Welfare Reform in European Countries: A Microsimulation Analysis

This article compares the effects of increasing traditional welfare to introducing in‐work benefits in the 15 (pre‐enlargement) countries of the European Union. We use a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins, and the EUROMOD microsimulation model to estimate current marginal and participation tax rates. We quantify the equity‐efficiency trade‐off for a range of elasticity parameters. In most countries, because of large existing welfare programmes with high phase‐out rates, increasing traditional welfare is undesirable unless the redistributive tastes of the government are extreme. In contrast, the in‐work benefit reform is desirable in a very wide set of cases.