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---

### I. Introduction
- Most European countries have a comprehensive set of income support programs including social insurance and social assistance transfers.
- Social insurance (e.g., unemployment benefits) is typically time-limited and contribution-linked; social assistance includes categorical (e.g., universal child benefits) and means-tested transfers.
- Guaranteed Minimum Income (GMI) schemes are last-resort, means-tested income support programs for working-age households.
- GMI schemes determine benefit levels by comparing household “needs” with household “means”; needs reflect household size, composition, disability status, and local housing costs; means reflect income from work and assets.
- The means-tested design, with benefits withdrawn as other household income increases, can create strong work disincentives.
- Eligibility is typically not time-limited at the outset but may be conditioned on availability and active job search; many schemes embed periodic reassessment of eligibility.
- Paper scope:
  - Reviews GMI design across Europe, empirical evidence on generosity and work disincentives, and measures to mitigate disincentives (reducing generosity, tapering withdrawals, in-work support, targeting disadvantaged workers, time-dependent withdrawal, and conditionality).
- Concluding analytic implications:
  - There appears to be ample room in many European countries to enhance benefit generosity since low benefits undermine primary objectives.
  - Countries with relatively high benefit withdrawal rates can consider reducing these to strengthen work incentives, particularly where poor employment outcomes reflect weak labor demand rather than strong preference for leisure.
  - Strengthening incentives to work can also be achieved through requiring beneficiaries to participate in effective job-search activities and supporting them in this activity.
  - Where weak labor demand is key, strengthening active labor market policies focused on training for skills development is crucial.

### II. Overview of Spending on Income Support (2018)
- Aggregate and composition:
  - Average income support spending across 35 European countries stood at 3.4 percent of GDP.
  - Average total income support shown as 3.42 percent of GDP in figures (labelled "Average,  3.42").
  - Average spending composition (percent of GDP):
    - Family benefits: 1.86 percent
    - Unemployment benefits: 0.81 percent
    - Social exclusion benefits: 0.50 percent
    - Housing benefits: 0.25 percent
- Means-tested vs non-means-tested:
  - Average means-tested spending: 1.07 percent of GDP.
  - Average non-means-tested spending: 2.35 percent of GDP.
  - 1.07 percent of GDP compared to 2.35 percent of GDP on non-means-tested benefits.
  - The relative importance of means-tested benefits:
    - Above 30 percent of total income support in 15 (out of 35) countries.
    - Below 15 percent in 6 countries.
- Historical evolution (1990–2018) — countries with longer series (Denmark, Finland, France, Norway, Switzerland, Germany, and the U.K.):
  - Average spending increased sharply to around 7 percent of GDP in 1995.
  - Spending fell sharply to around 5–6 percent of GDP thereafter.
  - The share of means-tested spending increased on average from around 26 percent in 1990 to around 37 percent in 2015.
  - Data availability varies by country (spending available from 1990 for 7 countries; from 1995 for 13 countries; from 2000 for 8 countries; and from 2005 onwards for 5 countries).

### Typology of Guaranteed Minimum Income (GMI) scheme designs
- Simple and comprehensive schemes (examples): Belgium, Cyprus, Switzerland, Estonia, Italy, Iceland, Lichtenstein, Luxembourg, the Netherlands, Norway, Sweden, Slovenia, and Slovakia.
  - Characteristic: specify a subsistence level and fill the gap between household income and subsistence.
  - Examples: Cyprus minimum income standard referenced to a minimum consumption basket; Netherlands referenced to the minimum wage.
- Simple schemes with restricted eligibility/coverage (examples): Austria, Greece, Croatia, Hungary, Lithuania, Portugal, and Serbia.
  - Causes of restriction include targeting mechanisms, under-resourced administration, residency requirements.
- General schemes of last resort with additional categorical benefits (examples): Germany, the U.K., Poland, Latvia, and North Macedonia.
  - Family benefits notable: in 2017 family support stood between 65–87 percent of all income support expenditure in Germany, Poland, and Latvia compared to an EU average of 57 percent.
  - Variation: Germany and Latvia largely universal family payments; Poland and the U.K. predominantly means-tested family payments.
- Complex network of categorical/overlapping schemes (examples): France, Ireland, Malta, and Romania.
  - Example: France’s main minimum income payment RSA plus Allocation de Solidarité Spécifique, Allocation de Solidarité aux Personnes Agées, Allocation aux Adultes Handicapés.
- Very limited/partial/piecemeal schemes (example): Bulgaria.
  - Issues: absence of indexing mechanisms, one-for-one reductions with employment income, restrictive eligibility criteria (e.g., rooms per household member).

### Key GMI design features affecting coverage, adequacy, and incentives
- Complexity implications:
  - Multiple separately administered payments can create widely varying benefit distributions and significant work disincentives for sub-groups.
  - Interlinked benefits (passporting) can create knock-on effects when eligibility for one payment changes.
  - Multiple distinct applications can lead to low take-up; consolidation may produce “automatic take-up” effects (example: U.K. reforms to universal credit).
- Conditionality:
  - Common forms include registration with employment offices, active job search, acceptance of suitable offers, participation in job-enhancing activities.
  - Breach typically results in partial or full suspension; stricter regimes may require weekly demonstration of job search or acceptance of any suitable job.
  - Immervoll and Knotz (2018) strictness indicator: Malta, Switzerland, and Slovenia have the strictest conditions for jobseekers receiving social assistance; Iceland, Bulgaria, and Greece the most relaxed.
- Reassessment:
  - Regular reassessment is common; over half the countries reviewed by Frazer and Marlier (2016) had periodic reassessment.
  - Periodic reassessment can result in payments ceasing for a sizeable proportion of recipients.

### Work disincentives: PTRs and METRs (2019 OECD simulations)
- Definitions:
  - Participation Tax Rate (PTR): share of additional household income from moving into employment lost due to reductions in benefits and income taxation.
  - Marginal Effective Tax Rate (METR): share of additional household income from an increase in earnings lost due to reductions in benefits and income taxation.
- Simulation assumptions:
  - Work is remunerated at two-thirds the average wage.
  - Household types modelled: Single; Lone Parent (single adult with two children); Couple/Unemployed (couple with two children where both unemployed and one moves into work); Couple/Employed (couple with two children with one earner at two-thirds average wage and the second adult changes labor supply).
  - PTR: one unemployed adult moves into full-time work at two-thirds average wage (variations by household type as described).
  - METR: working adult moves from part-time (50 percent) to full-time.
- PTR medians across countries by household type:
  - Couple/Unemployed: 66 percent (highest median PTR).
  - Lone Parent: 58 percent.
  - Single: 55 percent.
  - Couple/Employed: 33 percent (substantially lower).
- METR medians across countries by household type:
  - Lone Parent: close to 51 percent (highest median METR).
  - Couple/Unemployed: around 50 percent.
  - Single: 44 percent.
  - Couple/Employed: 34 percent (lowest).
- Observations:
  - PTRs and METRs vary widely across countries and household types.
  - Measures are sensitive to assumptions including time horizon and size of earnings increase.

