AND WORK INCENTIVES - hvtc.edu.vn€¦ · This compendium builds on that work by presenting in a systematic way the complicated interactions of tax and benefit systems. It includes

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BENEFIT SYSTEMSANDWORKINCENTIVES

E D1I9T9I8O N

Benefit Systemsand Work Incentives

E D1I9T9I8O N

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATIONAND DEVELOPMENT

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into forceon 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promotepolicies designed:

– to achieve the highest sustainable economic growth and employment and a rising standard of living inMember countries, while maintaining financial stability, and thus to contribute to the development of theworld economy;

– to contribute to sound economic expansion in Member as well as non-member countries in the process ofeconomic development; and

– to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordancewith international obligations.

The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany,Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,Turkey, the United Kingdom and the United States. The following countries became Members subsequentlythrough accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969),Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic(21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and Korea (12th Decem-ber 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of theOECD Convention).

Publie en francais sous le titre :

SYSTEMES DE PRESTATIONS ET INCITATIONS AU TRAVAIL

Edition 1998

OECD 1998Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through theCentre francais d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France,Tel. (33-1) 44 07 47 70, Fax (33-1) 46 34 67 19, for every country except the United States. In the United States permissionshould be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive,Danvers, MA 01923 USA, or CCC Online: http://www.copyright.com/. All other applications for permission to reproduce ortranslate all or part of this book should be made to OECD Publications, 2, rue Andre-Pascal, 75775 Paris Cedex 16, France.

3

FOREWORD

In 1997, the OECD published Making Work Pay which explored how tax and benefit systemsmay discourage individuals to seek employment. It explained how the different elements of thebenefit system can combine to make work unrewarding. This compendium builds on that work bypresenting in a systematic way the complicated interactions of tax and benefit systems. It includesanalyses of effective tax rates and net incomes in and out of work for a variety of family situationsand shows exactly which elements of the benefit system create the most damage to work-incentives.

This volume includes a description of all the different benefits made available to those withoutwork, the taxes they pay and tables facilitating international comparison of work-incentives. It hasbeen prepared by Mr. Marco Doudeijns and Mr. Mark Pearson and is published under theresponsibility of the Secretary General of the OECD. It is the first of a biannual series on benefitsand work-incentives in the OECD countries. The analyses draw on detailed country-by-countryinformation which is available on the Internet site: http://www.oecd.org/els/socpol/BenefitsCompendium/index.htm

The comparative tables are based on Secretariat estimates and make use of information whichhas been supplied by the delegates to the Working Party on Social Policy. The data on income taxeswhich were needed for the production of the comparative tables were supplied by the delegates tothe Working Party on Tax Policy Analysis and Tax Statistics of the Directorate for Financial, Fiscaland Enterprise Affairs.

The country-by-country descriptions give information on the benefits made available to,and the taxes paid by, those without work. They are available in the language (English andFrench) in which the information was supplied. The countries studied are: Australia, Austria,Belgium, Canada, the Czech Republic, Danemark, Finland, France, Germany, Hungary, Iceland,Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal,the Republic of Korea, Spain, Sweden, Switzerland, the United Kingdom and the United States.

These descriptions are available for no charge on the Internet:http://www.oecd.org/els/socpo/BenefitsCompendium/index.htm

A printed version (at a cost of FF 160 – to cover reproduction and postage costs) can beobtained by filling in the following form and mailing it to: OECD/DEELSA, Social Policy Division,Benefits and Incentives Compendium, 2, rue André-Pascal, 75775 Paris Cedex 16, France.

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7

TABLE OF CONTENTS

1. INTRODUCTION .......................................................................................................................... 9

2. DESCRIPTION OF KEY FEATURES OF THE TAX AND BENEFIT SYSTEM ........................................................... 13

Introduction .............................................................................................................................. 13An overview of the key benefits in the system ........................................................................... 13Calculation of gross benefits ...................................................................................................... 15The tax treatment of benefits ..................................................................................................... 25Part-time and occasional work .................................................................................................. 25

3. COMPARATIVE TABLES AND CHARTS ................................................................................................ 29

Introduction .............................................................................................................................. 29Benefit income in the first month of receipt ............................................................................... 29Benefit income in the 60th month ............................................................................................. 32Young unemployed ................................................................................................................... 36Child-care benefits .................................................................................................................... 36Changes in benefit systems over time: OECD’s unemployment benefit index ............................ 38

4. PART-TIME WORK AND TWO-EARNER COUPLES ................................................................................... 43

Introduction .............................................................................................................................. 43Explanations of the columns of Tables 4.1 and 4.2 ..................................................................... 43

5. POLICY DEVELOPMENTS ............................................................................................................... 49

Introduction .............................................................................................................................. 49Major policy trends in OECD countries ..................................................................................... 49

ANNEX: ASSUMPTIONS AND LIMITATIONS ............................................................................................. 51

BIBLIOGRAPHY............................................................................................................................... 59

8

Benefit Systems and Work Incentives

List of tables and charts

Table 2.1. Main elements of the tax and benefit system .......................................................................... 14Table 2.2. UA payment rates and benefit duration .................................................................................. 16Table 2.3. UA payment rates and benefit duration .................................................................................. 18Table 2.4. Benefits for dependent family members ................................................................................. 19Table 2.5. Housing benefit allowances ................................................................................................... 20Table 2.6. Child-care benefit systems ..................................................................................................... 22Table 2.7. Employment-conditional tax credits and benefits ................................................................... 23Table 2.8. Lone-parent benefit arrangements .......................................................................................... 24Table 2.9. Maximum social assistance monthly amounts ........................................................................ 26Table 2.10. The tax treatment of benefits ................................................................................................ 27Table 2.11. Casual employment and benefit receipt ............................................................................... 28Table 3.1. Net replacement rates for four family types at two earnings levels after tax ............................ 30Table 3.2. The composition of the net benefit income of an unemployed single in the first month

of benefit receipt .............................................................................................................................. 31Table 3.3. The composition of the net benefit income of a one-earner couple with two children

in the first month of benefit receipt ................................................................................................... 32Table 3.4. Net replacement rates for four family types at two earnings levels after tax ............................ 33Table 3.5. The composition of the net benefit income of a single unemployed person in the

60th month of benefit receipt ........................................................................................................... 34Table 3.6. The composition of the net benefit income of a one-earner couple with two children

in the 60th month of benefit receipt ................................................................................................. 35Table 3.7. The unemployment benefit entitlements of young unemployed single people ......................... 36Table 3.8a. Child-care costs and benefits, reference earnings at APW level (annualised) ......................... 37Table 3.8b. Child-care costs and benefits, reference earnings at 2/3xAPW level ..................................... 38Table 3.9. Gross replacement rates for three family types, over a five-year period and

two earnings levels .......................................................................................................................... 39Table 4.1. Relative incomes for part-time work and two-earner couples ................................................. 46Table 4.2. Average effective tax rates for part-time work and two-earner couples .................................... 47

Chart 3.1. Index of benefit entitlements, 1961-1995................................................................................ 40

9

1. INTRODUCTION

The net incomes of those not working are of interest for social, public finance and labour marketreasons. A key aim of social policy is to ensure that households, particularly those with children,have an adequate standard of living. But the higher the benefits paid to families without employment,the lower the immediate financial incentive to enter paid employment. The hypothesis that thegreater the unemployment benefits, the more difficult the transition from unemployment toemployment, is discussed at length in economic literature [for further reference see OECD 1996a].Policy analysts need evidence for this hypothesis and would therefore want to quantify benefitgenerosity.

The OECD used an estimate of replacement rates (i.e. the proportion of income from workreplaced by unemployment and related welfare benefits) as a proxy for benefit generosity in theOECD Jobs Study (issued in 1994). These estimates, however, were based on gross (i.e. beforetaxes) earnings and gross benefits. They did not take account of the fact that benefit payment levelsare often supplemented with family and housing benefits. The need for more accurate informationhas since then led to an integrated approach, whereby replacement rates are calculated takingaccount of income taxes and a wide range of social welfare benefits. The aim of this report is toillustrate how net incomes of unemployed people are calculated and to compare these with netincomes in work.

Given the interest in the effects of the tax and benefit system on employment and concernsabout the adequacy of incomes of those without jobs, there is a need for international comparisons.This publication will:

• briefly describe the elements of the tax and benefit system necessary to calculate benefitentitlements for those without work;

• give example calculations, showing how the different elements of tax and benefit systemsinteract in each country;

• present comparative tables of benefit entitlements across OECD countries;

• indicate the operation of means-tests on the incentive to work part-time in two-earnercouples; and

• examine the effects of child-care costs and benefits on the incentives to work of relevantfamilies.

10


While national comparisons of income in and out of work are common, the complexity of taxand benefit systems has hitherto limited the scope of international comparisons. Examples include:

• The broad rules governing benefit entitlement which are given in publications by the UnitedStates Department of Health (1995), by MISSOC (1995) and by the Council of Europe(Comparative Tables of Social Security Schemes).

• The OECD developed a time series of unemployment benefit entitlements (OECD, 1991),which subsequently led to a composite index of entitlements, used in the OECD Jobs Study.However, this index does not take account of taxation (and is therefore based on grossbenefit entitlements), does not include family benefits or supplements to other benefitsreflecting family circumstances, and does not include other benefits often received by thoseout of work, such as housing benefits.

• The OECD publishes The Tax Benefit Position of Production Workers annually. This calculatesaverage tax payments and family benefit entitlements for a limited number of family types.It gives no information on net incomes of those without employment or on very low incomes.

Recent work both inside and outside the OECD has increased the potential for internationalcomparisons of net incomes of those without work. An important aspect of the progress made isthe integration of both the income tax and social benefit system. The most important examples ofthis work are as follows:

• A study commissioned by the United Kingdom Department of Social Security and the OECDfrom the Social Policy Research Unit (United Kingdom Department of Social Security, 1996)collected information on typical social assistance rates on a comparable basis across24 OECD countries.

• In order to improve analysis of the effects of the tax system on employment as part of theOECD Jobs Study, the OECD developed “tax equations” which can calculate tax and socialsecurity contributions, for any level of earnings, for a much broader range of family typesthan previously.

• Officials from tax and social policy ministries jointly produced a report UnemploymentBenefits and Social Assistance in Seven European Countries, which brought together manyof the elements of the tax and benefit system which determined the incomes of those withoutwork.

• The Netherlands Central Planning Bureau (1996) produced a study financed by the EuropeanCommission which examined the ratios of net incomes in and out of work for EuropeanUnion countries and four states of the United States.

• As part of the follow-up to the OECD Jobs Study, the tax and social policy Divisions of theOECD have co-operated in producing estimates of incomes in and out of work for a varietyof family types for most OECD countries. Some of this work has been included in papersconsidered by the G7 Jobs Summit in Lille, in 1996, and the OECD Ministerial meeting, in

11

1996 and in the Employment Outlook (OECD, 1996a). A full analysis of the outcome ofthis project, covering OECD countries, was published in late 1997 (OECD, 1997).

This volume presents comparative information on net incomes for families without employmentand the assumptions used to generate these results. Chapter 2 introduces the eight different benefitsthat are included in this study and presents their key features. Chapter 3 provides comparativeinformation on the benefit income received by different family types in different employmentcircumstances. In Chapter 4, the special cases of part-time work and two-earner couples areconsidered. The annex includes a detailed explanation of the assumptions applied for calculatingnet incomes after taxes and benefits.

Introduction

13

2. DESCRIPTION OF KEY FEATURES OF THE TAX ANDBENEFIT SYSTEM

Introduction

Benefit systems in many countries are a complicated structure of interacting taxes and benefits.This chapter aims to provide a broad overview of the different elements of the benefit system, theirtax treatment and the way in which part-time or casual earnings influence the benefit amounts.

An overview of the key benefits in the system

Table 2.1 provides an overview of the benefits that are available in the countries which arecovered in this report. Most countries operate a benefit scheme that provides temporarycompensation for lost earnings if certain conditions are met by the claimant (UnemploymentInsurance or UI). As this benefit type is based on insurance principles, the claimant must havecontributed to the insurance fund for a given amount of time to be eligible for receiving the benefit.Claimants must be involuntarily unemployed and are required to search for employment. UI benefitsare taxable in most countries but not all, as is shown in Column 3. When the benefit elapses, theunemployed worker may have to depend on financial support in another form.

Financial assistance for those no longer eligible for UI benefits takes two forms, depending onthe country. Unemployment Assistance (UA) which exists in a number of countries is often designedas a follow-up benefit for UI, and one which pays at a lower rate. Payment may also be conditionalon employment history and has a limited duration in most cases. Those not eligible for either UI orUA will have to rely on general or Social Assistance (SA). The government acts as a provider of lastresort to secure a minimum standard of living. In Austria, France, Germany, Ireland and the UnitedKingdom, UA payments are of infinite duration. Unemployed workers in these countries, particularlythose with dependent family members, may, in addition, receive SA benefits to supplement theirUA payments. In the Czech Republic, Italy and Korea, where SA payments are not available whenbenefit payments end, alternative forms of support are available. UI or SA benefits do not exist,either in Australia or New Zealand. These countries provide an unemployment benefit withcharacteristics of both UA and SA for an unlimited duration. Claimants do not need to have anemployment history, but are required to be looking for a job.

Households with high rents and low income may qualify for housing benefits to provide financialsupport. The presence of dependants gives entitlement to so-called family benefits in most countries.

