[Journal:] IZA Journal of Labor Policy [ISSN:] 2193-9004 [Volume:] 3 [Year:] 2014 [Pages:] 1-20
Although there is a large literature on employment effects of earned income tax credits (EITCs) and unemployment benefits, less is known about wage effects. In our model, the impact is via the net (after-tax) replacement rate. Using a panel of individuals from Sweden, we find a positive relationship between the net replacement rate and wages with semi-elasticities in the range 0.2-0.4. This implies that a one per cent reduction in the unemployment benefit level or a one per cent increase in the net-of-tax rate is associated with a fall in the before-tax wage of 0.1-0.2 per cent. EITCs and unemployment benefit reductions are thus likely to induce wage moderation.
Earned income tax credit Unemployment benefits Wage formation