Indicators of unemployment and low-wage traps (Marginal effective tax rates on labour)

Abstract

This paper presents results of an on-going joint European Commission / OECD project, aimed at monitoring the direct influence of tax and benefit instruments on household incomes. Indicators of financial work incentives are needed for identifying any undesired influences of taxes and social transfers on people’s work decisions. Marginal effective tax rates (METRs) are calculated in order to show what part of a change in earnings is “taxed away” by the combined operation of taxes, social security contributions (SSCs), and any withdrawal of earnings related social benefits. Three different types of METRs are calculated in order to measure so-called low-wage,unemployment and inactivity traps, that is situations where incentives to work are low. The results allow the identification of countries and family types that face little financial incentive to increase work effort or to take up a job.Unemployment trap, incentive to work, METR, tax on labour Make work pay, unemployment benefits.