A NEGATIVE INCOME-TAX IN A MINI-WELFARE STATE - A SIMULATION EXERCISEWITH MIMIC

This paper traces the effects of a negative income tax on labor supply and economic growth by use of the applied general equilibrium model o f the Central Planning Bureau of the Netherlands, named MIMIC. The sim ulation results show that replacing the social security system by an i ndividualized negative income tax induces a large fall in labor supply , but the employment effect might be neutral. The main explanation is that the introduction of a negative income tax strongly reduces the re placement ratio and makes low-paid jobs much more attractive for worke rs. This generates wage moderation and leads to a large fall in unempl oyment. However, since the jobs created have a rather low labor produc tivity, production growth will be negative.