### Country approaches to limit work disincentives
- Main approaches:
  - Restricted generosity (lower maximum entitlements).
  - Tapering benefit withdrawal (gradual reduction or earnings disregards).
  - In-work support (wage subsidies, tax credits).
- Restricted generosity:
  - Many OECD countries have maximum benefit entitlements below income from a 40-hour week at statutory minimum wage for most household types (Immervoll, 2009).
  - Pena-Casas et al. (2013): around 70 percent of 25 EU countries have average maximum benefit ≤ 40 percent of median income.
- Tapering:
  - Gradual reduction of entitlements as income rises or disregards of earned income to avoid “cliff-edge” effects.
  - Tapering can be income-based or time-based (duration-indexed).
- In-work support:
  - Additional payments for moving into work or increasing labor supply (e.g., U.S. Earned Income Tax Credit, U.K. tax credits pre-universal credit, France’s RSA tax credits).

### Country examples of duration-based or disregard designs
- Ireland:
  - €20 of earnings per day of permitted work is disregarded from employment income when calculating Jobseekers’ Allowance entitlement (beneficiaries allowed up to three days per week).
  - Deductions calculated as 60 percent of earnings less this income disregard.
  - Part-time Job Incentive Scheme and Back to Work Family Dividend: fixed-duration payments offered to the long-term unemployed; payments are slightly lower than primary GMI entitlements but not tapered with earned income.
- Malta:
  - Social/Unemployment Assistance (SUA) payment tapered in proportion to time since finding employment:
    - 35 percent taper for the first year of employment.
    - 55 percent taper for the second year.
    - 75 percent taper for the third year.
    - 100 percent thereafter.
- Estonia:
  - Duration-based tapering: beneficiaries can keep all earned income during the first two months of employment.
  - Subsequently, beneficiaries are allowed 50 of earnings as an income disregard for the following four months.
  - After that period, benefits are withdrawn one for one (100 percent taper).

### Optimality, trade-offs, and policy options
- Theoretical/empirical guidance:
  - Simulations within a social welfare framework suggest optimal METRs of (60, 70, 90) percent for lower-income groups corresponding to (low, middle, high) inequality aversion parameters; optimal transfers equal to (36, 54, 67) percent of median income (Coady and Le, 2020).
  - For moderate aversion to inequality, METRs in the order of 50 percent would appear optimal.
  - Saez (2002) suggests much lower, even negative, METRs may be desirable for unemployed groups who respond strongly to financial incentives with low market wages.
  - Consumption taxes (around 17 percent in many European countries) imply lower METRs associated with income tax and benefit withdrawal rates.
- Practical trade-off:
  - Adequate generosity is required to achieve poverty alleviation objectives.
  - Containing fiscal cost of generous benefits typically requires higher benefit withdrawal rates (BWRs), which can raise PTRs/METRs and create work disincentives.
  - Many countries combine low generosity with low BWRs, prioritizing employment incentives over poverty alleviation.
- Policy options highlighted:
  - Combine higher generosity with higher BWRs where appropriate to contain fiscal cost.
  - Countries with very high BWRs should consider reducing these, including through:
    - Allowing income disregards.
    - Implementing time-dependent (rather than income-dependent) benefit withdrawal.
  - Attenuate adverse effects of higher BWRs via strengthened complementary activation policies (conditionality, ALMPs, training, job placement).
  - Target income disregards and time-dependent withdrawal at most disadvantaged groups to lower work disincentives while containing fiscal cost.

### Conclusions and reform guidance
- Means-tested GMI schemes have expanded in scope across many European countries and play an important role in poverty protection but can create strong work disincentives.
- Key design trade-offs: benefit generosity, benefit withdrawal, and benefit eligibility.
- Reform sequencing and diagnostics — guiding questions:
  - Are benefits generous enough to achieve poverty objectives across household types?
  - Is there room to increase benefit withdrawal rates to contain fiscal cost without introducing unduly strong work disincentives?
  - Where work disincentives are large, can these be reduced in a fiscally sustainable way (e.g., income disregards, time-dependent withdrawal, targeted at disadvantaged groups)?
  - Is there room to strengthen activation policies to contain work disincentives associated with generous benefits and higher BWRs?
- Need for country-specific and program-specific analysis; cross-country summary data (Table 1 and disaggregated data) serve as starting points.
- Detailed beneficiary work and benefit history analysis recommended to tailor benefit and conditionality rules to individual circumstances and labor market attachment.

### Annex 1. Estimation of PTRs and METRs — key findings
- Jara and others (2019) use the Euromod tax-benefit simulation model and 2017 policy rules to estimate and decompose PTRs and METRs for 28 European countries.
- Short-term vs Long-term PTRs:
  - LPTRs are on average 21 percentage points lower than SPTRs.
  - Benefits (principally UI) account for more than half of the SPTR in all but four countries.
  - Examples of countries with relatively generous unemployment benefits and high SPTRs: Luxembourg, Sweden, France, and Finland.
  - LPTRs are dominated by the impact of the tax and social contribution system, which accounts for more than half of LPTRs in most countries.
  - Countries with established comprehensive GMI schemes (such as Greece, Denmark, Cyprus, and the U.K.) — social assistance benefits make a relatively higher contribution to work disincentives in LPTRs.
  - SPTRs and LPTRs are highly correlated: countries that have high LPTRs typically also have high SPTRs.
- METRs:
  - Tax and social contributions explain well over half of the disincentives to increase labor supply for all countries studied.
  - Loss of benefits is an important driver of METRs in countries including the U.K., the Netherlands, France, Cyprus, Ireland, Romania, Slovenia, and Luxembourg.
- Comparison with OECD estimates:
  - OECD PTRs are on average 5.3 percentage points lower than SPTRs and 14.9 percentage points higher than LPTRs.
  - For METRs, OECD estimates are 5.2 percentage points higher than J&O estimates.
  - Correlation coefficients:
    - PTRs: correlation between average OECD PTRs and SPTRs is 0.56, and 0.57 for LPTRs.
    - METRs: correlation coefficient is 0.83.
  - Pattern differences reduce cross-country variation in J&O/SPTR/LPTR relative to OECD estimates.

