Increasing labour market activity of poor and female: Lets make work pay in Macedonia Nikica Mojsoska-Blazevski Marjan Petreski Partner: FREN (Foundation for Advancement of Economics)

Outline A. Background and disincentives to work Motivation for the research Objective Disincentives to work in Macedonia B. Policy design and simulation results Policy design Results and discussion Conclusion

Research Motivation Labour market challenges: – High inactivity rate of 36% – Low employment rate, 44% (high gender gap) – One in four workers is employed informally

Table 1 – Activity rates in Macedonia and EU by individual characteristics, in % (2012)

Research Motivation Unemployment and inactivity are main determinants of poverty – The overall poverty rate is 27.3%, whereas unemployed and inactive persons are more likely to be poor (51% and 35%, respectively) Social transfers considerably reduce the risk of poverty: the at-risk poverty before social transfers is 43% However, they do not manage to support the self- sufficiency of the beneficiaries – Less productive workers are kept out of the labour market

Research objective The potential of MWP policies for reduction of inactivity and social exclusion – Special focus on poor and females

Barriers to employment/activity Three types of barriers for the disadvantaged individuals (World Bank, 2013): – participation barriers: non-market barriers which prevent workable individuals from supplying their labour – employment barriers: skills and knowledge – benefit disincentives: value of leisure and work Our study focuses on the third type of barrier

Social protection in Macedonia Main safety net program in Macedonia is the social financial assistance (SFA), costing 0.3% of GDP – households whose members are able to work but unable to secure themselves materially – App. EUR 90 per month – Means-tested Unemployment benefits play only a marginal role

Disincentives to work 1. The means-tested nature of the benefit implies that any income that is formally earned reduces the amount of the benefit received – Promotes inactivity and/or informal employment 2. Immediate withdrawal of the benefit once the income exceeds the threshold level (100% marginal effective tax rate)

Disincentives to work (cont.) Figure 1 - Tax Wedge and Effective Tax Rates for a One-Earner Couple with Two children in Macedonia (2012)

Disincentives to work (cont.) 3. Some other entitlements stemming from the SFA eligibility – cheap telephone and television packages; financial reimbursement for energy bills; personal computers from the government, etc. 4. Regressive structure of the labour tax reducing the incentive for labour supply at low wage levels

B. Policy design and simulation results

Policy design

Methodology 1.Estimating wage equation and imputing wages for those who are not working (Heckman 2-step estimator) 2.Discrete labor choice: 0, 20 or 40 hrs per week, typical household 3.MAKMOD: computing household disposable income (9 combinations) 4.Estimating preferred labor/leisure – consumption combination by means of utility function 5.Introduction of WTC (in MAKMOD) – back to step 3, 4 and 5

Methodology (2) MAKMOD – Tax and benefit micro-simulation model for Macedonia based on the EUROMOD (and built upon the guidance of SRMOD team) – Static model: individual behaviour (employment, childcare, saving, etc.) is assumed to be exogenous to the tax-benefit system – Baseline fiscal system: 2011 – Data: Survey of Income and Living Conditions from 2011 (4.000 hh/ individuals) Labour Supply Model (LSM) – Is fully integrated with the static model – Used to derive the budget sets under the baseline and reformed scenarios – Impose revenue neutrality conditions taking into account the behavioural reactions MAKMOD + LSM => Behavioural tax and benefit model

Results - Heckman 2-step equation -

All coefficients have the expected sign; The inverse Mills ratio (lambda) suggests a significant selection bias – i.e. a non-random selection of both males and females into the labour force. However, unobserved factors that make employment more likely tend to be associated with lower wages for males and higher for females.

Results - Preference estimates – conditional logit - singles-

Income insignificant, may be explained by factors like: – underreporting of informal income; – family/household income being more important than individual income, i.e. the case when spending decisions are made by somebody else in the household (World Bank, 2008); and – lack of accessible and affordable childcare for singles with children. Increasing marginal disutility of hours worked – the marginal disutility of hours worked is larger for females as they likely assign greater value to home-related tasks; – the marginal disutility of hours worked decreases with the level of education for females, given the higher reward of education compared to males

Results - Preference estimates – conditional logit - couples-

Marginal utility of income increases with the age of males only – may be related to the increased need for spending in more mature families Marginal utility declines with hours worked – but the decline is constrained by the level of education, especially of women. Parenthood gains significance in the case of couples – likely due to the small number of single parents – and it increases the utility of income and reduces disutility of working hours.

Labour supply elasticities Elasticities for single females are lower than those for single males, but the regularity reverses in couples. Findings for couples are largely aligned with some imminent characteristics for patriarchal-minded and traditional societies as is Macedonia, whereby the males have the role of house-breeders. The finding that married males have lower labour supply elasticity than single males may be associated with the larger living costs once family has been established

Labour market choices – reform simulation Singles - Both reforms would result in a lower non-participation contributing to an increase of employment, the effect being larger under FIWB Couples - only the IIWB reduces non-participation and increases employment and the effect is smaller than for the case of singles.

Labour market choices for poor and non-poor – reform simulation An introduction of in-work benefit produces sizeable results for poor singles, while only IIWB for couples It slightly increases the inactivity of single non-poor, which is likely due to some borderline cases who would opt for non-participation as the benefit fully replaces their income

Labour market choices for male and female – reform simulation Results suggest that the proposed reforms will have larger impact on females – Comparable magnitudes to those established in the literature (e.g. Figari, 2011, for the Italian case). The respective changes in the case of males are much smaller in size: 0.7 p.p. and 2.4 p.p.

Conclusions and recommendations The proposed reform will increase labour market participation in Macedonia – the effect would be particularly strong for poor and females FIWB would perform better for singles and IIWB for couples – Due to differences in the policy design and in preferences The recommendation to the MLSP is to consider the introduction of the IWB

Thank you for your attention!