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2001:01 Income maintenance policies, houshold characteristics and work incentives in the Czech republic

Petra Štěpánková

This paper investigates work disincentives imposed by the income maintenance system on the unemployed with certain household characteristics. It firstly specifies which parameters of the income maintenance system may impose work disincentives, and then attempts to identify the relationship between the work incentives and the household characteristics. It shows that the income maintenance system is more generous towards larger families with children.
The binomial Logit estimation of outflows to employment using the Labor Force Survey Data evidences that between the fourth quarter of 1998 and 1999, marked as a recession period, the children characteristics were not the significant determinants of outflows from unemployment to employment. Nevertheless, the calculations of the gross probabilities show that Social Assistance recipients from the families with children have much lower outflow from unemployment.
Using the empirical results some passive labor market policy options are discussed.

Summary
The main aim of this study is to examine the link between the income maintenance system in unemployment and work incentives of the unemployed. The first chapter is an introduction The main motivation of this analysis is an increase in long-term unemployment in the Czech Republic.
The study starts with the description of the social benefits for the unemployed and proceeds with the analysis of the parameters that may have impact on work incentives. Firstly, it focuses on the Unemployment Insurance (UI). This is one of the most parsimonious schemes in Europe and does not seem to harm the motivation. Nevertheless, if the recipients of UI work the whole amount is taken away which may deter people to accept some less attractive seasonal or part-time jobs that might serve as a bridge job to regular employment. Further, the UI is paid only for six months and than the unemployed are pushed into the means tested social assistance (SA) scheme. Besides UI and SA, there are some other social benefits that affect the worker's decision to find a job. The main problem seems to be the concept of Minimum Living Standard (MLS) that embodies very small economies of scale. Therefore, large families with children are better off. In the Czech Republic the MLS increases by 77 percent with the additional person in a household. In contrast to CR in Netherlands the increase accounts only 41percent. Nevertheless, the MLS is indexed in a way that increases economy of scale, and this negative effect is slowly diminishing
Chapter 3 is an empirical part. It is based on the analysis of 1998-1999 data from the Czech Labor Force Survey. The chapter provides several interesting findings. First, it looks at the characteristics of the unemployed, and reveals the heterogeneity with respect to eligibility for the benefits, duration and household characteristics. Than it looks on the gross outflow probabilities of three groups of the unemployed: the UI recipients, the SA recipients and the other unemployed. The data suggest that with probability 77 percent the SA recipients will be unemployed in a year, this is much higher than for the group of all registered unemployed 57 percent. Moreover, this is especially due to SA recipients with children. Further the study provides the estimates of individual transition determinants. The main focus was placed upon the household characteristics such as size and number of children in a family. These explanatory variables seem to be insignificant for 1999 data which may be explained by less favorable economic conditions in 1999 when labor demand characteristics played probably greater role than incentives of labor supply.
Chapter 4 comes up with several policy questions associated with the whole problem. It is stressed that the share of the long-term unemployed is increasing which means that more people will be dependent on the less incentive compatible SA. Moreover, it may be true that the SA recipients are subject to a less strict work test than UI recipients. Furthermore, the adjustment of MLS for larger economies of scale and the allowing the UI recipients to earn some money (under certain threshold) without loosing eligibility for benefits could contribute to greater incentives on the Czech labor market.

Keywords:
work incentives, unemployment, social policy Czech Republic JEL classification: J68, C25, H31