### Annex 3. Activation Policies — mechanisms, evidence, and strictness
- Objectives of activation:
  - Mitigate financial work disincentives created by the tax and benefits system.
  - Screen out unwarranted benefit claims.
  - Provide support for individuals with difficulty finding or maintaining employment (especially the long-term unemployed).
- Forms of activation:
  - Requiring GMI recipients to engage in monitored job search activity as a pre-condition for benefit receipt.
  - Policies to reduce the cost of employing GMI recipients (wage and hiring subsidies).
  - Increasing employability through state-sponsored training opportunities.
- Job Search, Monitoring and Sanctions — international examples:
  - United Kingdom (Universal Credit):
    - Recipients sign a personalized commitment with a work coach.
    - Placed in one of four groups with differing job search requirements.
    - “All work-related requirements” group can be required to demonstrate up to 35 hours of job search activity a week.
    - Tiered sanctions; the most severe can result in cessation of payments for up to 26 weeks.
  - Denmark:
    - Recipients assessed into two groups: limited support vs. activation candidates.
    - 2015 reforms moved away from tight early-stage job search requirements toward counselling and “right and duty” program participation.
  - Italy (Reddito di Cittadinanza, RdC):
    - Recipients must sign a “work pact” and accept one of three “suitable” job offers within the first 18 months of receiving payment.
    - Minimum suitable wage level fixed at €858 per month.
    - “Suitable” travel distance widens with each rejected offer; after two rejections recipients can be expected to accept a job anywhere in Italian territory.
    - Recipients must be available for eight hours a week for municipality-mandated activities.
- Evidence and trade-offs:
  - Lalive and others (2005): sanctions and warnings lower unemployment duration at lower cost compared to other activation policies (Swiss data).
  - Arni and others (2009): warnings and sanctions decrease unemployment duration but depress wages long-term and associate with lower job stability (Swiss data).
  - Concern: strict monitoring and sanctions can create incentives to exit benefits via worse job matches.
- Wage and Hiring Subsidies:
  - Rationale: increase the benefit of employment for recipients and employers.
  - Rothstein (2008) estimate: net transfer to low-skill workers is $0.28 of every $1 spent on the U.S. EITC, with the remainder captured by employers.
  - Targeting challenges: more cost-effective when targeted at most disadvantaged groups; broader targeting risks “cream skimming”; narrow targeting risks a “stigma effect”.
  - European objectives:
    - Safeguarding existing employment links (example: Germany’s Kurzarbeit).
    - Creating new links/access for disadvantaged groups (examples: Estonia Palgatoetus; Sweden Nystartjobb; Germany Gründungszuschuss).
- Strictness of Conditionality — Immervoll and Knotz (2018) overall strictness indicator (0 least strict to 5 very strict):
  - Cross-country examples (Overall Strictness and selected component scores for 2017):
    - Austria (AT): Overall Strictness 3.1; ALMP Availability 4.0; Occupational Mobility 5.0; Geographical Mobility 2.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 4.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 1.0; Sanction for first refusal of Job Offer 0.0; Sanctions for Subsequent Refusal of Job Offers 2.0; Sanction for first refusal of ALMP 2.0; Sanctions for Subsequent Refusal of ALMP 2.0.
    - Switzerland (CH): Overall Strictness 4.0; ALMP Availability 0.0; Occupational Mobility 5.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 4.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 5.0; Sanction for first refusal of Job Offer 5.0; Sanctions for Subsequent Refusal of Job Offers 5.0; Sanction for first refusal of ALMP 5.0; Sanctions for Subsequent Refusal of ALMP 5.0.
    - Italy (IT): Overall Strictness 3.6; ALMP Availability 4.0; Occupational Mobility 4.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 1.0; Jobsearch Monitoring Documentation 5.0; Sanctions for Voluntary Unemployment 5.0; Sanction for first refusal of Job Offer 5.0; Sanctions for Subsequent Refusal of Job Offers 5.0; Sanction for first refusal of ALMP 5.0; Sanctions for Subsequent Refusal of ALMP 5.0.
    - United Kingdom (UK): Overall Strictness 3.8; ALMP Availability 4.0; Occupational Mobility 4.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 5.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 3.0; Sanction for first refusal of Job Offer 3.0; Sanctions for Subsequent Refusal of Job Offers 4.5; Sanction for first refusal of ALMP 3.0; Sanctions for Subsequent Refusal of ALMP 3.0.
    - Greece (EL): Overall Strictness 0.2; ALMP Availability 0.0; Occupational Mobility 0.0; Geographical Mobility 0.0; Valid Reasons 0.0; Frequency of Jobsearch Monitoring 0.0; Jobsearch Monitoring Documentation 0.0; Sanctions for Voluntary Unemployment 1.0; Sanction for first refusal of Job Offer 1.0; Sanctions for Subsequent Refusal of Job Offers 1.0; Sanction for first refusal of ALMP 0.0; Sanctions for Subsequent Refusal of ALMP 0.0.
  - Cross-country findings (2017):
    - Countries with the strictest conditions for jobseekers: Malta, Switzerland, Slovenia.
    - Countries with the most relaxed conditions: Greece, Turkey, Slovak Republic.
  - Figures and regressions noted:
    - Figure A3.1 regression annotated as y = 52 + 1.6 ⋅ (x), R^2 = 0.0044.
    - Figure A3.2 METR panels regression annotated as y = 49 + 1.2 ⋅ (x), R^2 = 0.002.

