DP171 | The Effects of the Tax-Benefit System on UK Unemployment: A Microeconomic Analysis


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Using data from the 1981 Family Expenditure Survey we estimate a logit model for the choice between unemployment and employment, using explanatory variables such as tax and social security benefit rates. Other variables represent the characteristics of the households in the survey and unemployment rates in the industries in which the households usually work. The complexities of the tax-benefit system are summarized by a set of budget line parameters calculated for each household. Our estimates do not suggest that employment is significantly explained by the tax-benefit system. Nevertheless, we simulate the influence of tax-benefit reforms on unemployment using an equation that attaches a moderately strong prior belief to the theory.