14 Benefit System

s and Work Incentives

Table 2.1. Main elements of the tax and benefit system

Unemployment Income tax Unemployment Social Housing Universal Means-tested Lone-parent Employment Child-careInsurance treatment of Assistance1 Assistance1 benefits family benefits family benefits benefits conditional benefits

unemployment benefits2

insurance

Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11

Australia3 - * Y - Y Y Y Y Y YAustria Y * Y Y - Y - - - -Belgium Y taxable - Y - Y - - - -Canada Y taxable - Y Y - - - - -Czech Republic Y * - - - Y - - - -Denmark Y taxable - Y Y Y - - - YFinland Y taxable Y Y Y Y - - - YFrance Y taxable Y Y Y Y - Y - -Germany Y * Y Y Y Y - - - -Greece Y taxable Y - - Y - - - -Hungary Y taxable - Y Y Y - - - -Iceland Y taxable - Y Y Y - - - -Ireland Y taxable Y Y Y Y - Y Y -Italy4 Y taxable - Y - Y Y - Y -Japan Y * - Y Y Y - Y - YKorea Y * - - - - - - - -Luxembourg Y taxable - Y Y Y - - - -Netherlands Y taxable Y Y Y Y - - - -New Zealand3 - * Y - Y - Y Y Y YNorway Y taxable Y Y Y Y - - - YPoland Y taxable - - Y Y - - - YPortugal Y * Y Y - Y - - - -Spain Y taxable Y Y - Y - - - -Sweden Y taxable Y Y Y Y - Y - YSwitzerland Y taxable - Y Y Y - - - -United Kingdom Y * Y Y Y Y - - Y -United States Y taxable - Y - - Y - Y -

Notes:Y Indicates that the specific benefit is present in this country, “—” otherwise.“Taxable” Indicates that beneficiaries have to pay income and/or payroll taxes on benefit income, “*” indicates that unemployment benefit recipients do not pay tax, either because theirbenefits are not taxable or because the tax system is structured such that full-year recipients do not pay tax.1. Note that UA and SA can also be taxable but that this is not indicated in the table.2. Employment conditional benefits may take the form of refundable tax credits.3. In Australia and New Zealand an assistance type benefit is payable which has characteristics of both UA and SA.4. In Italy, a tax credit for house rent is available.Source: OECD.

15

Other sources of income influence the amounts of means-tested family benefits in Australia, Italy,New Zealand and the United States. In Australia, France, Ireland, Japan, New Zealand and Sweden,lone parents can rely on a separate benefit scheme.

Employment conditional benefits can only be received by people in paid employment. Australia,Ireland, Italy, New Zealand, the United Kingdom and the United States operate such benefits eitherto increase financial incentives to work or to keep working families from sliding into poverty.Child-care benefits may help parents who are working or looking for work cover their child-carecentre fees. Countries that do not have centrally administered child-care benefit schemes and arenot included in Table 2.1 can have locally based schemes.

Calculation of gross benefits

Unemployment Insurance

Table 2.2 examines the calculation process of Unemployment Insurance (UI) benefits. Theinformation included in the table applies to a 40-year-old single worker with a long employmenthistory, previously earning an average income.1

In order to be eligible, the unemployed worker must have been employed in insured employment(i.e. must have contributed into the insurance fund) during a specific period (Column 2). In somecountries benefit payment does not start immediately upon becoming unemployed but rather aftera short so-called “waiting period” (Column 3). In Iceland, the waiting period is extended for thosewho previously had high earnings. The maximum duration of benefit payments (Column 9) maydepend on the employment history (Belgium, France, Greece, Hungary, Japan, the Netherlands,Poland, Spain and Switzerland) and age (Austria, Finland, France, Germany, the Netherlands, Portugaland Sweden) or is fixed.

The level of benefits (Column 4) is generally calculated according to previous earnings (but mayalso be influenced by other factors such as employment record, age and family situation), and issubject to minimum and maximum limits (Columns 5 and 7). In Belgium, the payment rate (whichis expressed as a percentage of previous pre-tax earnings) decreases over time from 60 per cent to42 per cent for a single person but remains at 60 per cent indefinitely for someone with familyobligations. In some other countries too, payment rates decrease over time (Czech Republic, France,Hungary and Norway). Four countries administer flat-rate benefits (Iceland, Ireland, Poland andthe United Kingdom). US$ equivalents for the minimum and maximum benefit are in Columns 6and 8.

1 An average income is defined to equal the earnings level of Average Production Workers (APW). For more informationrefer to OECD (1996a).

Description of key features of the tax and benefit system

16


Table 2.2. UA payment rates and benefit duration

Employment conditions Waiting Payment Minimum benefit Maximum benefit Durationperiod rate (%)1 (yearly)2 (yearly)2 (months)

National US$ National US$currency currency

Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9

Australia - - - - - - - -Austria 20 weeks in 1 year or 7 days 57 20 112 1 429 152 496 10 836 12

52 weeks in 2 years if firstclaim. Maximum durationif 156 weeks in 5 years

Belgium3 312 days in 18 months 0 day 60 252 720 6 712 402 168 10 682 indefiniterising to 624 days in last3 years depending on age

Canada 20 weeks in 1 year 2 weeks 55 - - 23 296 18 873 12Czech Republic 12 months in the last 7 days 60 - - 43 920 3 887 6

3 yearsDenmark4 26 weeks in 3 years 0 day 90 - - 132 864 15 404 84Finland4, 5 26 weeks in 2 years 5 days 80 30 444 5 067 - - 23France 4 months in the last 8 days 75 50 677 7 653 358 038 54 067 60

8 monthsGermany6, 7 360 days in 3 years 0 day 60 - - 56 160 27 181 12Greece6 125 days in the last 6 days 40 711 600 3 418 - - 12

14 monthsHungary 12 months in the last 0 day 75 103 200 1 509 216 000 3 158 12

4 yearsIceland 425 hours in the last year variable flat 566 566 7 156 - - 12Ireland 39 weeks in 1 year 3 days flat 3 250 5 000 - - 15Italy 52 weeks in 2 years 7 days 80 - - 18 000 000 11 327 12Japan8 6 months in 1 year 7 days 80 - - 2 963 000 16 858 7Korea 12 months in the last 14 days 50 1 728 900 2 792 12 600 000 20 349 6

18 monthsLuxembourg 26 weeks in 1 year 0 day 80 - - 1 312 320 32 944 12Netherlands 26 weeks in 1 year for 0 day 70 - - 52 205 25 119 54

basic benefit, 4 years in5 for extended benefits

New Zealand - - - - - - - -Norway4, 9 - 3 days 62 - - 143 987 15 361 43Poland 180 days of work in the 1 day flat 3 021 2 238 - - 18

last yearPortugal 540 days in 2 years 0 day 65 624 000 5 115 1 216 800 9 974 21Spain 12 months in 6 years - 70 658 350 5 263 1 931 160 15 437 14Sweden 80 days in the last 5 days 80 63 700 6 389 146 640 14 708 10

5 monthsSwitzerland 6-18 months in 2 years 5 days 70 - - 68 040 33 018 18United Kingdom - 3 days flat - - 2 415 3 604 12United States 26 weeks total, regionally: - 50 2 184 2 184 15 236 15 236 6

minimum earnings requirement

Notes:1. The payment rate is expressed as a percentage of gross earnings, unless indicated “flat” which means a flat rate.2. Minimum and maximum benefits are recalculated from yearly earnings ceilings if necessary. 1995 purchasing parities are used to

calculate US$ values (1994 for the Czech Republic).3. Belgium: the payment rates for single persons is reduced to 42 per cent in the second year.4. Denmark, Finland and Norway have a voluntary UI scheme.5. Finland: daily payments: Mk 118 + 42 per cent of earnings below Mk 494, plus 20 per cent of earnings exceeding Mk 494. The benefit

is restricted to 80 per cent of previous earnings.6. Germany and Greece: payment rates are higher when dependants are present.7. German payment rates are expressed as a percentage of net income.8. Japan: the payment rate depends on age and previous earnings level.9. Norway: total duration equals two periods of 80 + 13 weeks. Average earnings in previous three years must be at least 75 per cent of

the “base amount” to qualify.Source: OECD.

17

Unemployment assistance

When an unemployed individual is either not eligible or no longer eligible for UI, he or she mayseek unemployment assistance (UA) benefits in some countries (Austria, Finland, France, Germany,Greece, Ireland, the Netherlands, Portugal, Spain and the United Kingdom). Table 2.3 providesinformation on UA payment rates and benefit duration in these countries. The information includedin the table applies to a 40-year-old single worker with a long employment history, previouslyearning an average income.

Entitlement to UA payment is conditional on previous employment (Column 2) in some countriesbut can be paid to all unemployed persons in others (Australia, Finland, Iceland and New Zealand).Some of the UA benefit schemes include a waiting period (Column 3), which is only effective forfirst-time users (i.e. unemployed who do not qualify for UI in Ireland and Sweden; all unemployedin New Zealand). The length of the waiting period in New Zealand is calculated according toprevious earnings and varies between 2 and 10 weeks. The total duration (Column 9) is indefinitein most cases but limited in Greece, the Netherlands, Portugal, Spain and Sweden.

The determination of gross benefit levels varies greatly across countries. The payment rate(Column 4) is in some cases flat, in other cases calculated according to previous UI benefits or asa percentage of previous earnings. These rates are maximum rates and payments are subject to ameans-test with the financial resources of the household playing a role in the assessment. The levelof benefits may further differ regionally in some countries because of the social administrationoffice’s discretionary power in benefit decisions.

Family benefits

The presence of dependent children may qualify a household for supplementary benefit payments.The most important such benefit payments are Family Benefits, but unemployed people withdependants can also receive an increase in their unemployment benefits. Table 2.4 shows theyearly amount of family benefits granted for one child, as well as additions for further children. Thetable also indicates if additional unemployment benefits are granted when there are dependants,and if so, how much. The tabulated amounts are based on the assumption of one child under theage of 13 in a one-earner couple.

With few exceptions, family-benefits are paid as fixed amounts per child and are not means-tested,meaning that people with work and people without receive the same amounts. In Greece, Iceland,Italy and the United States, family benefits are means-tested - determined taking other income intoaccount.

Additions to unemployment benefits for dependants exist in eight of the 27 countries and aresometimes also paid for dependants other than children (e.g. in Greece, New Zealand, Norway,Portugal and the United Kingdom additions are paid for a dependent spouse).


18


Table 2.3. UA payment rates and benefit duration

Employment conditions Waiting Payment Minimum benefit Maximum benefit Durationperiod rate (%)1 (yearly)2, 3 (yearly)2,3 (months)

National US$ National US$currency currency

Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9

Australia - - flat - - 8 076 5 999 indefiniteAustria to have received UI - 92% of UI 18 503 1 315 140 296 9 969 indefiniteBelgium - - - - - - - -Canada - - - - - - - -Czech republic - - - - - - - -Denmark - - - - - - - -Finland - - flat 30 449 5 067 - - indefiniteFrance 5 years in the last 10 years - flat 26 640 4 023 - - indefiniteGermany4 6 months in the last year - 53 - - 49 608 24 009 indefiniteGreece 60 days in the last 2 years - 36% of UI 640 440 3 076 - - 3Hungary - - - - - - - -Iceland - - - - - - - -Ireland - 3 days flat 3 250 5 000 - - indefiniteItaly - - - - - - - -Japan - - - - - - - -Korea - - - - - - - -Luxembourg - - - - - - - -Netherlands 3 years in the last 5 years 0 flat 18 171 8 743 - - 12New Zealand5 - 2-10 weeks flat - - 7 200 4 768 indefiniteNorway - - - - - - - -Poland - - - - - - - -Portugal6 5.9 months in 1 year - flat 436 800 3 580 - - 10.5Spain to have exhausted UI, or to - flat 658 350 5 263 - - 30

have worked 6 monthsSweden 75 hours in the last 5 days flat 63 700 6 389 - - 5

5 monthsSwitzerland - - - - - - - -United Kingdom - - - - - - - -United States - - - - - - - -

Notes:1. The payment rate is expressed as a percentage of gross earnings, unless indicated “flat” which means a flat rate equal to the value in

the minimum column or “% of UI” which means that the UA benefit is calculated as a percentage of the previous or theoreticalUI benefit.

2. Minimum and maximum benefits are, if necessary, recalculated from yearly earnings ceilings.3. 1995 purchasing parities are used to calculate US$ values4. Germany: the payment rate is expressed as a percentage of net income and is higher when dependants are present.5. New Zealand: waiting period depends on previous earnings.6. Portugal: first-time jobseekers with dependants do not need to meet the employment conditions; duration is 18 months if claimant

was not eligible for UI.Source: OECD.

19

Table 2.4. Benefits for dependent family members

1st child (yearly)1 Extra for additional children Extra in unemployment benefit

National US$currency

Australia2 2 311 1 714 Increases per child -Austria 18 600 1 321 Amounts per child Sch 627($45)/month/childBelgium 31 212 829 Benefits increase until the third child, Family benefit amounts are increased in

and increase by two steps with age 7th month of unemploymentCanada - - - -Czech republic 7 920 701 Increases with age (means-tested) -Denmark 9 600 1 113 Amount related to the child’s age -Finland 6 420 1 069 Increases per dependant Lump sum additions Mk 6 192 ($1 031) for the

first childFrance 7 980 1 205 Amounts increase with age -Germany3 840 407 Progressively increasing until the UI is raised with 7 percentage points, UA with

3rd child, then DM 2 880 ($1 594) 5 percentage pointsper child

Greece 5% of gross - Same amount for each of the first UI is raised with 10 percentage points for eachearnings 3 children plus 10% for a dependent dependant

spouseHungary 33 000 482 Amounts per child increase with -

the family sizeIceland 39 364 506 Increases for low income families IKr 85.63 ($1.10)/day per dependent childIreland 324 498 Ir£384 ($591) from the third child Ir£686 ($1 065) for each dependent childItaly4 1 080 000 1 681 The amount reduces with increases in -

taxable income; different rates forsingle parents

Japan 60 000 341 The amount is doubled for third and -subsequent children

Korea - - - -Luxembourg 39 504 992 Increases with the number of children The replacement rates is increased with

5 percentage pointsNetherlands 1 139 548 Increases per child and with age -New Zealand 2 016 1 335 NZ$1 296 ($858) for each other child UA amounts depend on family type

under 13Norway 10 572 1 128 Increases per child A flat-rate addition for each dependantPoland 252 187 Same amount for each child -Portugal 30 960 254 - UA is increased for dependantsSpain 36 000 288 Increases for each child -Sweden 9 000 903 Skr 2 400 ($240) for the 3rd, -

Skr 7 200 ($720) for the 4thSwitzerland 2 112 1 025 Amounts per child UI is increased by 10 percentage points if there

are dependantsUnited Kingdom 541 807 81% of this amount is paid for Additions for a dependent spouse

subsequent childrenUnited States 1 056 1 056 AFDC is in fact part of financial -

assistance to the whole family

Notes:1. 1995 purchasing parities are used to calculate US$ values (1994 for the Czech Republic).2. Additional Family Payments pay out extra, age-related amounts per child. Receipt of this benefit entitles to additional benefits.3. Family benefits are means-tested.4. Benefits may be received from the second child onwards.Source: OECD.