### Annex 4. Reform Experiences in the U.K. and Germany
- Overview:
  - Both the U.K. and Germany undertook large-scale welfare reforms centered on GMI programs.
  - Germany: 2002–2005 Hartz reforms aimed to lower unemployment and improve labor market flexibility.
  - U.K.: Universal Credit (UC), proposed in 2010 and rolled out from 2012, aims to make the welfare system more cost effective, simpler, and to improve work incentives.
- Germany — Hartz reforms:
  - Commission established in 2002.
  - Three priorities: (i) improving employment services; (ii) activating the unemployed; (iii) fostering employment demand by deregulating the labor market.
  - Implementation waves: Hartz I and II (2003); Hartz III (2004); Hartz IV (2005).
  - Hartz I and II (2003):
    - Increased labor market flexibility by lowering taxation and legal requirements on temporary and low hours work.
    - Removed restrictions on fixed-term contracts, maximum duration of temporary work, and sectoral limits on temporary work.
    - Subsidies targeted at the unemployed:
      - Social security exemptions for businesses employing workers over the age of 55.
      - "Integration subsidies" providing employers with a subsidy of up to 50 percent of wages for 6–24 months for older and disabled workers.
      - Top-up subsidies offered directly to older workers who took up a job that paid less than their previous job.
      - “Ich-AG” subsidy for self-employment, paid directly to the self-employed with income below a threshold and could be received for up to three years.
  - Hartz III (2004): restructured the German employment agency system to be more service oriented.
  - Hartz IV (2005):
    - Combined social assistance and unemployment assistance for the long-term unemployed into one benefit (Unemployment Benefit II).
    - Overall generosity was drastically cut for many households.
    - Continued benefit receipt became subject to means-testing.
    - Strict activation measures introduced, including sanctions for refusing job offers.
  - Evidence on impact:
    - Jacobi and Kluve (2006): positive impacts on employment probabilities for wage subsidies and deregulation of “mini and midi-jobs”; limited impacts from employment agency reforms.
    - Krebs and Scheffel (2013): Hartz reforms lowered the non-cyclical unemployment rate by 1.4 percentage points and contributed to long-run growth; found an initial reduction in real wages and a reduction in the welfare of unemployed households.
    - Bradley and Kugler (2019): reforms lowered wages; limited impact on aggregate unemployment because both job finding and separation rates increased in roughly equal proportion; increased labor market churn may indicate improved flexibility.
    - General finding: reforms improved labor market flexibility but created a class of marginal jobs that tend to be low-paying, not unionized, and provide little opportunities for skill build-up.
- United Kingdom — Universal Credit (UC):
  - Rationale and design:
    - UC proposed in 2010; rolled out from 2012.
    - Combines five pre-existing working-age benefits into a single means-tested entitlement with a single taper.
    - Only those with responsibility for children or with caring responsibilities benefit from an income disregard under UC.
    - Conditionality and sanction regime is stricter and extended to groups previously not subject to conditionality.
    - Recipients sign a personalized commitment outlining work-related responsibilities; placed in one of four groups with differing job search requirements (e.g., up to 35 hours of job search activity a week for “all work-related requirements” group).
    - Tiered sanctions; the most severe can result in cessation of payments for up to 26 weeks.
    - Monthly reporting mandated under UC replaces annual reporting required under previous in-work support for many recipients.
  - Implementation timeline and challenges:
    - Started in 2012; initially expected to be completed in 2015 but projected to complete in 2024.
    - Delays reflect administrative difficulties and concerns about households losing out and entering poverty.
    - Evidence limited due to incomplete rollout; studies use small-scale geographic investigations and microsimulation analyses that ignore labor supply responses.
  - Evidence and early findings:
    - Gardiner and Finch (2020) — Liverpool region qualitative analysis:
      - UC “removes the very highest benefit withdrawal rates that can disincentivize earnings progression...it creates the risk that some recipients are incentivized to reduce their hours,” with weaker incentives for second earners in couples to increase labor supply.
      - The ability of UC’s in-work conditionality to reduce these disincentives “seems far from assured.”
    - Brewer and Handscomb (2020) — UC performance during COVID-19:
      - Administrative systems held up to a surge in claims.
      - The fall in disposable income for recipients after accounting for UC is markedly higher than for those benefitting from the U.K.’s furlough scheme and will likely constitute a shock to household living standards.

*Source — wpiea2021179-print-pdf (IMF working paper content provided).*

### References  _______________________________________________________________________________________  37

### References

### I. Introduction
- Most European countries have a comprehensive set of income support programs including social insurance and social assistance transfers.
- Social insurance (e.g., unemployment benefits) is typically time-limited and contribution-linked; social assistance includes categorical (e.g., universal child benefits) and means-tested transfers.
- Guaranteed Minimum Income (GMI) schemes are last-resort, means-tested income support programs for working-age households.
- GMI schemes determine benefit levels by comparing household “needs” with household “means”; needs reflect household size, composition, disability status, and local housing costs; means reflect income from work and assets.
- The means-tested design, with benefits withdrawn as other household income increases, can create strong work disincentives.
- Eligibility is typically not time-limited at the outset but may be conditioned on availability and active job search; many schemes embed periodic reassessment of eligibility.
- The paper reviews GMI design across Europe, empirical evidence on generosity and work disincentives, and measures to mitigate disincentives (reducing generosity, tapering withdrawals, in-work support, targeting disadvantaged workers, time-dependent withdrawal, and conditionality).
- Concluding summary of analytical implications:
  - There appears to be ample room in many European countries to enhance benefit generosity since low benefits undermine primary objectives.
  - Countries with relatively high benefit withdrawal rates can consider reducing these to strengthen work incentives, particularly where poor employment outcomes reflect weak labor demand rather than strong preference for leisure.
  - Strengthening incentives to work can also be achieved through requiring beneficiaries to participate in effective job-search activities and supporting them in this activity.
  - Where weak labor demand is key, strengthening active labor market policies focused on training for skills development is crucial.

### II. Overview of Spending on Income Support
- In 2018:
  - Average income support spending across 35 European countries stood at 3.4 percent of GDP.
  - 5 countries had spending above 5 percent.
  - 5 countries had spending below 2 percent.
  - Average spending composition (percent of GDP):
    - Family benefits: 1.86 percent
    - Unemployment benefits: 0.81 percent
    - Social exclusion benefits: 0.50 percent
    - Housing benefits: 0.25 percent
- Around two-thirds of income support is not means tested (Figure 2).

*Source: wpiea2021179-print-pdf - References*

### 1.07 percent of GDP compared to 2.35 percent of GDP on non-means-tested benefits. But the

### wpiea2021179-print-pdf - 1.07 percent of GDP compared to 2.35 percent of GDP on non-means-tested benefits. But the

### Spending patterns and means-testing in income support (2018)
- Average means-tested spending: 1.07 percent of GDP.
- Average non-means-tested spending: 2.35 percent of GDP.
- The relative importance of means-tested benefits:
  - Above 30 percent of total income support in 15 (out of 35) countries.
  - Below 15 percent in 6 countries.
- Cross-country average total income support shown as 3.42 percent of GDP in figures (labelled "Average,  3.42").

### Historical evolution of income support and means-testing (1990–2018)
- In countries with data from 1990 (Denmark, Finland, France, Norway, Switzerland, Germany, and the U.K.):
  - Average spending increased sharply to around 7 percent of GDP in 1995.
  - Spending fell sharply to around 5–6 percent of GDP thereafter.
  - The share of means-tested spending increased on average from around 26 percent in 1990 to around 37 percent in 2015.
- Figure 3 note: Data availability varies by country (spending available from 1990 for 7 countries; from 1995 for 13 countries; from 2000 for 8 countries; and from 2005 onwards for 5 countries).

