Search results

Macroeconomic shocks such as the recent global economic crisis can have far-reaching effects on the levels and the distribution of resources at the individual and the household levels. A recession associated with a labor market downturn and turbulent property and financial markets gives rise to significant and widespread losses for workers and households. Identifying the likely pattern of losses is, however, not straightforward. This is especially the case at the outset of a severe recession, when up-to-date information about current household circumstances is patchy, and economic conditions are subject to rapid change.

This chapter investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi-country microsimulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low-income groups in Eastern and Southern European countries.

European countries have the world’s most redistributive tax and transfer systems. While they have been well equipped to deal with vertical inequality – fostering redistribution from the rich to the poor – less is known about their performance in dealing with horizontal inequality, that is, in redistributing across socioeconomic groups. In a context where individuals may not only care about vertical redistribution, but also about the economic situation of the specific groups they belong to, the horizontal dimension of redistribution becomes politically salient and can be a source of social tensions. The authors analyse the performance of the 28 EU countries for redistribution across (i) age groups; (ii) occupational groups; and (iii) household types over the period 2007–2014 using counterfactual simulation techniques. We find a significant degree of heterogeneity across countries: changes in the tax and transfer system have particularly hit the young and the losers of occupational change in Eastern European countries, while households with greater economic security have benefited from these changes. The findings of this study suggest that horizontal inequality is a dimension which policy-makers should take into account when reforming tax and transfer systems.

As unemployment rises across the European Union (EU), it is important to understand the extent to which the incomes of the new unemployed are protected by tax–benefit systems and to assess the cost pressures on the social protection systems of this increase in unemployment. This chapter uses the EU tax–benefit model EUROMOD to explore these issues, comparing effects in five EU countries. It provides evidence on the differing degrees of resilience of the household incomes of the newly unemployed due to the variations in the protection offered by the tax–benefit systems, according to whether unemployment benefit is payable, the household situation of the unemployed person and across countries.

In Germany, the economic crisis 2008/09 was restricted to export-oriented industries such as automotive, chemistry, and mechanical engineering and hence to industries with a high proportion of qualified employees. Therefore, we expect the most current crisis to have a reversed effect on the relative earnings position between more and less qualified in contrast to a development that favored the more qualified since the beginning of the 1980s. Our empirical study is based on the Institute for Employment Research (IAB) Establishment Panel, a representative German establishment level panel data set that surveys information from almost 16,000 personal interviews with high ranked managers.

Despite the “German Job Miracle,” conditional difference-in-differences estimations to control for observed and unobserved heterogeneity reveal substantial employment reductions in establishments affected by the economic crisis. Falls in employment are strongest in plants with a relatively low proportion of qualified workers. Furthermore, our results indicate that the economic crisis is associated with a decline in wages, but only in those establishments that do not operate working time accounts. In sum, we do not find evidence for the current crisis having a reversed effect on the relative earnings position. Obviously once again, the higher qualified are better off than the lower qualified.