Income benefits for early exit from the labour market in eight European countries

Income benefits for early exit from the labour market in eight European countries


106 pages
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A comparative study
Economic policy - Economic and Monetary Union
Employment policy
Labour market - free movement of workers


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Langue English
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1998 No 3 European Economy appears twice a year. It contains important reports
and communications from the Commission to the Council and the
Parliament on the economic situation and developments. As a
complement to European Economy, the series Reports and studies will be
published on problems concerning economic policy.
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describes in a more succinct way financial and economic developments
in the European Union.
• Series Β —'Business and consumer survey results' gives the main
results of opinion surveys of chief executives (orders, stocks,
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situation and, etc.) in the Community, and other business cycle
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• Series C —'Economic reform monitor' provides brief overviews of
economic developments and the progress of reform in the 10 countries
of central Europe with which the EU has negotiated association
agreements, as well as in the two largest transitional economies to have
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Unless otherwise indicated the texts are published under the
responsibility of the Directorate-General for Economic and Financial
Affairs of the European Commission, rue de la Loi 200, Β-1049 Brussels,
to which enquiries other than those related to sales and subscriptions
should be addressed. European Commission
Directorate-General for Economic and Financial Affairs
1998 Number 3 Incoine benefits for early
exit from the labour market
in eight European countries
A comparative study Abbreviations and symbols used
Member States
Β Belgium
DK Denmark
D Germany
West Germany WD
Greece EL
E Spain
F France
IRL Ireland
I Italy
L Luxembourg
NL The Netherlands
A Austria
Ρ Portugal
FIN Finland
S Sweden
United Kingdom UK
European Community excluding Greece, Spain and Portugal EU-9
EU-10 nyg Spain and Portugal
EU-12- European Community, 12 Member States including West Germany + n, 12r Statesg Germany
European, 15 Member States includingy EU-15+
European currency unit ECU
ATS Austrian schilling
BEF Belgian franc
DEM German mark (Deutschmark)
Danish krone DKK
ESP Spanish peseta
FIM Finnish markka
FRF French franc
GBP Pound sterling
GRD Greek drachma
Irish pound (punt) IEP
ITL Italian lira
LUF Luxembourg franc
NLG Dutch guilder
PTE Portuguese escudo
SEK Swedish krona
CAD Canadian dollar
CHF Swiss franc
JPY Japanese yen
RUR Russian rouble
USD US dollar
IV Other abbreviations
ACP African, Caribbean and Pacific States having signed the Lomé Convention
ECSC European Coal and Steel Community
EDFn Development Fund
EIBn Investment Bank
EMCF European Monetary Cooperation Fund
EMSny System
ERDFn Regional Development Fund
Euratom European Atomic Energy Community
Eurostat Statistical Office of the European Communities
GDP (GNP) Gross domestic (national) product
GFCF Gross fixed capital formation
LDCs Less developed countries
Mio Million
Mrd 1 000 million
NCI New Community Instrument
OCTs Overseas countries and territories
OECD Organisation for Economic Cooperation and Development
OPECn of Petroleum Exporting Countries
PPS Purchasing power standard
SMEs Small and medium-sized enterprises
toe Tonne of oil equivalent
: Not available Foreword
number of EU Member States, with the contribution of mployment is Europe's top priority. The
officials from DG II. The aim of this group has been to Community's employment strategy, as agreed at
improve cross-country comparisons of tax and benefit the extraordinary Luxembourg Summit in E
systems and to examine the labour market implications November 1997, is based on creating a sound macro-
of social and tax policies. The first study, entitled economic environment, coordinating the employment
'Unemployment benefits and social assistance in seven policies of the Member States, and harnessing all other
European countries', examined the impact of tax and s to support employment. These efforts seek
benefit systems on the economic welfare of households to reduce unemployment and to contribute to a well-
via the calculation of net replacement rates. It compared functioning economic and monetary union.
the living standards of those who are unemployed or on
social assistance with those at work. By choosing the There seems to be general agreement on the need to
wage level of an average production worker as a bench­promote active employment policies and continued
mark, it allowed a comparison of the operation of tax-structural reforms, including improving the interplay
benefit systems in different countries to be made in the between tax and benefit systems. Structural reforms
most relevant manner. The study revealed the existence necessarily involve rethinking of the size and role of the
of high net replacement rates in a number of countries, State in the economy. The public sector needs trimming
especially at the lower end of the income scale. This is and restructuring. Overall spending should be reduced
perhaps indicative of inadequate work incentives. It in order to ensure sustainability in public finances and a
also provided evidence that the impact of complex wel­fair level of taxation. But structural reforms are also
fare provisions on work incentives goes well beyond implied by the evolution of demographic patterns
unemployment benefits alone. One needs to consider within the Community, which will see more resources
the effects of taxes, family supplements, means-tested devoted to elderly people in the future. In addition,
benefits and income-related child care fees. demographic trends imply changes to the size and com­
Additionally, in many countries, social assistance guar­position of the workforce. A decline in the population
antees a social minimum and allows one to top up low of working age threatens to curtail economic growth
benefits, thus resulting in a higher net replacement rate and so depress overall living standards. This calls for
than the unemployment benefit. These results have policies to encourage the increased participation of
played an important role in the discussion of the need to elderly people in the labour market. An increase in the
review benefit and tax systems. In Community policy retirement age (both effective and statutory) could yield
discussions, the report has been used in the economic a double gain: on the one hand, lower pension outlays
and structural policy considerations of both the and, on the other, a larger labour force conducive to
Economic Policy Committee and the Economic and higher economic growth and a broader tax base, which
Financial Affairs (Ecofin) Council. would in turn support pension financing. An increase in
the effective retirement age would mean that fewer
people would withdraw from the labour market before
The present study analyses another important feature of
they reached the formal retirement age. It could also
the impact of benefit systems on work incentives,
mean that more people would be willing and able to
namely the problem of early withdrawal from the
work beyond the formal retirement age.
labour market. Just as high benefits may restrict will­
ingness to take up a job, early retirement schemes may
reduce labour supply by encouraging early withdrawal. The present study — which is the second of its kind —
was conducted by a voluntary group of officials from a This aspect of benefit systems is of particular interest benefit systems can work as substitutes for each other, because, as mentioned earlier, demographic develop­
and how this can often have adverse effects. ments imply the need for policies to encourage pre­
Sometimes, for example, short-term benefit systems, cisely the opposite response.
like unemployment benefits, can provide a higher
replacement income than long-term early pension The study was motivated by the observation that labour
schemes. Under certain circumstances, this can encour­force participation among elderly workers has declined
age people to choose unemployment instead of early significantly over recent decades. The analysis of early
retirement. retirement schemes conducted here shows that many
countries have used them as labour market instruments
to reduce labour supply. Current systems encourage This study is an important contribution to the debate on
complete withdrawal from the labour market by the welfare reforms and provides useful information on best
requirement that recipients of benefits should not work. practices. Its publication in European Economy —
On the other hand, the use of part-time retirement Reports and studies highlights the continuing interest of
schemes is rare in all countries. Whilst the replacement DG II in contributing to the debate on the reform of
level of part-time retirement seems high in comparison welfare and social protection systems, which began
with the living standard in full-time employment, it is with the publication of the volume 'The welfare state in
perhaps not high enough compared with full-time retire­ Europe — Challenges and reforms' (European
ment. Additionally, the study discusses how various Economy — Reports and studies, Number 4, 1997).
Heinrich Matthes
Chairman of the Editorial Board of
European Economy