### Typology of Guaranteed Minimum Income (GMI) scheme designs
- Simple and comprehensive schemes (examples): Belgium, Cyprus, Switzerland, Estonia, Italy, Iceland, Lichtenstein, Luxembourg, the Netherlands, Norway, Sweden, Slovenia, and Slovakia.
  - Characteristic: specify a subsistence level and fill the gap between household income and subsistence.
  - Examples: Cyprus minimum income standard referenced to a minimum consumption basket; Netherlands referenced to the minimum wage.
- Simple schemes with restricted eligibility/coverage (examples): Austria, Greece, Croatia, Hungary, Lithuania, Portugal, and Serbia.
  - Causes of restriction include targeting mechanisms, under-resourced administration, residency requirements.
- General schemes of last resort with additional categorical benefits (examples): Germany, the U.K., Poland, Latvia, and North Macedonia.
  - Family benefits notable: in 2017 family support stood between 65–87 percent of all income support expenditure in Germany, Poland, and Latvia compared to an EU average of 57 percent.
  - Variation: Germany and Latvia largely universal family payments; Poland and the U.K. predominantly means-tested family payments.
- Complex network of categorical/overlapping schemes (examples): France, Ireland, Malta, and Romania.
  - Example: France’s main minimum income payment RSA plus Allocation de Solidarité Spécifique, Allocation de Solidarité aux Personnes Agées, Allocation aux Adultes Handicapés.
- Very limited/partial/piecemeal schemes (example): Bulgaria.
  - Issues: absence of indexing mechanisms, one-for-one reductions with employment income, restrictive eligibility criteria (e.g., rooms per household member).

### Key GMI design features affecting coverage, adequacy, and incentives
- Complexity implications:
  - Multiple separately administered payments can create widely varying benefit distributions and significant work disincentives for sub-groups.
  - Interlinked benefits (passporting) can create knock-on effects when eligibility for one payment changes.
  - Multiple distinct applications can lead to low take-up; consolidation may produce “automatic take-up” effects (example: U.K. reforms to universal credit).
- Conditionality:
  - Common forms include registration with employment offices, active job search, acceptance of suitable offers, participation in job-enhancing activities.
  - Breach typically results in partial or full suspension; stricter regimes may require weekly demonstration of job search or acceptance of any suitable job.
  - Immervoll and Knotz (2018) strictness indicator: Malta, Switzerland, and Slovenia have the strictest conditions for jobseekers receiving social assistance; Iceland, Bulgaria, and Greece the most relaxed.
- Reassessment:
  - Regular reassessment is common; over half the countries reviewed by Frazer and Marlier (2016) had periodic reassessment.
  - Periodic reassessment can result in payments ceasing for a sizeable proportion of recipients.

### Work disincentives: PTRs and METRs (2019 OECD simulations)
- Definitions:
  - Participation Tax Rate (PTR): share of additional household income from moving into employment lost due to reductions in benefits and income taxation.
  - Marginal Effective Tax Rate (METR): share of additional household income from an increase in earnings lost due to reductions in benefits and income taxation.
- Simulation assumptions:
  - Work is remunerated at two-thirds the average wage.
  - Household types modelled: Single; Lone Parent (single adult with two children); Couple/Unemployed (couple with two children where both unemployed and one moves into work); Couple/Employed (couple with two children with one earner at two-thirds average wage and the second adult changes labor supply).
  - PTR: one unemployed adult moves into full-time work at two-thirds average wage (variations by household type as described).
  - METR: working adult moves from part-time (50 percent) to full-time.
- PTR medians across countries by household type:
  - Couple/Unemployed: 66 percent (highest median PTR).
  - Lone Parent: 58 percent.
  - Single: 55 percent.
  - Couple/Employed: 33 percent (substantially lower).
- METR medians across countries by household type:
  - Lone Parent: close to 51 percent (highest median METR).
  - Couple/Unemployed: around 50 percent.
  - Single: 44 percent.
  - Couple/Employed: 34 percent (lowest).
- Observations:
  - PTRs and METRs vary widely across countries and household types.
  - Measures are sensitive to assumptions including time horizon and size of earnings increase.

### Country approaches to limit work disincentives
- Approaches include restricting generosity, tapering benefit withdrawal, and providing in-work support (wage subsidies).
- Restricted generosity:
  - Many OECD countries have maximum benefit entitlements below income from a 40-hour week at statutory minimum wage for most household types (Immervoll, 2009).
  - Pena-Casas et al. (2013): around 70 percent of 25 EU countries have average maximum benefit ≤ 40 percent of median income.
- Tapering:
  - Gradual reduction of entitlements as income rises or disregards of earned income to avoid “cliff-edge” effects.
  - Tapering can be income-based or time-based (duration-indexed).
- In-work support:
  - Additional payments for moving into work or increasing labor supply (e.g., U.S. Earned Income Tax Credit, U.K. tax credits pre-universal credit, France’s RSA tax credits).

### Country examples of duration-based or disregard designs that reduce short-term disincentives
- Ireland:
  - €20 of earnings per day of permitted work is disregarded from employment income when calculating Jobseekers’ Allowance entitlement (beneficiaries allowed up to three days per week).
  - Deductions calculated as 60 percent of earnings less this income disregard.
  - Part-time Job Incentive Scheme and Back to Work Family Dividend: fixed-duration payments offered to the long-term unemployed; payments are slightly lower than primary GMI entitlements but not tapered with earned income.
- Malta:
  - Social/Unemployment Assistance (SUA) payment tapered in proportion to time since finding employment:
    - 35 percent taper for the first year of employment.
    - 55 percent taper for the second year.
    - 75 percent taper for the third year.
    - 100 percent thereafter.
- Estonia:
  - Duration-based tapering: beneficiaries can keep all earned income during the first two months of employment.
  - Subsequently, beneficiaries are allowed 50 of earnings as an income disregard for the following four months (text preserves “50 of earnings”).
  - After that period, benefits are withdrawn one for one (100 percent taper).

### Optimality, trade-offs, and policy options
- Theoretical/empirical guidance:
  - Simulations within a social welfare framework suggest optimal METRs of (60, 70, 90) percent for lower-income groups corresponding to (low, middle, high) inequality aversion parameters; optimal transfers equal to (36, 54, 67) percent of median income (Coady and Le, 2020).
  - For moderate aversion to inequality, METRs in the order of 50 percent would appear optimal.
  - Saez (2002) suggests much lower, even negative, METRs may be desirable for unemployed groups who respond strongly to financial incentives with low market wages.
  - Consumption taxes (around 17 percent in many European countries) imply lower METRs associated with income tax and benefit withdrawal rates.
- Practical trade-off:
  - Adequate generosity is required to achieve poverty alleviation objectives.
  - Containing fiscal cost of generous benefits typically requires higher benefit withdrawal rates (BWRs), which can raise PTRs/METRs and create work disincentives.
  - Many countries combine low generosity with low BWRs, prioritizing employment incentives over poverty alleviation.
- Policy options highlighted:
  - Combine higher generosity with higher BWRs where appropriate to contain fiscal cost.
  - Countries with very high BWRs should consider reducing these, including through:
    - Allowing income disregards.
    - Implementing time-dependent (rather than income-dependent) benefit withdrawal.
  - Attenuate adverse effects of higher BWRs via strengthened complementary activation policies (conditionality, ALMPs, training, job placement).
  - Target income disregards and time-dependent withdrawal at most disadvantaged groups to lower work disincentives while containing fiscal cost.

### Conclusions and reform guidance
- Means-tested GMI schemes have expanded in scope across many European countries and play an important role in poverty protection but can create strong work disincentives.
- Key design trade-offs: benefit generosity, benefit withdrawal, and benefit eligibility.
- Reform sequencing and diagnostics:
  - Questions to inform country-level reforms:
    - Are benefits generous enough to achieve poverty objectives across household types?
    - Is there room to increase benefit withdrawal rates to contain fiscal cost without introducing unduly strong work disincentives?
    - Where work disincentives are large, can these be reduced in a fiscally sustainable way (e.g., income disregards, time-dependent withdrawal, targeted at disadvantaged groups)?
    - Is there room to strengthen activation policies to contain work disincentives associated with generous benefits and higher BWRs?
- Need for country-specific and program-specific analysis; cross-country summary data (Table 1 and disaggregated data) serve as starting points.
- Detailed beneficiary work and benefit history analysis recommended to tailor benefit and conditionality rules to individual circumstances and labor market attachment.

*Italic: Source — wpiea2021179-print-pdf (IMF working paper content provided).*

### Annex 1. Estimation of PTRs and METRs

### Annex 1. Estimation of PTRs and METRs

### Overview
- Jara and others (2019) (J&O) use the Euromod tax-benefit simulation model and 2017 policy rules to estimate and decompose Participation Tax Rates (PTRs) and Marginal Effective Tax Rates (METRs) for 28 European countries.
- J&O measure both short-term PTRs (SPTRs) — capturing incentives to move into work while individuals are still eligible for unemployment insurance (UI) — and long-term PTRs (LPTRs) — capturing incentives after UI eligibility is exhausted and social assistance (typically GMI benefits) is the main source of support.

### Short-term vs Long-term PTRs
- LPTRs are on average 21 percentage points lower than SPTRs.
- Benefits (principally UI) account for more than half of the SPTR in all but four countries.
- Luxembourg, Sweden, France, and Finland are examples of countries with relatively generous unemployment benefits and high SPTRs.
- LPTRs are dominated by the impact of the tax and social contribution system, which accounts for more than half of LPTRs in most countries.
- There is substantial heterogeneity in the contribution of social assistance to LPTRs; in countries with established comprehensive GMI schemes (such as Greece, Denmark, Cyprus, and the U.K.) social assistance benefits make a relatively higher contribution to work disincentives.
- Although LPTRs are systematically smaller than SPTRs, both are highly correlated: countries that have high LPTRs typically also have high SPTRs.

### Marginal Effective Tax Rates (METRs)
- Tax and social contributions explain well over half of the disincentives to increase labor supply for all countries studied.
- The loss of benefits is an important driver of METRs in some countries, notably the U.K., the Netherlands, France, Cyprus, Ireland, Romania, Slovenia, and Luxembourg.

### Comparison with OECD Estimates
- Averaging over OECD estimates of PTRs for different household types:
  - The OECD estimates are on average 5.3 percentage points lower when compared to SPTRs.
  - The OECD estimates are on average 14.9 percentage points higher when compared to LPTRs.
- For METRs, the OECD estimates are 5.2 percentage points higher than J&O estimates.
- Despite level differences, estimates produced by J&O and the OECD are closely correlated:
  - For PTRs, the correlation coefficient between the average OECD PTRs and SPTRs is 0.56, rising very slightly to 0.57 for LPTRs.
  - For METRs, the correlation coefficient is 0.83.
- Pattern differences:
  - For PTRs: on average SPTRs are higher than OECD PTRs for countries with relatively low OECD PTRs, while LPTRs are on average lower for countries with high OECD PTRs — resulting in lower variation in SPTRs and LPTRs across countries compared to OECD PTRs.
  - For METRs: both METRs coincide for countries with low OECD METRs, but countries with high OECD PTRs systematically have relatively lower J&O METRs — resulting in lower variation across countries for J&O METRs relative to OECD METRs.

*Source: Annex 1. Estimation of PTRs and METRs, wpiea2021179-print-pdf*

### Annex 3. Activation Policies

### Annex 3. Activation Policies

### Overview
- Purpose: Activation policies mitigate financial work disincentives created by the tax and benefits system, screen out unwarranted benefit claims, and provide support for individuals with difficulty finding or maintaining employment (especially the long-term unemployed).
- Forms of activation:
  - Requiring GMI recipients to engage in monitored job search activity as a pre-condition for benefit receipt.
  - Policies to reduce the cost of employing GMI recipients (wage and hiring subsidies).
  - Increasing employability through state-sponsored training opportunities.
- Mechanisms of effectiveness in the literature:
  - “Threat/motivation” effects: penalties for not engaging in mandatory activities.
  - “Treatment” effects: interventions that enhance employability (training, better job search techniques).

### A. Job Search, Monitoring and Sanctions
- Common design elements:
  - Requirement to commit to job search activity, often with assistance and monitoring.
  - Sanctions for inadequate search effort, typically payment-related but can include increased monitoring.
  - Conditionality may be tailored to assessed capacity for work and risk of remaining unemployed.
- International examples and specific features:
  - United Kingdom (Universal Credit):
    - Recipients sign a personalized commitment with a work coach.
    - Recipients placed in one of four groups with differing job search requirements.
    - “All work-related requirements” group can be required to demonstrate up to 35 hours of job search activity a week.
    - Tiered sanctions; the most severe can result in cessation of payments for up to 26 weeks.
  - Denmark:
    - Recipients assessed into two groups: limited support vs. activation candidates.
    - 2015 reforms moved away from tight early-stage job search requirements toward counselling and “right and duty” program participation.
    - Pre-reform requirements included uploading a résumé within one month and in-person interviews at least once every three months.
  - Italy (Reddito di Cittadinanza, RdC):
    - Recipients must sign a “work pact” and accept one of three “suitable” job offers within the first 18 months of receiving payment.
    - Minimum suitable wage level fixed at €858 per month.
    - “Suitable” travel distance widens with each rejected offer; after two rejections recipients can be expected to accept a job anywhere in Italian territory.
    - Recipients must be available for eight hours a week for municipality-mandated activities.
    - Exemptions and relaxations exist for people with disabilities and individuals with caring responsibilities (including for minors).
    - OECD (2019) noted improving quality and capacity of public employment centers is critical to RtC effectiveness.
- Evidence and trade-offs:
  - Lalive and others (2005): sanctions and warnings lower unemployment duration at lower cost compared to other activation policies (Swiss data).
  - Arni and others (2009): warnings and sanctions decrease unemployment duration but depress wages long-term and associate with lower job stability (Swiss data).
  - Concern: strict monitoring and sanctions can create incentives to exit benefits via worse job matches.

### B. Wage and Hiring Subsidies
- Rationale: Increase the benefit of employment for recipients and employers, contrasting with monitoring/sanctions which increase the cost of unemployment.
- Typical forms: reductions in social contributions or payroll taxes, or direct payments to employers or employees.
- Interaction with minimum wage: Without an effective minimum wage, in-work benefits and direct payments can enable employers to pay lower wages; example estimate:
  - Rothstein (2008): net transfer to low-skill workers is $0.28 of every $1 spent on the U.S. EITC, with the remainder captured by employers.
- Design challenges and targeting:
  - More cost-effective when targeted at the most disadvantaged groups (older, longer-term unemployed, low-skill).
  - Broader targeting risks “cream skimming” (employers replacing existing workers).
  - Narrow targeting risks a “stigma effect” signaling lower productivity to employers.
- Objectives of subsidies in Europe:
  - Safeguarding existing employment links:
    - Example: Germany’s Kurzarbeit scheme — employers reduce hours; government pays a fixed percentage of lost earnings to cushion employees and avert layoffs. Support is typically for a fixed duration but duration is a flexible policy parameter.
  - Creating new links / access for disadvantaged groups:
    - Estonia (Palgatoetus):
      - Aimed at the long-term unemployed and ex-prisoners.
      - Paid up to 12 months and cannot exceed 50 percent of wages.
      - Conditions agreed between the Unemployment Insurance Fund and the employer; working conditions agreed between employee and employer.
    - Sweden (Nystartjobb, NSJ):
      - Aimed at long-term unemployed already subject to activation.
      - Subsidy paid to employers, proportional to employers’ social security contributions, duration linked to length of unemployment subject to maximum limits.
      - Employer participation conditions include no layoffs in previous nine months for lack of work and wages/conditions in line with prevailing collective agreements.
      - Final agreement on wage subsidies jointly decided by public employment service, employer, and trade union.
      - Evaluation: research cited by Anxo (2014) suggests increase in probability of employment, but 63 percent of jobs would have occurred regardless — indicating risk of deadweight.
    - Start-up subsidies:
      - Germany (Gründungszuschuss):
        - Start-up grant equal to the value of unemployment benefits plus an additional amount to cover social contributions.
        - Initial duration six months; some support can be extended by a further nine months.
        - Applicants must present a viable business plan and demonstrate sufficient skills to run a business.
        - For long-term unemployed receiving social assistance, activation vouchers can be used for counselling to produce business plans and develop competencies.
        - Impact: Caliendo and Kunn (2011) found recipients had significantly higher probability of labor market participation relative to non-recipients for up to five years and higher earnings.

### C. Strictness of Conditionality
- Immervoll and Knotz (2018) construct an overall strictness indicator aggregating scores across components (0 least strict to 5 very strict).
- Components included in the strictness aggregation:
  - Requirements on availability for work (e.g., whether participation in full-time training permits being “unavailable for work”).
    - Example cross-country differences: participation in full-time training permits being “unavailable for work” in Ireland and Spain; Sweden and Austria require continued search and acceptance of suitable offers during training.
  - Occupational mobility (requirements to search for and accept jobs in new occupations; timing of when such requirements come into effect varies).
  - Geographical mobility (acceptable commuting times/distances vary; examples: up to two hours commuting for a full-time job in Austria, three hours in the Netherlands, jobseekers must look for jobs up to 30 kilometers in France).
  - Valid reasons for refusing job offers (health incapacity and caring responsibilities commonly accepted; variation across countries).
  - Documentation of job search activity (amount and frequency of evidence; quality of public employment services affects feasibility; example: Malta requires a job search “diary” and contact details; Cyprus requires periodic “sign on” but not submission of evidence).
  - Sanctions for refusal of suitable job offers, ALMP participation, and voluntary unemployment (variation in severity, time-limited reductions vs. claim termination; variation in number of refusals before sanctions apply — e.g., France applies sanctions after a second refusal; Slovenia at first refusal).
- Cross-country findings (2017):
  - Countries with the strictest conditions for jobseekers: Malta, Switzerland, Slovenia.
  - Countries with the most relaxed conditions: Greece, Turkey, Slovak Republic.
  - Table A3.1 reports country-level overall strictness scores and component scores for 2017 (scale 0–5) for many countries.
- Visual/statistical notes from figures:
  - Figure A3.1: Strictness Index Score (2017) plotted across countries with a regression line annotated as y = 52 + 1.6 ⋅ (x), R^2 = 0.0044 in the figure.
  - Figure A3.2: Presents PTRs and METRs by strictness for household types (Couple (UE), Lone Parent, Single); a regression line in METR panels annotated as y = 49 + 1.2 ⋅ (x), R^2 = 0.002 in the figure.
- Selected numeric examples from Table A3.1 (Overall Strictness and component scores for 2017 where provided):
  - Austria (AT): Overall Strictness 3.1; ALMP Availability 4.0; Occupational Mobility 5.0; Geographical Mobility 2.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 4.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 1.0; Sanction for first refusal of Job Offer 0.0; Sanctions for Subsequent Refusal of Job Offers 2.0; Sanction for first refusal of ALMP 2.0; Sanctions for Subsequent Refusal of ALMP 2.0.
  - Switzerland (CH): Overall Strictness 4.0; ALMP Availability 0.0; Occupational Mobility 5.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 4.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 5.0; Sanction for first refusal of Job Offer 5.0; Sanctions for Subsequent Refusal of Job Offers 5.0; Sanction for first refusal of ALMP 5.0; Sanctions for Subsequent Refusal of ALMP 5.0.
  - Italy (IT): Overall Strictness 3.6; ALMP Availability 4.0; Occupational Mobility 4.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 1.0; Jobsearch Monitoring Documentation 5.0; Sanctions for Voluntary Unemployment 5.0; Sanction for first refusal of Job Offer 5.0; Sanctions for Subsequent Refusal of Job Offers 5.0; Sanction for first refusal of ALMP 5.0; Sanctions for Subsequent Refusal of ALMP 5.0.
  - United Kingdom (UK): Overall Strictness 3.8; ALMP Availability 4.0; Occupational Mobility 4.0; Geographical Mobility 3.0; Valid Reasons 3.0; Frequency of Jobsearch Monitoring 5.0; Jobsearch Monitoring Documentation 4.0; Sanctions for Voluntary Unemployment 3.0; Sanction for first refusal of Job Offer 3.0; Sanctions for Subsequent Refusal of Job Offers 4.5; Sanction for first refusal of ALMP 3.0; Sanctions for Subsequent Refusal of ALMP 3.0.
  - Greece (EL): Overall Strictness 0.2; ALMP Availability 0.0; Occupational Mobility 0.0; Geographical Mobility 0.0; Valid Reasons 0.0; Frequency of Jobsearch Monitoring 0.0; Jobsearch Monitoring Documentation 0.0; Sanctions for Voluntary Unemployment 1.0; Sanction for first refusal of Job Offer 1.0; Sanctions for Subsequent Refusal of Job Offers 1.0; Sanction for first refusal of ALMP 0.0; Sanctions for Subsequent Refusal of ALMP 0.0.
- Notes: Table A3.1 uses color coding to denote top/middle/bottom third of the strictness distribution; notes state zero values are interpreted as “non-response”.

*Source: Annex 3. Activation Policies (from the provided content).*

### Annex 4. Reform Experiences in the U.K. and Germany

### Annex 4. Reform Experiences in the U.K. and Germany

### Overview
- Both the U.K. and Germany undertook large-scale welfare reforms centered on guaranteed minimum income (GMI) programs.
- Germany: 2002–2005 Hartz reforms aimed to lower unemployment and improve labor market flexibility.
- U.K.: Universal Credit (UC), proposed in 2010 and rolled out from 2012, aims to make the welfare system more cost effective, simpler, and to improve work incentives.

### Germany — Hartz reforms

Hartz Commission objectives and timing
- Commission established in 2002 in response to a sustained rise in unemployment in the late 1990s and early 2000s.
- Three priorities: (i) improving employment services; (ii) activating the unemployed; (iii) fostering employment demand by deregulating the labor market.
- Reforms implemented in four waves: Hartz I and II (2003), Hartz III (2004), Hartz IV (2005).

Key features of Hartz I and II (2003)
- Increased labor market flexibility by lowering taxation and legal requirements on temporary and low hours work.
- Removed restrictions on fixed-term contracts, maximum duration of temporary work, and sectoral limits on temporary work (notably the construction sector).
- Temporary workers required to receive either equal pay and treatment to non-temporary workers or wages determined by bargaining agreements between unions, employers, and temporary work agencies.
- Subsidies targeted at the unemployed:
  - Social security exemptions for businesses employing workers over the age of 55.
  - "Integration subsidies" providing employers with a subsidy of up to 50 percent of wages for 6–24 months for older and disabled workers.
  - Top-up subsidies offered directly to older workers who took up a job that paid less than their previous job.
  - “Ich-AG” subsidy for self-employment, paid directly to the self-employed with income below a threshold and could be received for up to three years.

Hartz III (2004)
- Restructured the German employment agency system to make it more service oriented.

Hartz IV (2005)
- Completely restructured the unemployment benefit system by combining social assistance and unemployment assistance for the long-term unemployed into one benefit (Unemployment Benefit II).
- Overall generosity was drastically cut for many households.
- Continued benefit receipt became subject to means-testing.
- Strict activation measures introduced, including sanctions for refusing job offers.

Evidence on impact
- Jacobi and Kluve (2006): positive impacts on employment probabilities for various wage subsidies and deregulation of “mini and midi-jobs”; limited impacts from employment agency reforms; employment agency-mandated temporary work reduced probability of employment for those required to participate.
- Krebs and Scheffel (2013): Hartz reforms lowered the non-cyclical unemployment rate by 1.4 percentage points and contributed to long-run growth; found an initial reduction in real wages and a reduction in the welfare of unemployed households, consistent with reduced GMI generosity.
- Bradley and Kugler (2019): reforms lowered wages; limited impact on aggregate unemployment because both job finding and separation rates increased in roughly equal proportion; increased labor market churn may indicate improved flexibility.
- General finding: reforms improved labor market flexibility but created a class of marginal jobs that tend to be low-paying, not unionized, and provide little opportunities for skill build-up, leaving marginally employed people stuck in low-paid segments and reliant on social assistance to reach a minimum income level.

### United Kingdom — Universal Credit (UC)

Rationale and structural design
- UC proposed in 2010 with roots in the aftermath of the Great Recession.
- Objectives: make the welfare system more cost effective, increase simplicity, and improve work incentives.
- Combines five pre-existing working-age benefits (predecessor benefits covering unemployment assistance, in-work support for low earners, income support for sickness and disability, and housing support).
- Structural reforms beyond consolidation:
  - A maximum entitlement is calculated for each recipient based on eligibility for various components and then subjected to a single means-test and taper.
  - In contrast to previous in-work support (tax credits), only those with responsibility for children or with caring responsibilities benefit from an income disregard under UC.
  - Conditionality and sanction regime is stricter and extended to groups previously not subject to conditionality.
  - Recipients sign a personalized commitment outlining work-related responsibilities and penalties.
  - Recipients placed in one of four groups with differing job search requirements:
    - Example: “all work-related requirements” group required to demonstrate up to 35 hours of job search activity a week.
    - “Work-focused interview” group required to meet their work coach regularly.
  - Tiered sanctions for failing to meet conditions; the most severe can result in cessation of payments for up to 26 weeks.
  - Monthly reporting mandated under UC replaces annual reporting required under previous in-work support for many recipients.

Implementation timeline and challenges
- Reform started in 2012; initially expected to be completed in 2015 but projected to complete in 2024.
- Delays reflect administrative difficulties in combining and reforming multiple disparate payments and concerns about households losing out and entering poverty.
- Evidence is limited due to incomplete rollout; available studies use small-scale geographic investigations and microsimulation analyses that ignore labor supply responses.

Evidence and early findings
- Gardiner and Finch (2020) — Liverpool region qualitative analysis:
  - UC “removes the very highest benefit withdrawal rates that can disincentivize earnings progression...it creates the risk that some recipients are incentivized to reduce their hours,” with weaker incentives for second earners in couples to increase labor supply.
  - The ability of UC’s in-work conditionality to reduce these disincentives “seems far from assured.”
- Brewer and Handscomb (2020) — UC performance during COVID-19:
  - Administrative systems held up to a surge in claims.
  - The fall in disposable income for recipients after accounting for UC is markedly higher than for those benefitting from the U.K.’s furlough scheme and will likely constitute a shock to household living standards.

*Source: Annex 4. Reform Experiences in the U.K. and Germany (wpiea2021179-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021179-print-pdf.pdf_