Policy Analyses at IZA Hilmar Schneider IZA IDSC Scientific Advisory Board Meeting, Bonn, May 29, 2009

2 Fields of Evidence Based Policy Analysis at IZA ► Evaluation of Active Labor Market Policy ► Simulation of Reform Proposals ► Laboratory Experiments ► Comparative Institutional Analyses

3 Evaluation Projects at IZA ► The Impact of the Labor Market Reform in Germany on the Effectiveness and Efficiency of Training Programs (BMAS) ► Evaluation of the Active Labor Market Program "Beautiful Serbia" (UNDP) ► Promotion of Self-Employment (IAB) ► Vouchers and Case-Workers in Public Training Programs ► The Effect of Active Labor Market Programs on Not-Yet Treated Unemployed Individuals

4 Example: Effectiveness of training programs Source: Schneider et al. (2006) Start of training program before Start of training program after month since program entry difference of employment probability between particitpants and non-participants

5 Example: Reform effect of training programs Source: Schneider et al. (2006) difference of differences of employment probabilities of participants and non- participants before and after the reform difference of employment probability month since program entry

6 Simulation Projects at IZA ► Potential Employment Effects of a dual wage subsidy in the low wage sector (MAGS NRW) ► Impact Assessment of a wage subsidy proposed by the German Council of Economic Advisors (SVR) ► Employment Impact and Fiscal Impact of the IZA Workfare Model ► Employment Impact and Fiscal Impact of the Bofinger/Walwei-Concept (BMF) ► Employment Impact and Fiscal Impact of the Althaus Proposal for a Basic Income ► Employment Impact and Fiscal Impact of the Workfare Concept Proposed by the Federal Ministry of Economics (BMWi)

7 Simulation Models ► Policy simulations can be interpreted as quasi-experiments to ex-ante analyze reform proposals ► Map the complex tax benefit system and provide a tool to answer "what if" questions about different reform options ► Predict the impacts of policy changes on individuals (gains and losses, income distribution, labor supply), the government budget and key aggregated economic indicators (e.g. growth, employment, prices, consumption)

8 Microsimulation (MSM) ► Model structural characteristics of individual micro units within a particular system ► Great flexibility regarding the mapping of the complex tax benefit system ► Simulate first round effects (no behavioral responses) and second round labor supply effects ► Partial equilibrium models that do not consider the broader economic environment in which the micro units are acting

9 IZAψMOD: Status Quo ► Static behavioral microsimulation model ► Data: GSOEP = representative panel survey of private households ► Tax benefit calculator: direct taxes, social insurance contributions and cash benefits ► Structural discrete choice household labor supply model ⇒ Econometric estimation of labor supply elasticities

10 IZAψMOD: Structure Currently under construction

11 Example: Comparison between Workfare and Basic Income ► Debate about reform to boost employment of low-wage / low-skilled workers ► Several reform proposals with different flavors of some kind of negative income tax concept (low wage subsidies, basic income) ► Illustration of application of IZAψMOD by comparing two extreme scenarios: basic income vs. workfare ► IZA workfare concept (IZA): –Receipt of social benefit for people capable of work is conditioned on (fulltime) participation requirement –This concept sets negative incentives for people not working ► Althaus’ basic income (ABI): –Unconditional receipt of universal basic income (800 € per month including health insurance) –Taper rate of income: 50% until 1600 €, above 1600€: flat income tax of 25% –Concept of negative income tax with the idea of setting positive labour supply incentives

12 Application: Results I

13 Application: Results II

14 Application: Results III

15 Application: Results IV a) IZA Workfare (IZA) ► Large employment effects: about 1.4 million individuals additionally supply positive working hours compared to the reference scenario 2007 (slightly less in full time equivalent) ► Positive budget effects: increase in net revenue of about 25 billion euros (including second round effects) compared to the reference scenario 2007 (first round effect: about 2.5 billion Euro) ► In the medium-term, about 500,000 workfare jobs are needed within the framework of this concept which leads to additional costs b) Althaus’ Basic Income (Althaus) ► Sizeable positive employments effects: more than 400,000 individuals entering the labor market compared to the reference scenario (619,000 in full time equivalent) ► However, there are massive negative budget effects: in the medium term, the budget will be burdened by about 220 billion Euros (and even 230 billion without accounting for behavioral responses)

16 Conclusions and Outlook ► Access to micro data is an important pre-condition for reliable policy analysis ► Heterogeneity on the micro level is a key for the identification of structural and causal relationships ► However, policy analyses are limited by survey data ► Reliability could be improved by usage of official statistics ► Access to micro data at official statistics has remarkably improved during the last decade ► However, it’s potential is still underdeveloped, because economic key variables are collected independently (e.g. monthly wages and working hours of workers, investment and production of firms) ► Legislative initiatives are required in order to reach new horizons

IZA – Shaping the Future of Labor Hilmar Schneider IZA, Bonn, Germany Tel: +49 (0) Fax: +49 (0) Web: