of structural and causal relationships

► However, policy analyses are limited by survey data► Reliability could be improved by usage of official statistics► Access to micro data at official statistics has remarkably improved during

the last decade► However, it’s potential is still underdeveloped, because economic key

variables are collected independently (e.g. monthly wages and working hours of workers, investment and production of firms)

► Legislative initiatives are required in order to reach new horizons

IZA – Shaping the Future of LaborIZA – Shaping the Future of Labor

Hilmar SchneiderIZA, 53072 Bonn, GermanyTel: +49 (0) 228 - 38 94 220Fax: +49 (0) 228 - 38 94 510E-Mail: schneider@iza.orgWeb: http://www.iza.org