20


Table 2.5. Housing benefit allowances

Housing benefits Benefit reduction rate Treatment of housing costs(maximum payments in % of rent) (% of net income) in social assistanceColumn 2 Column 3 Column 4

Australia Rent is added to Additional Family 50% -Payment (AFP) if it exceeds certainamounts (<75%).

Austria - - Regionally differing treatmentBelgium - - Housing costs are supposed to be covered

by standard SA ratesCanada Housing costs are added to 100 % maximum SA is the only possible way to cover housing

SA payment rates up to maxima (100%) expensesCzech Republic - - Housing costs are supposed to be covered

by standard SA ratesDenmark Separate means-tested scheme 16-27% Rent in excess of housing benefits is added

(75% subject to a maximum) to SA payment ratesFinland Separate means-tested scheme (<80%) 28% Rent in excess of housing benefits and

certain other housing costs are added toSA payment rates

France Separate income-related scheme (80%) - -Germany Separate means-tested scheme 21% Rent in excess of housing benefits is added

(100% subject to a maximum) to payment rates and is conditional onreceipt of at least a part of SA

Greece - - -But rents can be deducted fromtaxable income

Hungary Separate scheme (100%) 35% of gross earned -and replacementincome

Iceland Separate scheme (50%) 100% -Ireland 100% 100% Rent included in SA means-testItaly - - -

But a tax credit for rent is availableJapan Rent is covered up to certain amounts 100% of net income SA is the only possible way to cover housing

as part of SA [Y 13 000 ($120)/month] exceeding threshold expensesvalues regressivelyincreasing with grossearnings

Korea - - -Luxembourg 100% 100% Total coverage up to LF 5 000 ($126)/month

conditional on receipt of at least a part of SANetherlands Separate means-tested scheme (80%) Progressive, 0-100% Housing costs exceeding individual

subsidies are supposed to be covered bystandard SA rates

New Zealand Separate scheme (65%) 25% in restricted -range of earnings,otherwise none

Norway Nkr 1 000 ($107)/month on average 100% -Poland Zl 61.95 ($46)/month 100% -Portugal - - Additions to social assistance are possibleSpain - - Rent allowance is part of social assistanceSweden Separate scheme (30-75%, depending 10-33%, depending Rent in excess of housing benefits is added

on rent) on family type to SA payment ratesSwitzerland Housing costs are added to SA payment 100% SA is the only possible way to cover housing

rates up to maxima (100%) expensesUnited Kingdom 100% of rent is covered for 65% for people not 100% of rent is covered for SA claimants

SA claimants receiving assistanceUnited States Local initiatives exist - Rent is included in the Food Stamps means-

testSource: OECD.

21

Housing benefits

To help people on low income pay their private rents and housing costs, most OECD countriesoperate a separate benefit scheme. Housing benefits are broadly distinguishable in two groups. Insome countries (Denmark, Finland, France, Germany, Hungary, Iceland, the Netherlands, NewZealand, Norway, Poland, Sweden and the United Kingdom), housing benefits are administeredthrough a separate scheme. Greece, Italy and Korea are the only countries where rents are neithercovered in a separate scheme nor by SA, but these countries allow a tax credit for rent payments.Other countries have included a special allowance in SA. Table 2.5 shows how the housing benefitschemes are operated; no specific assumptions need to be made for this table.

Payments under both types of housing benefit depend on rent and family composition. Themaximum amount of rent covered by the schemes varies per country between 30 per cent (Sweden)and 100 per cent in several countries (Column 2). The maximum benefit amounts are reducedaccording to a certain percentage of present income (Column 3). In Belgium, the Netherlands andthe Czech Republic, rent is not added to SA payment rates (as it is in many other countries –Column 4) but is an integral part of SA. In some countries maximum benefits for both the separatehousing benefit scheme and the assistance related scheme can be received at the same time(Denmark, Finland and Sweden).

Child-care benefits

The cost of approved day care or nursery centres may be partly or totally compensated throughbenefit payments. The refund possibilities for child-care costs for a single parent in work with twochildren under 4 years old in approved day care centres is shown in Table 2.6.

A number of countries have a separate benefit scheme paying out to parents who make use ofapproved child-care facilities (Australia, New Zealand, Norway and Poland). Other countries makeallowances either in the tax system (Australia, Canada and France), in the means-test of familybenefits (Germany, United Kingdom) or reduce the child-care fees according to the parents’ income(Finland, Japan, New Zealand). In other countries child care may be provided without fee for theparents (Sweden) or is provided by the employer (possible with state support; not included in thetable).

Employment conditional benefits

Some benefits are only paid to people in a full-time or part-time job. They are paid directly tothe employee upon taking up paid employment. These employment conditional benefits effectivelyincrease the net income from work, increase the difference between in-work and out-of-workincome and thereby create an incentive to leave a situation of benefit dependency. Several OECDcountries have introduced employment benefits of some form or other with varying payment ratesand qualifying requirements. Table 2.7 provides an overview.


22


Table 2.6. Child-care benefit systems

Refund possibilities

Australia Subsidised provisions; means-tested benefits; tax rebateAustria -Belgium -Canada Child care is treated as a work related expense and is thus deductible from taxable income (up to a maximum)Czech Republic There is a benefit allowing mothers to care for children at home; no benefit for care centre feesDenmark Actual cost if earnings are below a ceiling (80% of APW)Finland Contributions in child-care costs depend on present incomeFrance The subsidy equals the social security contributions of the applying parent, separate programmes and tax

reductions also exist; different tax credits also existGreece -Germany Can be covered by social assistanceHungary There is a benefit allowing mothers to care for children at home; no benefit for care centre feesIceland -Ireland -Italy -Japan Contributions in child-care costs depend on present incomeKorea Not fully developed yetLuxembourg Payments are made for home child careNetherlands -New Zealand Means-tested scheme, reduces payable feesNorway Flat-rate means-tested benefit: Nkr 66 000 ($7 041) per annumPoland Flat-rate means-tested benefit: Zl 62.41 ($46) per month per childPortugal -Spain -Sweden Free care provided universallySwitzerland -United Kingdom £40 ($60)/week per child in care can be added to net income apart from the Family Credit formula; some

locally subsidised day care centres; nursing vouchersUnited States Some locally subsidised day care centres

Source: OECD.

Lone-parent benefits

Lone parents may be entitled to a separate benefit. The nature of lone-parent benefits and themaximum value for a lone parent with two children under 4 years old is shown in Table 2.8. Alllone-parent benefit schemes in the table have flat payment rates.

In Australia, France, Ireland, Japan, and Sweden, for example, lone-parent benefits aremeans-tested but recipients are not required to look for work. Supplements to family benefits, suchas paid in Denmark, Finland, Hungary, Iceland, Italy, Norway and the United Kingdom are paidunder the same conditions as the basic family benefits. Lone-parent benefits can be received inthese countries until the oldest child reaches the age that is indicated in the table, ranging from3 years old in France to 18 years old in Italy. In the Netherlands, a separate benefit for lone parentsdoes not exist but lone parents receiving SA are not required to look for work until the oldest childis 5. In the United States, lone parents qualify for regular family benefits.

23

Table 2.7. Employment-conditional tax credits and benefits1, 2

Canada Ireland3 Italy4, 5 New Zealand6 Spain5 United Kingdom7 United States8

Work income Family income Family benefits Independent family Employment credit Family Credit Earned income taxsupplement supplement for employees tax credit credit

(to be introduced)

Average Annual C$357 (US$289) Ir£1 925 ($2 962) - NZ$1 404 ($936) Ptas 30 800 ($246) £2 400 ($3 582) $1 450ReceiptResponsible Tax administration Social security Social security Tax administration Tax administration Social security Tax administrationdepartmentMaximum benefit C$500 annually - L 1 029 630 pa NZ$15/week per child Ptas 70 000 ($590) £77.90 per week $2 094/3 110/ 314 pa

($405) ($648) ($10.2) ($116)Minimum earnings C$3 750 ($3 038) none none none none none nonePhase in rate 8% none none - - none 34/36/7.65%Earnings when C$20 921 immediately L 15 000 000 pa NZ$20 000 annually Ptas 1 035 000 £73 per week ($109) $11 290/11 290/phasing out begins ($16 949) ($1 589) ($13 587) annually ($8 274) 5 130 annuallyWithdrawal rate 10% of gross 60% of gross stepwise reduction: 18% between NZ$20 000 5% of gross income 70% of net income 15.98/20.2521/ 7.65%

income income effectively 37-48% ($13 587) and NZ$27 000 under Ptas 1 915 000 of gross incomefor higher incomes ($18 342), 30% above

Minimum hours no limit 20 hours (19 from no limit no limit no limit 16 hours supplement no limitworked July 1996) for 30 hours or moreFamily type families with families with every earning families with children every earning person families with children first figure is for 1-child

children children person pilot scheme for families, 2nd for 2 orothers more children, 3rd for

no childrenNotes:1. Data on the entitlement rules refer to 1995 except for New Zealand (Independent Family Tax Credit, 1997) and the United States (1996). Data on costs, number of recipients, etc., refer to

1993 for Canada and Ireland, 1990 for Italy and 1994 for the United Kingdom and the United States.2. 1995 purchasing parities are used to calculate US$ values (1994 for the Czech Republic).3. Payment is 60 per cent of the difference between family income before tax and a weekly threshold of Ir£165 plus Ir£20 per child with a minimum payment of Ir£5; there are other

employment-conditional benefits in Ireland. The part-time job incentive scheme is open to the long-term unemployed (15 months or more) who work for less than 24 hours a week. Aflat-rate payment (Ir£40 per week for singles, Ir£66 for one-earner couples) is paid where this is more beneficial than means-tested unemployment assistance. The Back to Work Allowanceis paid to the long-term unemployed (one year or more) who are aged 23 years or more and to lone parents (no age limit) where the person takes up self-employment or a new job(i.e. additional in the economy). 75 per cent of the standard means-tested unemployment or lone-parent assistance is paid in the first year, 50 per cent in the second year and 25 per centin the third year.

4. In addition to this payment, Italy has income-related tax credits for dependent spouses and children. Ordinary unemployment benefits only last for 6 months in Italy, so the allowanceoperates de facto as an employment-conditional benefit.

5. The credit is not refundable; its value is limited for people on low incomes.6. IFTC and Family Support are subject to the same means-test; at least 70 per cent of family income must be from earnings (or pensions). IFTC figures for New Zealand are forecasts for when

the scheme is fully implemented in 1998-99. The pre-existing Guaranteed Minimum Family Income (GMFI), which is a smaller employment-conditional payment, will continue to be paid.The GMFI is paid to lone parents working more than 20 hours and couples working more than 30 hours, and the difference between family income and NZ$320 is paid. As all eligible familiesreceive family benefits, and there is a minimum wage of around NZ$6.25 per hour, maximum benefit for lone parents is around NZ$110, substantially less (around NZ$30) for single-earnercouples. It has approximately 5 000 recipients. It is operated through the tax administration.

7. Rates depend on age and number of children. The above figure is for two children aged under 11.8. Figures for the earned income tax credit are total programme costs including the outlay on repayments and the tax expenditure component (the reduction in tax liabilities).Source: United Kingdom Department of Social Security (1994), United States Department of the Treasury, United States House of Representatives (1994) and information supplied by nationalauthorities.


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Table 2.8. Lone-parent benefit arrangements

Type of benefit Rate (yearly)1 Income test

National US$currency

Australia2 Separate benefit, and tax rebate for children under 16 9 651 7 160 50% of earningsAustria - - - -Belgium - - - -Canada - - - -Czech Republic - - - -Denmark Family benefit supplement for children under 6 29 076 3363 noFinland Family benefit supplement 20 088 3 348 noFrance Separate benefits for children under 3 27 912 4 215 100% of net incomeGermany Increases in social assistance supplements for 3 186 1 542 100% of net income

children under 16Greece - - - -Hungary Family benefit supplement for children under 16 6 000 88 noIceland3 Family benefit supplement and separate benefit for 72 710 934 no

children under 16Ireland4 Separate benefit for children under 18 4 831 7 428 -Italy5 Increases in family benefits from the 3rd child 240 000 151 no

onwards for children under 18Japan Separate benefit for children under 18 556 680 3 165 noKorea - - - -Luxembourg Non-refundable tax credit in taxable income - - -Netherlands6 No job-search requirements for SA until the oldest - - -

child is 5New Zealand Separate benefit for children under 18 11 250 7 450 18-30% of earningsNorway Additional amounts in family benefits for 132 00 14 070 no

children under 16Poland - - - -Portugal - - - -Spain - - - -Sweden Separate benefit per child for children under 16 28 152 2 824 noSwitzerland - - - -United Kingdom Addition to child benefits for children under 16 328 488 noUnited States Lone parents receive family benefits for children - - -

under 19

Notes:1. 1995 purchasing parities are used to calculate US$ values (1994 for the Czech Republic), the examples assume two children younger

than 4 years of age.2. Means-test is less stringent than for unemployment beneficiaries.3. There is a supplement for people with low incomes which is means-tested.4. Unemployment benefits are halved if lone-parent benefits are paid. The income test is not applied to the first Ir£24 of weekly earnings5. Family benefits are in fact lower per family member for a lone parent than for a married couple with the same number of children.6. Prior to January 1996, lone parents were required to be looking for work.Source: OECD.

