Labor Supply and Inequality Effects of In‐Work Benefits: Emiprical Evidence from Serbia

The labour force participation rate of the working age population in Serbia in 2012 stood at 64%, while the inactivity rate was considerably above the EU average. There are several studies arguing that high inactivity rates are mostly due to the design of the tax and the benefit system. Our paper provides ex‐ante evaluation of the impact of in‐work benefit schemes in Serbia on labour supply and income distribution. In‐work benefits are meanstested transfers given to individuals conditional on their employment status. For the purpose of this analysis we combine the tax and benefit micro‐simulation model for Serbia with a structural discrete choice labour supply model. We simulate two in‐work benefit schemes: the first one is a means‐tested one on family income while the second one is a purely individualized policy. Our results show that the IWB assessed at the household level encourage the participation of single individuals, while benefit that is conditioned on individual earnings have greater incentive effects than the family‐based alternatives since they do not discourage the participation of second‐earners in a couple. Most of the behavioural changes take place among the poorest individuals with important redistributive effects.