25

Social assistance

People without resources can, in most OECD countries, fall back on state-provided financialassistance. Table 2.9 shows the maximum social assistance payment rates for three different familytypes which are used in this study.

Social assistance payments can depend on decisions of regional governments or even on thediscretion of social workers. Other than UI, and in some cases UA, SA is paid to the entire householdand the resources of the entire household are considered for the assessment.2 How this study dealswith the regional variation of the payment rates is indicated in the final right column. The words“national rates” refer to uniform rates that are paid throughout the country. Where national ratesare recommended without being strictly enforced, the table says: “national guidelines”. Wherethere is regional variation in payment rates, two approaches may be followed: the national averageis known and used, otherwise the study uses a representative region (“regionally determined”).Country-by-country descriptions, which are available on the Internet (see foreword) give detailsabout the determination of SA payment rates. The fact that representative regions are used in somecases and national averages in others is explained in the annex.

The tax treatment of benefits

Benefit income is treated as taxable income in many OECD countries, but the recipient is oftenentitled to special allowances. Moreover, different benefits have different tax treatments (Table 2.10).The table employs abbreviations T and S where tax and social security contributions are payablerespectively. The word “reduced” between brackets indicates that tax or social security contributionsare payable by beneficiaries but at a reduced rate. In some cases, benefits are taxable but the taxsystem is structured such that a year-long recipient will pay no tax – these are indicated by T(n).The dash (-) indicates that the specific benefit is not taxable. Where a specific benefit does notexist, for example, for the UA in Canada or the UI in Australia, this is indicated by “None”.

Benefit income in some countries (UI and UA in Austria and Germany) is calculated as netincome and is therefore not taxable.

Part-time and occasional work

Many of the benefits above are reduced as soon as the beneficiary starts to work. The rate atwhich such reductions take place is an important determinant of the incentive to take up occasionalor part-time work. Many countries allow a limited amount of earnings without affecting benefitreceipt, thus reducing the disincentives to start work.

2 In other words, the benefit unit (i.e., the group of persons to whom the benefit is paid) and the resource unit (i.e., thegroup of persons whose resources are considered in the assessment) are the household. The resource unit and thebenefit unit are the individual for UI. UA benefits can be paid to the individual but have the household as resourceunit (as for example in Germany). More details can be found in the country-by-country descriptions (see foreword).


26


Table 2.9. Maximum social assistance monthly amounts

Single1 Couple plus two children1 Lone parents, two children1 Determination of rates

National US$ National US$ National US$currency currency currency

Australia n.a - n.a - n.a -Austria 5 260 374 9 966 708 7 774 552 regionally determinedBelgium 20 103 534 26 805 712 26 805 712 national ratesCanada 520 421 1 178 954 1 086 880 regionally determinedCzech Republic 2 440 216 7 060 625 5 380 476 national ratesDenmark 6 643 770 8 850 1 027 8 858 1 027 national ratesFinland 2 021 336 6 104 1 016 4 689 780 national averageFrance 2 326 351 4 885 738 4 187 632 national ratesGermany 590 286 1 652 860 1 475 714 national ratesGreece 25 000 120 25 000 120 25 000 120 national ratesHungary 6 720 98 6 720 98 6 720 98 national guidelinesIceland 43 360 558 78 048 1 004 69 376 892 national guidelinesIreland 262 402 538 828 376 578 national guidelinesItaly 622 000 392 1 586 000 998 1 323 000 833 regionally determinedJapan 81 120 462 192 430 1 095 153 120 871 regionally determinedKorea 115 258 186 115 258 186 115 258 186 national ratesLuxembourg 31 165 782 55 921 1 404 40 339 1 013 national ratesNetherlands 1 332 641 1 902 915 1 712 824 national ratesNew Zealand2 - - 1 205 798 1 205 798 national ratesNorway 5 083 542 9 167 978 - - regionally determinedPoland 196 145 196 145 196 145 national ratesPortugal3 20 000 164 20 000 164 20 000 164 national ratesSpain 32 000 125 54 400 435 48 000 384 regionally determinedSweden 3 451 346 9 630 967 7 279 730 national guidelinesSwitzerland 985 478 2 111 1 024 1 581 767 national guidelinesUnited Kingdom 202 301 500 744 407 607 national ratesUnited States4 119 119 916 916 759 759 regionally determined

Notes:1. 1995 purchasing parities are used to calculate US$ values (1994 for the Czech Republic).2. Only available as guaranteed income to full-time employees with family benefits.3. Only available to first time jobseekers in the age 18-25, it lasts 15 months after a 24-month waiting period.4. Amounts include AFDC and Food Stamps.Source: OECD.

Table 2.11 indicates, for all means-tested schemes (Column 2), the resource unit of the means-test(i.e. the group of persons whose resources are taken into account for the determination of thebenefit payment level) and the amount of income that is disregarded in the means-test (Columns 3and 4). The disregarded income amounts are converted into hours (Column 5); someone workingat APW (Average Production Workers) earnings level could work the specified number of hours perweek before his/her benefit started to be reduced. In some countries, the disregard can beaccumulated (Australia, Canada, Finland and Iceland). Unused disregards can be saved over time(so that A$30 per week equals A$60 after two weeks of benefit, and so on, up to a limit), be paid outupon finding employment (Iceland) or contribute to future benefit entitlements (Canada).

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Table 2.10. The tax treatment of benefits1

Unemployment Unemployment Family benefits Lone-parents Housing benefits Socialinsurance assistance benefits assistance

Australia None T(n)S(n) - - - -Austria * * - - - -Belgium T(reduced) None - - None -Canada TS None None - None -Czech Republic - None - None None -Denmark TS(reduced) None - - - TS(reduced)Finland TS(reduced) TS(reduced) - - - -France TS(reduced) T(n)S(n) - - - -Germany * * - - - -Greece T(reduced)S T(reduced)S TS None None T(reduced)SHungary TS - None None None NoneIceland TS(reduced) None - TS(reduced) TS(reduced) TS(reduced)Ireland T(n) - - T - -Italy T None - None None -Japan - None - - - -Korea - None None None None -Luxembourg TS(reduced) None - None None TS(reduced)Netherlands TS TS - - - TSNew Zealand None T - T - -Norway TS None - None None -Poland TS None - None TS -Portugal - - - None None NoneSpain TS(reduced) T(n) T(n) None None T(n)Sweden TS TS - - - -Switzerland TS(reduced) None - - None -United Kingdom T(n) None - - - T(n)United States T None - - None -

Note:The table employs abbreviations T and S where tax and social security contributions are payable respectively. The word “reduced”between brackets indicates that tax or social security contributions are payable by beneficiaries but at a reduced rate. In some cases,benefits are taxable but the tax system is structured such that a year-long recipient will pay no tax -- these are indicated by T(n). The dash(-) indicates that the specific benefit is not taxable. Where a specific benefit does not exist, for example, for the UA in Canada or the UI inAustralia, this is indicated by “None”.Source: OECD

A disregard in the means-test of UI translates into an immediate work-incentive for beneficiaries(Austria, Belgium, Canada, Finland, Germany, Hungary, Ireland, the Netherlands and the UnitedKingdom). Apart from Australia and New Zealand, where UI does not exist, a disregard in UA orSA benefits those people who have exhausted their UI-entitlements and have been employed forsome time. In those countries where the resource unit of the means-test is the household, thebenefit amount available to other household members (e.g., non-working spouses) is affected bythe beneficiary’s decision to work (see also Chapter 4).


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Table 2.11. Casual employment and benefit receipt

Scheme Income test Maximum disregard1 Disregarded in Observationshrs/w equivalents2

Column 2 Column 3 Column 4 Column 5 Column 6

Australia UA individual A$30/week of GI 1h45 unused disregards can be accumulatedAustria UI individual Sch 3.500/month of NI 6h30 benefit ceases when income exceeds

disregardAustria UA household Sch 5 500/month of NI 10h10 benefit ceases when income exceeds

disregardBelgium UI individual - - benefit ceases when income exceeds

disregardBelgium3 SA household BF 12 500/month of NI 7h10 no accumulation of unused disregardCanada4 UI individual reduction in proportion to hours worked 0h unused disregards can be accumulatedCanada7 SA household C$518/month + 25% of remainder of NI 6h10 no accumulation of unused disregardFinland UI individual Mk 750/month + 20% of remainder of GE 2h45 no accumulation of unused disregardFinland UA household Mk 567/month + 25% of remainder of GE 2h05 unused disregards can be accumulatedGermany UI individual DM 30/week + 50% of remainder of NI 2h15 no accumulation of unused disregard,

working >18h/week: benefit ceasesGermany SA household DM 250/month of NI 2h50 no accumulation of unused disregardHungary UI individual minimum wage level (Forint 12 200/month)15h30 benefit ceases when income exceeds

disregardHungary SA household Forint 1 000/month of GE 1h15 -Iceland5 UI individual reduction related to hours worked 0h unused disregards can be accumulated,

working >2 days/week: benefit ceasesIreland UI individual Ir£10/week of GE 1h50 no accumulation of unused disregardIreland UA household Ir£15/day of GE (individual income) 2h no accumulation of unused disregard,

working >3 days/week: benefit ceasesLuxembourg SA household 20% of maximum payment standard in GE 5h15 no accumulation of unused disregardNetherlands6 UI/UA individual 70% of GE for first 5h/week 0h no accumulation of unused disregard,

working >4 days/week: benefit ceasesNetherlands SA household local discretion - -New Zealand7 UA individual NZ$60/week per person + 70% of 7h40 no accumulation of unused disregard

remainder NIPortugal SA household 80% of Esc 52 000/month of GE 16h25 -UK7 UI individual reduced in proportion to days worked 0h -UK7 SA household £15/week of NI 2h40 -UK7 CTB8 household £15/week of NI 2h40 -USA FS9 household $737/month of NI 2h50 -USA FS9 household $30 of irregular income per quarter 2h20 -

Notes:1. Disregards can be as a percentage of gross earnings (GE), gross earnings plus gross benefits (GI), or net income (NI).2. The equivalent in hours that can be worked before the disregard is exhausted if the beneficiary has APW full-time equivalent pay,

assuming a 40 hours working week. If disregards are net of tax, the income situation of a couple with two children has been used forthe conversion to hours per week.

3. BF 10 000/month of gross earnings for someone without children.4. Benefits are proportional to the ratio hours worked/:minimum qualifying number of hours so that part-timers always qualify and

ad-hoc or casual work helps build up entitlements. An “intensity rule”, penalising repeat users, can be offset by “work-credits”. Anindividual has a five-year benefit history during which each 20-week block of UI claim exceeding the first 20 reduces Gross ReplacementRates with 1 percentage point (maximum five percentage points) work credit: work whilst on UI will be credited against the intensityrule proportional in number of hours on claim.

5. Accumulated disregards can be paid upon entry in employment.6. The availability criterion is used for all income, when more than five hours are worked. The full benefit will be reduced in proportion

to the number of days the recipient is no longer available for work, provided he/she was dismissed from a job extending the part-timehours.

7. Disregards are increased for dependent family members.8. CTB = Council Tax Benefit.9. FS = Food Stamps.Source: OECD.

29

3. COMPARATIVE TABLES AND CHARTS

Introduction

This chapter contains comparative information on net replacement rates (NRR) as calculatedusing the assumptions given in the annex (p. 51) and Chapter 2 (p. 13) and the country-specificinformation available on the Internet (see foreword).

Benefit income in the first month of receipt

NRRs in this section are calculated for the first month of unemployment after any waiting period(see Table 2.2) has been completed. Taxation is calculated by multiplying benefits received in thefirst month by 12 and determining annual tax liability as if the benefit level were to remain unchangedover the year. In each case it is assumed that the unemployed worker is 40 years old and has anuninterrupted employment record of 22 years. Children are assumed to be aged 6 and 4. Child-carebenefits are not included. Benefits are calculated for the main unemployment benefit. No socialassistance is assumed to be paid, reflecting an assumption that the household has sufficient assetsto be disqualified.

Table 3.1 presents net replacement rates for four family types and at two earnings levels. Somecombination of higher rates of unemployment benefits, family benefits, increased housing benefitsor reduced tax payments on unemployed families ensures that replacement rates are almost alwayshigher for couples where one spouse is not working than they are for single persons. NRRs forfamilies with children are higher yet.

Tables 3.2 and 3.3 indicate the importance of different income sources for a single unemployedperson and a one earner couple with two children respectively. The total benefit income in the firstmonth of unemployment is split up in its different components, standardising total net income outof work at 100. In each case, calculations are for someone who previously earned the APWearnings. Sources of income other than unemployment benefits are often very important to familieswith children.

30


Table 3.1. Net replacement rates for four family types at two earnings levels after taxIncluding unemployment benefits, family, and housing benefits in the first month of benefit receipt

APW-level 66.7% of APW-level

Single Married Couple, Lone parent, Single Married Couple, Lone parent,couple 2 children 2 children couple 2 children 2 children

Australia 37 50 72 57 50 67 82 60Austria 57 60 71 69 57 62 77 73Belgium 65 57 60 66 84 76 76 82Canada 61 63 68 66 61 64 68 66Czech Republic 54 76 77 78 60 74 76 77Denmark 65 68 77 77 90 94 95 95Finland 68 71 87 86 83 86 92 88France 76 74 79 80 85 85 87 87Germany 70 66 80 80 73 74 76 80Hungary 67 67 74 75 86 86 90 91Iceland 55 46 59 69 73 66 81 86Ireland 33 49 64 59 45 64 72 71Italy 36 42 47 45 35 42 46 44Japan 63 61 59 67 72 69 67 75Korea 55 55 54 54 54 54 53 53Luxembourg 86 86 90 90 85 85 91 91Netherlands 75 81 82 75 86 90 86 86New Zealand 37 41 64 59 52 71 77 74Norway 66 67 73 74 65 67 75 77Poland 34 36 42 41 49 52 61 58Portugal 79 78 77 78 89 88 87 87Spain 73 74 76 75 71 71 73 74Sweden 75 75 85 87 78 78 85 87Switzerland 77 77 88 57 76 76 88 88United Kingdom 52 63 67 56 75 88 80 63United States 58 60 59 60 59 59 50 52

Note: It is assumed that waiting periods are met.Source: OECD.

31

Table 3.2. The composition of the net benefit income of an unemployed single in the first month ofbenefit receipt

Income components Net incomes

Unemployment Unemployment Social Family Housing Income taxes Out of In workinsurance assistance assistance benefits benefits work

Australia - 81 - 0 19 0 100 270Austria 100 0 0 0 0 0 100 175Belgium 100 0 0 0 0 0 100 154Canada 124 0 0 0 0 -24 100 164Czech Republic 100 - 0 0 - 0 100 185Denmark 156 0 0 0 0 -56 100 154Finland 124 - 0 0 7 -31 100 147France 105 0 0 0 4 -9 100 132Germany 99 0 0 0 1 0 100 143Hungary 118 - 0 0 0 -18 100 149Iceland 90 0 0 0 14 -4 100 181Ireland 100 0 0 0 0 0 100 303Italy 115 0 0 0 0 -15 100 280Japan 100 0 0 0 0 0 100 158Korea 100 - 0 - - 0 100 182Luxembourg 126 0 0 0 0 -26 100 116Netherlands 158 0 0 0 0 -58 100 133New Zealand 0 78 0 0 33 -11 100 270Norway 134 0 0 0 0 -34 100 152Poland 111 0 0 0 0 -11 100 294Portugal 100 0 0 0 0 0 100 227Spain 115 0 0 0 - -15 100 137Sweden 152 0 0 0 0 -52 100 133Switzerland 116 - 0 0 - -16 100 130United Kingdom 44 0 0 0 56 0 100 194United States 116 - 0 0 0 -16 100 172

Notes:It is assumed that waiting periods are met(-): These benefits do not exist in this country.Source: OECD.

Comparative tables and charts

32


Table 3.3. The composition of the net benefit income of a one-earner couple with two children in the firstmonth of benefit receipt



Australia - 69 - 21 10 0 100 139Austria 79 0 0 21 0 0 100 145Belgium 80 0 0 20 0 0 100 167Canada 95 0 0 13 0 -8 100 147Czech Republic 84 - 0 12 - 0 100 130Denmark 98 0 0 13 15 -26 100 130Finland 88 0 0 22 14 -24 100 150France 76 0 0 9 19 -4 100 127Germany 83 0 0 7 10 0 100 125Hungary 83 - 0 30 0 -13 100 135Iceland 81 0 0 24 17 -22 100 169Ireland 94 0 0 6 0 0 100 156Italy 78 - - 23 - -1 100 213Japan 100 0 0 0 0 0 100 169Korea 100 - 0 - - 0 100 185Luxembourg 96 0 0 12 0 -8 100 111Netherlands 124 0 0 9 6 -39 100 122New Zealand 0 80 0 11 21 -12 100 156Norway 103 0 0 16 - -19 100 137Poland 89 0 0 15 0 -4 100 238Portugal 93 0 0 7 0 0 100 130Spain 102 0 0 3 - -5 100 132Sweden 112 0 0 15 12 -39 100 118Switzerland 101 - 0 9 - -10 100 114United Kingdom 50 0 0 12 38 0 100 149United States 104 - 0 0 0 -4 100 169

Notes:It is assumed that waiting periods are met(-): These benefits do not exist in this country.Source: OECD.

Benefit income in the 60th month

Tables in this section mirror those in the previous section, but are for the 60th month ofunemployment. Insurance benefits have, in most countries, been exhausted by this time. In contrastto the tables in the previous section, it is assumed that families are not disqualified from socialassistance because of any means-tests. Table 3.4 presents net replacement rates for four familytypes and at two earnings levels.

Tables 3.5 and 3.6 indicate the importance of different income sources for a single unemployedperson and a one earner couple with two children respectively. The net replacement rates arebased on the assumption that social assistance supplements low income, where appropriate.

33

Table 3.4. Net replacement rates for four family types at two earnings levels after taxIncluding family and housing benefits in the 60th month of benefit receipt


Single Married Couple, Lone parent, Single Married Couple, Lone parent,couple 2 children 2 children couple 2 children 2 children

Australia 37 50 72 57 50 67 82 60Austria 54 60 69 66 54 59 74 70Belgium 46 66 63 69 78 90 91 98Canada 27 44 59 60 38 60 77 80Czech Republic 36 63 98 80 53 91 100 100Denmark 49 77 97 71 68 98 80 88Finland1 62 82 100 72 84 100 100 78France 43 43 51 49 57 56 58 60Germany 62 63 73 68 76 87 92 91Hungary 47 47 59 60 64 64 74 75Iceland 52 54 80 76 69 78 109 95Ireland 33 49 64 62 45 64 72 75Italy 0 4 11 8 0 6 14 11Japan 35 49 71 63 51 71 87 87Korea 10 10 10 10 15 15 15 15Luxembourg 54 66 77 60 75 89 89 86Netherlands 60 76 78 70 85 95 96 94New Zealand 37 41 64 59 52 71 77 74Norway 39 n.a 72 66 56 96 78 86Poland 30 29 35 36 42 42 51 51Portugal 0 0 6 6 0 0 8 8Spain 27 33 46 44 37 47 63 57Sweden 62 83 100 70 89 116 122 82Switzerland 52 64 68 59 74 92 96 83United Kingdom 52 63 76 65 75 88 91 80United States 7 13 51 43 11 18 58 50Source: OECD.


34


Table 3.5. The composition of the net benefit income of a single unemployed person in the 60th month ofbenefit receipt



Australia - 81 - 0 19 0 100 270Austria 0 100 0 0 0 0 100 185Belgium 78 0 22 0 0 0 100 173Canada 0 0 96 0 0 4 100 370Czech Republic 0 - 100 0 - 0 100 278Denmark 0 0 83 0 38 -21 100 204Finland 0 60 17 0 33 -10 100 161France 0 72 0 0 32 -4 100 233Germany 0 99 0 0 1 0 100 161Hungary 0 - 63 0 36 0 100 213Iceland 0 0 90 0 14 -4 100 192Ireland 0 100 0 0 0 0 100 303Italy - - - - - - 0 indefiniteJapan 0 0 86 0 14 0 100 289Korea 0 - 100 - - 0 100 1000Luxembourg 0 0 90 0 15 -5 100 185Netherlands 0 0 109 0 21 -30 100 167New Zealand 0 78 0 0 33 -11 100 270Norway - - 100 - - - 100 256Poland 0 0 68 0 32 0 100 333Portugal 0 0 0 0 0 0 0 indefiniteSpain 0 0 100 0 - 0 100 370Sweden 0 0 93 0 7 0 100 161Switzerland 0 - 100 0 - 0 100 192United Kingdom 0 0 44 0 56 0 100 194United States 0 - 100 0 0 0 100 1428

Source: OECD.

35

Table 3.6. The composition of the net benefit income of a one-earner couple with two children in the60th month of benefit receipt



Australia - 69 - 21 10 0 100 139Austria 0 79 0 21 0 0 100 151Belgium 67 0 12 21 0 0 100 141Canada 0 0 81 15 0 4 100 169Czech Republic 0 - 84 16 - 0 100 102Denmark 0 0 135 10 0 -45 100 103Finland 0 40 33 14 20 -7 100 100France 0 46 4 14 38 -2 100 198Germany 0 71 9 7 13 0 100 126Hungary 0 - 39 38 23 0 100 169Iceland 0 0 75 17 11 -3 100 125Ireland 0 94 0 6 0 0 100 156Italy - - - 100 - - 100 910Japan 0 0 94 0 6 0 100 71Korea 0 - 100 - - 0 100 1000Luxembourg 0 0 86 14 8 -8 100 130Netherlands 0 0 98 10 14 -22 100 128New Zealand 0 80 0 11 21 -12 100 156Norway - - 80 20 - - 100 169Poland 0 0 56 18 26 0 100 286Portugal 0 0 0 6 0 0 6 indefiniteSpain 0 0 92 8 - 0 100 217Sweden 0 0 74 12 0 0 100 100Switzerland 0 - 100 0 - 0 100 147United Kingdom 0 0 55 11 34 0 100 131United States 0 - 37 63 0 0 100 196

Source: OECD.


36


Young unemployed

As in most countries receipt of UI benefits is conditional on having worked, young peopleleaving school are often not eligible (as noted in Tables 2.2 and 2.3). Some countries have specialprovisions for young unemployed, while in other countries, the benefit amounts are related to ageand employment history.

Table 3.7 assumes a 20-year-old unemployed single person living alone without any familyresponsibilities and without an employment record. The numbers shown are net replacement ratesat the APW earnings level, including social assistance and housing benefits.

Table 3.7. The unemployment benefit entitlements of young unemployed single people


Initial 4th month 7th month 25th month Initial 4th month 7th month 25th month

Australia 32 32 32 32 44 44 44 44Austria 7 7 7 7 10 10 10 10Belgium 58 58 58 58 78 78 78 78Canada 27 27 27 27 38 38 38 38Czech Republic 36 36 36 36 53 53 53 53Denmark 56 56 56 56 78 78 78 78Finland 68 68 68 68 84 84 84 84France 19 19 19 19 25 25 25 25Germany 55 55 55 55 76 76 76 76Hungary 47 47 47 47 64 63 63 64Iceland 52 52 52 52 69 69 69 69Ireland 32 32 32 32 43 43 43 43Italy 0 0 0 0 0 0 0 0Japan 35 35 35 35 51 51 51 51Korea 10 10 10 10 15 15 15 15Luxembourg 8 8 8 8 11 11 11 11Netherlands 75 75 42 34 74 74 59 48New Zealand 37 37 37 37 52 52 52 52Norway 39 39 39 39 56 56 56 56Poland 9 28 28 9 13 39 39 13Portugal 24 24 24 0 34 34 34 0Spain 27 27 27 27 37 37 37 37Sweden 62 62 62 62 89 89 89 89Switzerland 52 52 52 52 74 74 74 74United Kingdom 47 47 47 47 68 68 68 68United States 7 7 7 7 11 11 11 11

Note: It is assumed that waiting periods are met.Source: OECD.

Child-care benefits

Table 3.8 shows in-work and out-of-work incomes in Columns 1 and 2 respectively for alone-parent family with two children. Net incomes do not include social assistance, and the twochildren are aged 4 and 3. The replacement rate [as defined in the annex, Equation (A1), p. 57] isfound in Column 5. Where lone parents do not work, it is assumed that no child-care costs are

37

incurred. Column 3 shows assumed total child-care costs were the lone parent to work. Column 4shows the net income in work, allowing for child-care costs and benefits and the replacement ratein Column 6 includes both child-care costs and benefits according to replacement rate definition(Equation A3 p. 58) in the annex. Table 3.8a shows calculations on the basis of APW referenceearnings, Table 3.8b on the basis of two thirds APW earnings. All amounts are shown in nationalcurrencies. Details of child-care costs and benefits can be found in the country by countrydescriptions on the Internet (see foreword).

Table 3.8a. Child-care costs and benefits,1 reference earnings at APW level (annualised)Net income Net income Total child Net income in Replacement Replacementout of work in work care costs work after rates before rates after

child care child care child care

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6

Australia 16 337 28 879 10 528 23 957 57 68Austria 178 583 259 416 86 814 172 602 69 103Belgium 501 984 796 960 315 278 481 682 63 104Canada 17 106 26 042 9 726 21 890 66 78Czech Republic2 - - - - - -Denmark 126 092 153 195 67 350 85 845 82 147Finland 103 589 120 665 11 220 109 445 86 95France3 - - - - - -Germany 32 038 41 317 16 903 24 414 80 131Hungary2 - - - - - -Iceland 934 287 1 357 335 421 680 935 655 69 100Ireland 6 711 11 367 4 125 7 242 59 93Italy 11 802 000 26 400 000 9 965 000 16 436 000 45 72Japan4 2 625 792 3 933 748 1 188 902 3 045 748 67 86Korea 7 500 000 13 765 000 4 500 000 9 265 000 54 81Luxembourg2 - - - - - -Netherlands5 29 786 36 729 15 205 21 524 75 138New Zealand 14 722 24 973 9 764 18 589 59 79Norway 147 874 199 977 66 090 133 887 74 110Poland 3 220 7 895 2 508 6 885 41 47Portugal 853 877 1 096 533 243 679 852 854 78 100Spain 1 321 639 1 753 934 615 838 1 138 096 75 116Sweden 158 503 181 567 57 078 181 567 87 87Switzerland 46 005 52 535 17 720 34 815 87 132United Kingdom6 6 770 12 158 4 570 10 654 56 64United States 12 740 21 061 7 981 13 080 60 97

Notes:1. Calculations assume a lone parent with two children under 4 years of age, both in recognised full-day child care; it is assumed that

waiting periods for unemployment benefits are met.2. The benefit is not shown because only parents who stay at home qualify; parents can choose to take care of their children at home in

which case they receive an earnings related benefit. Benefits towards day-care costs do not exist.3. A system of benefits and tax credits exist to reduce the cost of privately employed child-carers.4. The figures here reflect payments in the Osaka municipality.5. Local subsidies may exist, making child-care cost dependent on income.6. It is assumed that the Family Credit hours rule has been satisfied.Source: OECD.


38


Table 3.8b. Child-care costs and benefits,1 reference earnings at 2/3xAPW levelNet income Net income Total child Net income in Replacement Replacementout of work in work care costs work after rates before rates after

child care child care child care

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6

Australia 16 337 27 182 10 528 21 927 60 75Austria 142 496 195 530 86 814 108 716 73 131Belgium 501 984 611 660 315 278 296 382 82 169Canada 13 036 19 697 9 726 15 545 66 79Czech Republic2 - - - - - -Denmark 124 271 129 936 67 350 71 566 96 174Finland 97 667 110 387 0 110 387 88 88France3 - - - - - -Germany 25 666 32 241 16 903 15 338 80 167Hungary2 - - - - - -Iceland 934 287 1 082 153 421 680 660 473 86 155Ireland 7 104 9 478 4 125 5 353 83 132Italy 8 803 000 20 085 000 9 965 000 10 120 000 44 87Japan4 2 148 615 2 874 122 1 188 902 2 178 122 75 101Korea 5 000 000 9 390 000 4500 000 4 890 000 53 100Luxembourg2 - - - - - -Netherlands5 25 562 29 621 15 205 14 416 86 177New Zealand 14 722 19 864 9 764 13 580 74 108Norway 117 089 152 832 66 090 86 742 77 134Poland 3 220 5 594 2 508 4 584 58 70Portugal 685 920 784 835 243 679 541 156 87 122Spain 983 519 1 334 557 615 838 71 872 74 137Sweden 135 054 154 507 57 078 154 507 87 87Switzerland 32 686 37 176 17 720 19 456 88 168United Kingdom6 6 770 9 866 4 570 8 338 69 81United States 8 635 16 638 7 981 8 657 50 100

Notes:1. Calculations assume a lone parent with two children under 4 years of age, both in recognised full-day child care; it is assumed that the

waiting periods for unemployment benefits are met. The benefit is not shown because only parents who stay at home qualify; parentscan choose to take care of their children at home in which case they receive an earnings related benefit. Benefits towards day-carecosts do not exist.

2. A system of benefits and tax credits exist to reduce the cost of privately employed child-carers.3. The figures here reflect payments in the Osaka municipality.4. Local subsidies may exist, making child-care cost dependent on income.5. It is assumed that the Family Credit hours rule has been satisfied.Source: OECD.

Changes in benefit systems over time: OECD’s unemployment benefit index

There is a great deal of interest in changes in benefit systems over time. Unfortunately, it is notpossible to calculate a time series of net replacement rates. However, as part of the OECD JobsStudy, an index was constructed for OECD Member countries summarising gross (i.e. before-tax)unemployment benefit entitlements relative to gross earnings. The index is the average of 18 grossreplacement rates: three household types (single, dependent spouse and non-dependent spouse);three time periods (the first year, the second and third years, and the fourth and fifth years ofunemployment); and two earnings levels (average earnings and two-thirds of this level). The summarymeasure or generosity index as included in Table 3.9 and Chart 3.1 is calculated for all odd numberedyears from 1961 to 1995.

39

Table 3.9. Gross replacement rates for three family types, over a five-year period and two earnings levels

First year Second and third year Fourth and fifth year Overallaverage

Single With With spouse Single With With spouse Single With Withdependent in work dependent in work dependent spousespouse spouse spouse in work

Australia 29 52 0 29 53 0 29 53 0 27Austria 35 38 21 33 37 0 33 37 0 26Belgium 48 48 44 32 48 26 32 48 26 39Canada 58 58 58 12 24 0 13 24 0 27Denmark 67 69 66 67 69 66 67 69 66 67Finland 65 65 65 47 47 40 30 30 0 43France 58 58 58 40 40 34 25 25 0 37Germany 35 39 35 31 34 0 31 34 0 27Greece 44 53 44 19 19 19 0 0 0 22Hungary n.a n.a n.a n.a n.a n.a n.a n.a n.a n.aIreland 26 42 26 27 43 3 27 43 0 26Italy 43 44 43 14 14 14 0 0 0 19Japan 31 31 31 0 0 0 0 0 0 10Netherlands 70 70 70 46 58 18 34 48 0 46New Zealand 30 50 0 31 52 0 31 52 0 27Norway 62 62 62 47 47 47 8 8 8 39Poland n.a n.a n.a n.a n.a n.a n.a n.a n.a n.aPortugal 65 65 65 30 44 40 0 0 0 35Spain 65 65 65 30 30 30 0 0 0 32Sweden 76 76 76 6 6 6 0 0 0 27Switzerland 70 70 70 19 19 19 0 0 0 30United Kingdom 18 28 18 19 29 0 19 29 0 18United States 27 29 25 5 9 0 5 9 0 12

Note:n.a = not available.Data refer to 1995 for all countries except for the United States where data refer to 1994.Source: OECD database on unemployment benefit entitlements and replacement rates.

Assumptions

APW earnings are available only from the late 1970s on. In order to construct a consistentseries going back to 1961, a composite earnings index has been used. This consists of the averageof APW earnings and average earnings, defined as the total wage and salary bill on an OECDNational Accounts basis, divided by full-time equivalent wage and salary employment on the basisof OECD Labour Force Statistics and an OECD database on the incidence of part-time employmentin total employment.

Entitlement to benefit is calculated according to the legislation in force on the first of January, soa change introduced in the middle of 1989, for example, first affects the statistics reported for 1991.

Social assistance benefits are not generally included, unless there is a general entitlement. Hence,for example, the social assistance schemes in Norway and Sweden are not included. The level ofassistance benefits may not always be clearly defined, as supplements to cover particular expendituresmay be included. Typical rates have been used.


40


61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 950

15

30

45

60

75

0

15

30

45

60

75

61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 950

15

30

45

60

75

0

15

30

45

60

75

61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 950

15

30

45

60

75

0

15

30

45

60

75

Chart 3.1 Index of benefit entitlements, 1961-1995

Source:

Australia

Austria

Canada

Japan

New Zealand

Switzerland

United States

Belgium

Denmark

France

Germany

Ireland

Netherlands

United Kingdom

Finland

Greece

Italy

Norway

Portugal

SpainSweden

OECD database on unemployment benefit entitlements and replacement rates.

1

Percentages

1. The average of the unemployment benefit replacement rates for two earnings levels, three family situations and three durations of unemployment. For further details, see OECD (1994), The OECD Jobs Study: Evidence and Explanations, Chapter 8. The earnings data used to compute replacement rates for 1995 are Secretariat estimates.

2. Final-year data refer to 1994 for the United States.

2

41


In some countries, contributions to unemployment insurance funds are voluntary. Where this isthe case, the replacement rates have been weighted by the proportion of the workforce covered bythe scheme.

In France, for the years 1975-1983, replacement rates are an average with a weight of one-quarteron a case that qualified as an “economic” lay-off (receiving the allocation supplémentaire d’attenteand later allocation spéciale benefits) with the replacement rates for regular benefits receiving athree-quarters weight. In Italy the Cassa Integrazione Guadagni has not been included, as recipientsare not necessarily classified as unemployed. However, for 1993 and 1995, the Mobility Benefit,paid to those who become unemployed as a result of a collective lay-off, is weighted by stocks ofbeneficiaries.

All the above limitations are discussed in greater detail in Annex 8.A of the OECD Jobs Study(OECD, 1994).

Relationship of the index to NRRs

The gross replacement rates (GRRs) calculation differs from NRRs in the following ways:

• Tax on earnings and on benefits is not taken into account. If tax systems are progressive,then a tax on the former will be greater than a tax on the latter. Hence GRRs will generallybe lower than NRRs. Furthermore, changes in the tax treatment of benefits will mean thatthe time series of GRRs may appear different from that for NRRs.

• No children are included in the household types considered in the index. It does not reflectthe effects of changes in family-related benefits. The absence of such benefits will generallyresult in GRRs being lower than NRRs.

• No housing benefits are included. As Tables 3.3 and 3.5 show, these benefits form asignificant portion of income for households without earnings. GRRs will again be lowerthan NRRs.

• Social assistance is not included, unless it consists of a general income guarantee at nationallydetermined level. In the part of the index reflecting incomes in years 4 and 5 (and evenyears 2 and 3), benefit income is therefore assumed to be zero in many countries. Were itto be assumed that social assistance was paid, NRRs would be higher than GRRs.

43

4. PART-TIME WORK AND TWO-EARNER COUPLES

Introduction

Net replacement rates that are presented in the previous chapter assume that only one memberof a household works or has any entitlement to unemployment insurance benefits, and that theindividual works either full-time or is fully unemployed. As two-earner couples and part-time workare increasingly important features of the labour market, the manner in which they interact with taxand benefit systems has become a key area of policy development. This chapter illustrates howpart-time work and working partners may change financial incentives facing one or both membersof a couple when deciding whether to enter paid employment.

Table 4.1 presents relative incomes of a family with two children where either one or bothpartners work part-time. The table also includes cases where both partners are engaged in full-timeemployment. Net family incomes are presented as a share of the income of a one-earner couple –with one member working full-time, earning the APW earnings, and the spouse being non-employed.The family is assumed to have no entitlements to social assistance, but may receive housing benefits.

Column 1 corresponds to the NRR at the APW earnings level in Table 3.1. Column 3 presentsnet family incomes of a one-earner couple and all figures in that column are set to 100. Eachcolumn is headed by two descriptors, for example full-time employed/non-employed, and 100/0 inColumn 3. These describe the assumptions used to calculate net incomes in that case. For example,for Column 3 they mean that one member of the household is working full-time and earns 100 percent of the APW earnings and the other member of the household has no earnings and is notentitled to unemployment benefits.

Explanations of the columns of Tables 4.1 and 4.2

Column 1: unemployed/non-employed (0/0)

This case corresponds to the NRRs calculated in Chapter 3. A one-earner couple in the firstmonth of unemployment receives the basic unemployment plus any supplementary benefits fordependants and rent. It is assumed that the non-employed partner receives no unemploymentbenefits. The principal earner was previously earning at APW level.

44


Column 2: part-time employed/non-employed (40/0)

It is assumed here that one member of the household works part-time – 16 hours or two dayseach week – and that total earnings are 40 per cent of the APW level of earnings. In some countries,an unemployed person will lose their right to benefit if they work for more than a specified numberof hours or days. In the table, the number of hours worked does not exceed this maximum. Inother countries, part-time work can be combined with unemployment insurance at a reduced rate,or even at the full rate of payment. Note that part-time work is not the same as partial unemployment,for it involves someone who was previously full-time unemployed who now works part-time and isregistered as looking for full-time work.

Column 3: full-time employed/non-employed (100/0)

This is the standard case of a one-earner couple where the second member of the householdneither works nor has any individual benefit entitlement based on previous earnings.

Column 4: full-time employed/part-time employed (100/40)

This is a two-earner case. One spouse (A) is assumed to earn 100 per cent of APW earnings, theother spouse (B) earns 40 per cent of APW. It is assumed that spouse B does not receive anyunemployment benefits related to previous employment.

Column 5: full-time employed/full-time employed (100/100)

Both spouses work full-time and earn the APW level of earnings.

Column 6: full-time unemployed/part-time employed (0/40)

Here the previously non-employed spouse starts working. It is assumed that this spouse doesnot receive any benefits and earns 40 per cent of the APW wage; while the other receives afull-time unemployment benefit. Hence this case differs from Column 2. In each case, only onespouse is working part-time, but in Column 2 the part-time working spouse may still have somebenefit entitlement, while the non-working spouse is non-employed (and thus without any benefitentitlements).

Column 7: full-time unemployed/full-time employed (0/100)

This column is identical to Column 6, except that the working spouse works full-time ratherthan part-time. It differs from Column 3 as the non-working spouse is unemployed with somebenefit entitlement which may be unaffected by the incomes of the working spouse.

Column 8: full-time unemployed after 5 years/non-employed (0/0)

The last two columns in this table relate to the position of a couple where neither one hasworked for 5 years. Column 8 shows the level of benefits after 5 years of unemployment. Column 8differs from Column 1 insofar as unemployment insurance will often have been exhausted and thefamily may be receiving means-tested unemployment assistance or social assistance.

45

Column 9: part-time employed after 5 years of unemployment/non-employed (40/0)

Column 9 is comparable to Column 2, which also shows a combination of part-time employmentand non-employment. Column 2, however, relates to the period just following the onset ofunemployment, and thus differs from Column 9 in two important ways. First, the individual inColumn 9, by virtue of having been unemployed for five years prior to beginning part-timeemployment, may be receiving assistance benefits. In the early period of unemployment, insurancebenefits are common in most OECD countries. Not only will the absolute level of benefits bedifferent, but the assistance benefits will be means-tested whereas the insurance benefits normallyare not. Second, some countries have incentives to work part-time which are only available tothose who have been unemployed for some time.

The information from Table 4.1 is reorganised in Table 4.2 to show average effective tax rates(AETR). The interpretation of AETRs differs from that of replacement rates. AETRs indicate theshare of earned income, or extra earned income, that is not received by the family. In other words,they express the amount of earnings which is “taxed away”, either via means-testing procedures,cancellation of benefits or income taxes.

The definition of AETR is:

AETR = 1 – net income in work – net income out of workchange in gross income

Hence, for example, in Column 2 the AETR should be interpreted as being the difference in netfamily income when the principal earner is working part-time as opposed to being unemployed,divided by the gross part-time earnings and subtracted from one. So in Australia, 71 per cent of anypart-time earnings will be lost in the form of taxation or reduced benefit entitlement, whereas86 per cent of such earnings would be taxed or means-tested away in Denmark. Column 3 givesthe AETR when moving from unemployment to full-time work. In Columns 4 and 5, the AETR iscalculated for the second earner in the household, assuming that the primary earner has APWearnings in each case. In Columns 6 and 7, the AETR is calculated for the second earner in thehousehold, assuming that the primary earner is unemployed, and receiving benefits from previousinsured full-time employment. Column 9 gives the AETR when moving from unemployment in the60th month to part-time employment.

Part-time work and two-earner couples

46 Benefit System

s and Work Incentives

Table 4.1. Relative incomes for part-time work and two-earner couplesUnemployed/ Part-time Full-time Full-time Full-time Unemployed/ Unemployed/ Unemployed after Part-timenon-employed employed/ employed/ employed/ employed/ part-time full-time 5 years of employed

non-employed non-employed part-time full-time employed without employed unemployment/ after 5 yearsemployed employed benefit entitlements non-employed of unemployment/

non-employed0/0 40/0 100/0 100/40 100/100 0/40 0/100 0/0 40/0

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9

Australia 72 86 100 142 187 44 100 72 86Austria 71 50 100 134 182 98 148 69 50Belgium 60 56 100 121 156 98 133 63 67Canada 68 68 100 132 175 102 147 59 86Czech Republic 77 51 100 134 174 113 159 98 98Denmark 77 88 100 124 160 110 138 97 68Finland 87 93 100 141 184 115 158 100 100France 79 88 100 125 173 104 146 51 77Germany 80 71 100 133 166 115 157 73 87Hungary 74 67 100 138 178 113 152 59 67Iceland 59 50 100 111 146 76 127 80 74Ireland 64 52 100 136 177 83 125 64 89Italy 47 55 100 135 179 88 132 11 55Japan 59 41 100 139 197 100 159 71 80Korea 54 41 100 139 191 97 159 10 41Luxembourg 90 52 100 140 174 131 167 77 90Netherlands 82 88 100 133 181 111 158 78 78New Zealand 64 79 100 141 197 79 100 64 79Norway 73 84 100 127 162 103 141 72 65Poland 42 59 100 140 200 75 131 35 48Portugal 77 45 100 135 178 116 168 6 45Spain 76 86 100 136 216 111 164 46 45Sweden 85 92 100 130 179 119 158 100 92Switzerland 88 88 100 132 177 117 162 68 65United Kingdom 67 80 100 141 192 100 115 76 105United States 59 59 100 142 196 121 175 51 76

Note: Waiting periods are not considered.Source: OECD.

47

Table 4.2. Average effective tax rates for part-time work and two-earner couplesUnemployed/ Part-time Full-time Full-time Full-time Unemployed/ Unemployed/ Unemployed after Part-timenon-employed employed/ employed/ employed/ employed/ part-time full-time 5 years of employed

non-employed non-employed part-time full-time employed without employed unemployment/ after 5 yearsemployed employed benefit entitlements non-employed of unemployment/

non-employed0/0 40/0 100/0 100/40 100/100 0/40 0/100 0/0 40/0

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9

Australia - 71 76 10 28 71 76 - 71Austria - 149 74 22 25 40 30 - 142Belgium - 164 68 59 55 24 42 - 167Canada - 100 72 32 36 27 32 - 44Czech Republic - 165 78 15 28 11 20 - 100Denmark - 86 86 56 56 62 57 - 122Finland - 92 92 26 38 52 49 - 100France - 80 80 40 30 41 33 - 32Germany - 116 85 38 51 35 42 - 74Hungary - 117 76 12 28 12 28 - 81Iceland - 123 70 26 36 60 63 - 47Ireland - 126 55 70 49 52 25 - 117Italy - 84 56 29 35 16 30 - 10Japan - 141 64 14 15 11 12 - 56Korea - 130 58 10 16 0 3 - 28Luxembourg - 195 91 2 27 0 26 - 70Netherlands - 89 86 36 38 46 42 - 100New Zealand - 72 72 22 26 72 72 - 72Norway - 77 77 43 77 36 42 - 100Poland - 60 44 5 4 20 14 - 70Portugal - 173 79 21 29 11 18 - 11Spain - 79 78 19 19 21 20 - 102Sweden - 85 88 39 36 31 41 - 116Switzerland - 100 84 24 27 22 25 - 100United Kingdom - 75 74 20 29 35 63 - 93United States - 101 66 14 22 -25 6 - 48

Note: Waiting periods are not considered.Source: OECD.

Part-time w

ork and two-earner couples

49

5. POLICY DEVELOPMENTS

Introduction

The situation presented in this publication applies to 1995. Most countries have sinceadjusted their benefit payment rates. Whilst affecting the absolute benefit amounts, such adjustmentsdo not alter the relative generosity of benefits or the way in which they interact with each other andwith the income tax system. However, some countries have also introduced changes to theirbenefit system. The most important of such changes, those that by virtue of altering the functioningof the tax and benefit systems may affect the incentive-structure of working and unemployedhouseholds, are briefly described in this chapter. More detailed information is available in thecountry-by-country descriptions on the Internet (see foreword).

Major policy trends in OECD countries

Tightening eligibility conditions for unemployment benefits

With unemployment figures at a persistent high, many OECD countries have started to reviewthe tax and benefit system’s role as a source of financial incentives to work. Some countries haveintroduced a reform in unemployment benefits. Canada has put in place a system wherebyunemployment benefit recipients can gain credit-points which give them entitlement to spells ofpaid employment during benefit receipt. Some other countries, like Austria, have increased therequired employment/contributions record for repeat UI-claims. Finland, Iceland, the Netherlandsand Norway have tightened eligibility criteria for all claimants. Denmark, Finland and Swedenhave reduced benefit payments.

The requirement that one be looking for work in order to qualify for assistance benefits is nowmore rigorously enforced in Finland (especially for young unemployed), and in the Netherlands.Unemployment insurance and assistance benefits in the United Kingdom have been combinedinto one single benefit (Job-Seeker’s Allowance, October 1996) which involves more active helpwith the work search. Changes to the UI-benefit in Switzerland (which took effect during 1996) arealso aimed at a speedier reintegration of beneficiaries.

Extending the possibilities for part-time and occasional work

Regardless of whether part-time and occasional jobs lead to permanent employment, they dohelp the beneficiary maintain contact with the labour market. Such jobs can therefore only increasethe likelihood of swift re-employment. The structure of the tax and benefits system, in many countries,does little to encourage the beneficiaries or their partners to enter short hour or temporary

50


employment (see Doudeijns, 1998). Some OECD countries have recently implemented reforms toimprove work-incentives. The means-test of unemployment benefits in Australia has recently beenredefined on an individual basis so that one partner’s earnings do not disqualify the other fromentitlements. Further changes to the Australian benefit system are based on the same principle ofindividual means-testing. At the same time, means-tests are increasingly calculated according tochanges in family income. In January 1997, Canada defined eligibility for UI benefits on hours-basedrequirements, thus allowing for “small jobs” to contribute to meeting insurance eligibilityrequirements. The beneficiary may earn up to 25 per cent of his benefit income without beingsubjected to the means-test. The benefit reform in the United Kingdom has extended possibilitiesfor recipients and their partners to work in part-time employment.

Implementing employment-conditional benefits

Employment conditional benefits may result in increased work incentives which does not leadto lower benefits for full-year recipients. Table 2.7 (p. 23) indicates which such benefits exist indifferent OECD countries. Canada, the United Kingdom and the United States are experimentingwith extending their existing benefits to those without dependants. In Ireland, New Zealand andthe United Kingdom, new benefit types are being introduced. Since late 1996, Ireland and theUnited Kingdom have had a so-called “Back-to-Work Bonus”, which is paid to long-term recipientswho leave benefit for paid employment.

51

ANNEX: ASSUMPTIONS AND LIMITATIONS

Introduction

Various assumptions have been made in calculating the net incomes in and out of work on acomparable basis across countries. The first section of this annex outlines the assumptions made incalculating benefit amounts. The second section looks at the tax treatment of benefit income andearnings, and the third section at the income concept of the average production worker earningson which calculations are based. Both these sections are relatively brief; with greater detail beingfound in OECD, 1996b. The fourth section outlines the treatment of regional differences in tax andbenefit systems. The fifth one defines the replacement rate concept used in presenting results in therest of the report.

All net incomes, replacement rates and other outcomes in Chapters 3 and 4 are based on the taxand benefit system in effect as of 1 July 1995. The typical payment rates and general systemsdescribed in Chapter 2 also reflect the situation as of 1 July 1995.

1. Benefit assumptions

Benefits included

Benefits included in the calculations of “out of work” net incomes exclude benefits “in-kind”.Hence free school meals, subsidised transport, free health care, etc., are not included. Occasional,irregular or seasonal payments (e.g. for Christmas or cold-weather) as well as benefits strictly relatedto the purchase of particular goods and services (other than housing or child care as describedbelow), such as rebates for the purchase of butter in some countries in the European Union, reducedprice transport, purchase of domestic fuel or purchase of medical insurance and prescriptions arenot included either. An exception is made for Food Stamps in the United States, as these areconsidered to correspond closely to social assistance cash benefits paid in other countries.

Cash benefits considered consist of unemployment insurance, unemployment assistance, socialassistance, family benefits, housing benefits, child-care benefits, lone-parent benefits, andemployment-conditional benefits. Benefits which are therefore excluded include old-age cashbenefits, early-retirement benefits, sickness, invalidity and occupational injury benefits and benefitsrelating to active labour market policies. Also excluded are payments made to those unemployedas a result of collective dismissal, such as the Cassa Integrazione Guadagni (CIG) and MobilityBenefits in Italy. Severance pay, even where legally required of employers, is not included.

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All differences in the timing of benefits (e.g. whether they are paid in arrears or in advance)have been ignored. Certain tables refer to benefits in the first month of unemployment. This is afterany waiting period between becoming unemployed or registering for benefit and becoming entitledto receive the benefit. The results in the tables in the country by country descriptions on theInternet are annualised, as tax systems are based on annual, not on monthly, incomes. Whereinitial benefits are shown, the amounts correspond to those received (after the waiting period) andpaid (in the case of income taxes) during the first month, multiplied by 12. Those cases where theactual benefit durations are less than 12 months are indicated in the table notes.

Unemployment insurance

An examination of unemployment insurance entitlement comprises the conditions for beingentitled to benefit; the amount of benefit to which a person is entitled; and the length of benefitduration.

The standard assumption is that the benefit recipient is 40 years old and has been continuouslyfull-time employed and contributing to the unemployment insurance fund since the age of 18. Thisimplicitly means that the individual has a full contributions record in the period beforeunemployment; that where insurance is voluntary (as in some Nordic countries), the individualhas contributed to the fund; and that the individual falls into the “standard” unemployment insurancesystem (older workers are often eligible for a longer duration of benefit receipt). The assumptionmeans that in virtually every case the individual is entitled to unemployment insurance, wheresuch insurance exists. However, in some of the tables included in Chapter 3, it is assumed that theindividual is 20 years old, living alone and has never worked. In this case, the requirements for fulleligibility for unemployment insurance are usually not met, and insurance benefit will be received,if at all, at a reduced rate or for a short period of time.

The amount of insurance benefit is normally based on previous earnings. The level of previousearnings is defined with reference to the average production worker level of earnings (see below).It is assumed that the stated proportion of this level of earnings has been earned over whateverperiod upon which assessment for benefit is calculated. Where minimum or maximum levels ofbenefit are included in benefit regulations, these are applied. The individual is assumed to be fullyunemployed (see Chapter 4 for a relaxation of this assumption). If the family situation of theunemployed person (dependent spouse or children, for example) warrants additional supplementarypayments, these are included. Benefits are sometimes reduced after a period of receipt. Thereductions may be related to age and/or contributions record. Such reductions are applied asappropriate, using the assumptions about age and contributions record given in the previousparagraph.

It is assumed that the individual receives the benefit for the length of time to which he or she islegally entitled. This implies that the person meets existing requirements concerning actively seekingwork. In some countries, individuals have the right to enter an active labour market programme(training, subsidised employment, etc.) and thereby requalify for insurance benefits. For the purposeof this study, it is assumed that individuals do not enrol in such programmes. Special rules fortemporary layoffs are not included. Special rules for part-time work during unemployment are notincluded in Chapter 3, but are applied, if relevant, in the calculations in Chapter 4.

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Unemployment-related means-tested benefits

This section considers the assumptions made where cash benefits are means-tested, particularlyfor unemployment assistance and social assistance. The special assumptions made for housing,child-care, employment-conditional and lone-parent benefits are considered in the followingsections.

Means-tested benefits are usually paid only when the assets of a family are less than a certainlevel, and are reduced in amount as the income of the individual or family increases. The degreeto which these interact varies greatly in each country. Furthermore, social assistance benefits areoften discretionary and the level is decided locally. Hence the assumptions applied can have amajor effect on the benefit income to which those who are out of work are supposedly entitled.The general assumptions applied are the following:

• Entitlement for means-tested unemployment assistance and labour market supportprogrammes may depend on age and employment and/or contributions record. Wherethis is the case, the assumptions outlined in the section on unemployment insurance areapplied. Similarly, job-search activity and duration of benefit are as described in that section.

• Social assistance may only be paid when all other sources of support have been exhausted.This is sometimes interpreted as meaning the extended family has a duty to support thosewithout resources. It is assumed that no such support is forthcoming.

• The assets of a family must often be below a determined level in order to qualify for benefit.The assets ceiling may be relatively high (several hundred thousand dollars, excluding thevalue of housing in Australia) or very low (often requiring sale of housing and even of cars).It is assumed everywhere that in order to qualify for the benefit the family possesses negligibleassets.

• Benefits are reduced as family or individual income increases. For the purpose of thisstudy, however, it is assumed that families have no source of income other than from benefits.Chapter 4 considers the effects of relaxing this assumption of no income to allow part-timework and considers the case of multiple earners in a family.

• Social assistance in some countries may impose conditions on the behaviour of spouses. InSweden, both spouses must be searching for work in order to be entitled to social assistance.In Australia, each spouse is entitled to benefits, providing each meets certain activityrequirements. In these cases, it is assumed that both spouses are fulfilling all requirementsfor full social assistance benefits to be received.

• Social assistance often varies according to local guidelines, the individual needs of families,and discretion of benefit officers. Where benefit amounts are stipulated in nationalregulations, these are used. Even where there is local discretion, there are often nationalguidelines, and they are again used. In other cases, “typical” rates for each family typehave been used. The full listing of social assistance amounts, and whether they are basedon national rates, national guidelines or typical rates, are given in Table 2.9 of Chapter 2.

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• In some countries, social assistance may be used to supplement other income sources,including earnings and insurance benefits, where these are below the level of socialassistance. Unless otherwise indicated, this has not been taken into account in thecomparative tables.

Family benefits

Family benefits may be unrelated to the incomes of the family or means-tested. Where they aremeans-tested, the assumptions given in the previous section are applied. Benefit amounts are oftenrelated to the age of the child. The tables in Chapters 3 and 4 and the tables in the country-by-country descriptions on the Internet are based on the assumption that the family has two children,aged 6 and 4. Where different assumptions have been made, the number of children and theamounts relevant for the ages are given in the notes to the tables.

Housing benefits

Housing benefits are included where they consist of a cash-benefit paid to individuals with lowincomes or who are unemployed and who are living in private rented accommodation. Housingbenefit may consist of a general means-tested benefit which supplements other benefits, or it mayconsist of special rules concerning the treatment of housing costs in the calculation of socialassistance levels. In some cases, it may be a combination of the two systems.

Subsidies for the construction of housing, purchases of owner-occupied housing, subsidies forthe interest payments on owner-occupied housing, and other similar payments are not included.Similarly, the assumption of living in private rental accommodation means the benefits in-kindprovided by social housing, usually involving rents below the market rate, are not taken into accountin the comparative tables.

Housing benefits are often very complex. A very simple assumption has been applied in thisstudy, which has to be taken into account when interpreting the results. It is that housing costsconsist entirely of rent, and the level of rent for all family types regardless of income level andincome source is 20 per cent of the gross earnings of an average production worker. (Country-specificassumptions, where required, are indicated in the country-by-country descriptions on the Internet).

This implies:

• It is assumed that single people pay the same rent as couples with two children.

• Special rules (e.g. social assistance for non-rent-related housing costs such as water andelectricity) are not explicitly covered.

• A household living on social assistance is assumed to be paying the same rent as a similarhousehold with average earnings. It is further assumed that a household moving frombeing unemployed to earning the average wage will not undergo a change in housingcosts.

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The housing cost assumption may not therefore reflect the typical housing costs of those livingon benefit income in each country. It is justified on the grounds that, first, no practical alternativesare obviously preferable, and second, that it is transparent and easily understood.

Where housing benefits vary by area, a typical rate has been chosen. Assumptions concerningmeans-testing are the same as in the Section “Unemployment-related means-tested benefits” above.

Child-care benefits

Child-care benefits are not included in the tables in Chapter 3 except where explicitly indicated(Table 3.8). A typical payment for the child-care costs of two children has been assumed for eachcountry. This typical amount may reflect subsidies by central or local government, and may thereforebe zero. Hence, net incomes are shown as a percentage of net incomes in work after child-carecosts – a different presentation from those applying to the rest of the comparative tables in thisvolume. Where child-care benefits are means-tested, assumptions are the same as in the Section“Unemployment-related means-tested benefits” above.

A simple assumption has been made as to the level of child-care costs. It is assumed that thetotal, unsubsidised child-care cost for one child in care equals 15 per cent of the gross earningslevel of an average production worker in each country. For those countries where child-care costsare contingent upon the claimant’s income level, rather than on case-related subsidies to the claimantor to the day care centre, child-care costs are as dictated by the system. Where child care isprovided free of charge, the assumption is that child-care costs to the claimant are zero.

Employment-conditional benefits

Employment conditional benefits may be paid via either the tax administrative system (as inCanada, New Zealand, the United States) or the benefit system (Ireland, Italy, the United Kingdom).Both types of payment are considered benefits for the purpose of this report. Such benefits are paidonly to those with earnings or those who are working more than a certain number of hours perweek. They do not therefore affect incomes of those families out of work. They do affect theincomes of those working part-time, however (see Chapter 4), and the assumptions in that chapterabout hours worked and incomes earned determine the level of employment-conditional benefit.Delays in payment of benefit (which are often long -- most recipients in the United States receivethe payment in arrears at year-end) are ignored, with benefit income being calculated as it accrues.Means-testing provisions have been applied following the principles given in the Section“Unemployment-related means-tested benefits”. Provincial payments of this sort, which exist inCanada, have not been applied.

Lone-parent benefits

It is assumed that lone parents do not receive any alimony. Where it is assumed that receipt ofbenefits depends in part on co-operation with official attempts to identify the absent parent, it isassumed that such co-operation has been forthcoming. It is assumed that no other benefits(e.g. widow’s pensions) are received, except for other means-tested benefits as outlined in previous

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sections. Means-tests are applied to lone-parent benefits following the guidelines in the Section“Unemployment-related means-tested benefits”.

2. Assumptions about taxation

This section presents an overview of the assumptions used in calculating the tax due on earningsand benefits. Greater detail can be found in the methodology section of the OECD publication(1996b).

Only personal income tax and employees’ social security contributions payable in respect ofearnings and benefits are included. Social security contributions made to the private sector areexcluded. Central, state and local government income taxes are included.

Only standard tax reliefs are included when calculating tax payments. These are reliefs unrelatedto the actual expenditures incurred by the taxpayer and are automatically available to taxpayerswho satisfy the eligibility rules specified in legislation. Typical standard reliefs include the basicreliefs available to all taxpayers, or wage earners, or benefit recipients, irrespective of family status;standard reliefs available to taxpayers depending on their marital status; standard reliefs granted tofamilies with children and the standard relief relating to work-related expenses.

Non-standard reliefs are not included. Non-standard reliefs include those relating to costs ofowner-occupied housing, relief for interest on qualifying loans, insurance premiums, contributionsto savings or pension plans, purchase of medical insurance, and charitable donations. An exceptionis made for tax relief for purchase (but not provision) of child-care.

3. The assumption about earnings

Gross earnings in-work are expressed as a percentage of the average production worker earnings.Details of how the APW earnings are calculated in each country can be found in OECD publication(1996b). The broad guidelines are as follows.

• Earnings are calculated for Division 3 of the International Standard Classification of allEconomic Activities (ISIC, United Nations, New York, 1968). However, in Finland, Franceand Luxembourg it is not possible to separate mining from manufacturing earnings.

• Data relate to the average earnings for the country as a whole.

• The worker is an adult (male or female) directly engaged in a production activity. Thisdefinition includes manual workers and minor shop-floor supervisory workers. White-collarworkers are excluded, except in New Zealand, where the inclusion of this group of workersprobably increases average earnings by 5-10 per cent.

• The worker is assumed to be fully employed for the entire year, although the averages forFinland and Ireland include part-time workers. It is assumed that the individual will not beabsent from work because of illness at any time during the year.

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• Earnings are taken to include average amounts of overtime and regular cash supplements(Christmas Bonuses, thirteenth month payments, vacation month payments). Regular annualbonuses are included where they do not take the form of dividend payments.

• Fringe benefits are excluded.

4. Treatment of regional differences

Variations on the assumptions given above stem from regional differences in tax and benefitsystems. The broad principles are as follows:

• Regional variations consisting of deviations from general national guidelines, are not takeninto account. Hence, for example, extensions of unemployment benefit duration inhigh-unemployment Provinces and States in Canada and the United States are notconsidered.

• Where regional variations result from regional or local autonomy in setting regulations,either the average of the different local regimes, or the regime applying in a particularregion, can be considered typical.

Eight countries have regionally varying tax systems (two others – Japan and Norway – have localincome taxes which do not ). In five of these eight [Canada (excluding Quebec), Denmark, Finland,Iceland and Sweden] it is possible to calculate a weighted average of the single rate which appliesin each area to a tax base which does not differ significantly from that of the central government taxsystem. This is used in the calculations of net incomes in and out of work. In the other threecountries (Belgium, Switzerland and the United States) calculation of such an average rate is notpossible. Typical rates are used instead: the maximum permitted rate for Belgium, and the ratesapplying in Zurich (Canton and Commune) and Detroit (Michigan) for Switzerland and the UnitedStates respectively (see OECD, 1996b, for more details).

Information making it possible to calculate country-wide average benefit payments is not availableto the same degree, and typical cases are more commonly used. Variations in rates are typicallyfound in social assistance, although housing benefits may also be calculated according to regionalvariation. Where typical rates are used for the tax calculations, the benefit system in that regionhas been followed for consistency. Chapter 2 indicates the payment rates applied in this report.

Note that the assumptions about housing costs and benefits mean that variations in housingcosts across different regions are ignored.

5. The definition of replacement rates

Comparative tables in Chapter 3 are presented in the form of replacement rates. In all casesreplacement rates are defined as being net of taxation. Except where otherwise noted, the definitionof net replacement rates (NRR) is:

NRR = benefit income of the family when unemployed – tax on benefit income (A1)earned income + benefit income of the family when employed – tax on earnings and benefits

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Given the assumptions about which benefits are included in this study, as well as the assumptionthat individuals are fully unemployed, and that there is one earner in the family, this can be rewrittenas:

NRR =A = gross unemployment benefits + family benefits + housing benefits – income tax + social assistance (A2)B = gross earned income + family benefits + housing benefits – income taxes + social assistance

The denominator consists of earned income plus benefits which are due to families meetingthose criteria, with that income level. The numerator, benefit income, is calculated on the basis ofthe individual having previously had that level of earnings included in the denominator. Hence theNRR can be interpreted in two ways:

• The amount of income which someone with a given level of earnings would receive werehe or she to stop working, expressed as a percentage of current earnings.

• The ratio of current benefit income of those without work to the income they would receivewere they to find a job with the same level of earnings which they had before they lost theirjobs.

The earnings which those currently without jobs might expect to receive might be higher or(more likely) lower than that level of earnings they had before they lost their jobs. This possibilityis not considered in this report.

There are two main options for income concepts: before housing costs and after housing costs.In contrast to other studies (e.g., the Seven Country Study), this report uses a before-housing costconcept. Before and after housing costs give a similar picture of work incentives, but the absolutelevel of replacement rate differs. This is particularly relevant given the relatively simplistic assumptionabout housing costs followed in this report. If actual housing costs are lower or higher than thestandard 20 per cent of APW earnings assumption, then actual net replacement rates facing benefitrecipients will differ from those presented in Chapter 3 of this report.

In Table 3.8, an exception is made to the general definition of NRR given above because of thewide variety of methods used to support child care in OECD countries. The NRR is defined as:

NRR = A (A3)B – child-care costs + child-care benefits

Where provision of child care is subsidised, costs may be lower than where purchase is subsidised.By defining incomes when employed as being net of child-care costs and benefits, comparabilitybetween those countries which subsidise provision of child care as compared with countries whichsubsidise purchase of such facilities.

6. Representativity

Typical cases can never be fully representative of the actual situation in a particular country. Astudy of the representativeness of the APW has been carried out in OECD publication (1996b).

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BIBLIOGRAPHY

CENTRAL PLANNING BUREAU (1996), Net Replacement Rates: A Transatlantic View, The Hague.

COUNCIL OF EUROPE (1992), Comparative Tables of Social Security Schemes, 5th Edition, Councilof Europe Press, Belgium.

DOUDEIJNS, M. (1998), “Are benefits a disincentive to work part-time”, Part-time Paradoxes, inJ.O’Reilly & C. Fagan (eds.), Routledge, London.

MISSOC (1995), Social Protection in the Member States of the European Union, Office for OfficialPublications of the European Communities, Luxembourg.

OECD (1991), The Employment Outlook, Paris.

OECD (1994), Evidence and Explanations, Part II: The Adjustment Potential of the Labour Market.The OECD Jobs Study, Paris.

OECD (1995), The Employment Outlook, Paris.

OECD (1996a), The Employment Outlook, Paris.

OECD (1996b), The Tax/Benefit Position of Production Workers, Paris.

OECD (1997), Making Work Pay: Taxation, Benefits, Employment and Unemployment, The OECDJobs Strategy, Paris

SEVEN COUNTRY STUDY (1995), Unemployment Benefits and Social Assistance in Seven EuropeanCountries: A Comparative Study, Ministry of Social Affairs, The Hague.

UNITED KINGDOM DEPARTMENT OF SOCIAL SECURITY (1996), Social Assistance in OECDCountries, HMSO, London.

UNITED STATES DEPARTMENT OF HEALTH (1995), Social Security Programs throughout the World,Washington DC.

UNITED STATES HOUSE OF REPRESENTATIVES (1994), Overview of Entitlement Programs: 1995Green Book, United States Government Policy Office, Washington

OECD PUBLICATIONS, 2, rue Andre-Pascal, 75775 PARIS CEDEX 16PRINTED IN FRANCE

(81 98 05 1 P) ISBN 92-64-16073-6 – No. 50127 1998

Documents

AND WORK INCENTIVES - hvtc.edu.vn€¦ · This compendium builds on that work by presenting in a systematic way the complicated interactions of tax and benefit systems. It includes