Holly Sutherland

How reliable are microsimulation results?: An analysis of the role of sampling error in a U.K. tax-benefit model

Abstract We assess the statistical reliability of microsimulation models in two ways: by comparing simulated outcomes with survey ‘actuals’, and by calculating asymptotic confidence intervals for a variety of summary measures. The confidence intervals we derive take account of re-weighting for differential survey response, and also the effects of imposing revenue-neutrality. They are calculated for a version of one of the most widely-used U.K. tax-benefit simulation models. The results suggest that baseline simulations are reasonably accurate, but that some widely-used measures of the effects of policy changes may be very imprecise estimates of population effects.

Simulating the Reform of Means-Tested Benefits with Endogenous Take-up and Claim Costs

Microsimulation models are commonly used to examine the distributional impact of reforms of the means-tested benefit system. Take-up behaviour is related to the level of entitlement, so reform may induce changes in take-up. We develop a stochastic simulation method and apply it to a probit model of ‘income support’ take-up by the UK pensioners. The method allows us to adjust net income for the welfare losses because of tangible or intangible claim costs. Endogenous take-up and claim costs both have an important impact on the simulated outcomes of the policy reform.

Economic downturn and stress testing European welfare systems

As unemployment rises across the European Union (EU), it is important to understand the extent to which the incomes of the new unemployed are protected by tax–benefit systems and to assess the cost pressures on the social protection systems of this increase in unemployment. This chapter uses the EU tax–benefit model EUROMOD to explore these issues, comparing effects in five EU countries. It provides evidence on the differing degrees of resilience of the household incomes of the newly unemployed due to the variations in the protection offered by the tax–benefit systems, according to whether unemployment benefit is payable, the household situation of the unemployed person and across countries.

Reducing Child Poverty in Britain: An Assessment of Government Policy 1997-2001

The reduction and eventual elimination of child poverty has become one of the central objectives of the new Labour Government in Britain. Measures to achieve this by changing taxes and benefits and promoting paid work are described. Their effects are assessed using a micro-simulation model. The policy changes will achieve a significant reduction in child poverty but it will remain in 2001 substantially higher than in 1979 and much higher than in most European nations.

The impact of comparable policies in European countries: Microsimulation approaches

Abstract Simulation of the effects of comparable social and fiscal policies in countries within Europe is of interest from a number of perspectives. One approach involves the harmonisation of the capabilities and assumptions of existing national models in order to produce consistent results for a number of countries. We explore the prospects and limitations of this method, making use of a case study of the impact of Basic Income schemes in the UK and Ireland. An alternative approach is to build an integrated Europe-wide model, designed specifically to maximise comparability.

Effects of Minimum Wages on the Gender Pay Gap

This article explores the implications of alternative policy regimes for gender wage inequality. Against the background of a description of recent changes in pay ratios of men and women in Britain, the focus is primarily on calculating the likely effects on gender wage ratios of introducing the statutory minimum wage in the UK. The effects of alternative options are also assessed in part; giving women mens average hourly earnings, leaving occupations unchanged, and redistributing women through occupations in the same proportions as men, leaving their occupational average pay unchanged. The largest effects on pay ratios come from giving women the same pay as men in their existing occupations. However, a statutory minimum wage of £3.60 per hour does improve the gender pay ratio and helps women at the lower end of the pay spectrum. It is also considerably easier to implement than other options.

Combining Household Income and Expenditure Data in Policy Simulations

The analysis of the distributional impact of fiscal policy proposals often requires information on household expenditures and incomes. It is unusual to have one data source with information on both and this problem is generally overcome with statistical matching of independent data sources. In this paper Grade Correspondence Analysis (GCA) is investigated as a tool to improve the matching process. GCA draws out the relationships between the common variables to enable the sample to be partitioned into more homogeneous groups, prior to matching. An evaluation is conducted using the UK Family Expenditure Survey, which is unusual in containing both income and expenditure at a detailed level of disaggregation. Imputed expenditures are compared with actual expenditures through the use of indirect tax simulations. The most successful methods are then employed to enhance data from the Family Resources Survey and the synthetic dataset is used as a microsimulation model database.

Measuring the Size and Impact of Public Cash Support for Children in Cross-National Perspective

The authors suggest a new comprehensive measure of support given through tax benefit systems to families with children. Using microsimulation techniques, this accounts for all provisions contingent on the presence of children, while usually only gross child/family benefits are considered. The authors use EUROMOD, the European Union tax-benefit microsimulation model, to quantify the support for children and analyze its impact on household incomes and child poverty for 19 countries. The authors find that the conventional approach underestimates on average the total amount of support for children by about one fifth. Furthermore, the differences between two measures vary considerably across countries and are, therefore, critical for cross-national comparisons.

Microsimulation and Policy Analysis

We provide an overview of microsimulation approaches to assess the effects of policy on the income distribution. We focus mainly on the role of tax-benefit policies and review the concept of microsimulation and how it contributes to the analysis of the income distribution in general and policy evaluation in particular. We consider the main challenges and limitations and discuss directions for future developments.

Swapping Policies: Alternative Tax-Benefit Strategies to Support Children in Austria, Spain and the UK

Three European countries with very different tax-benefit systems have recently substantially increased the level of support for children: Austria, Spain and the UK. Austria mainly makes use of universal benefits; Spain, tax concessions; and the UK means-tested benefits and tax credits. This article addresses the question of whether the chosen strategies are in fact the most effective for each country. It considers what would have happened if these countries had transformed the architecture of their systems in either of the other two directions. It makes use of EUROMOD, the European tax-benefit microsimulation model that is designed for making cross-country comparisons, to explore the distributional and, in particular, child poverty effects of budget-neutral alternatives. The results show that three factors – the level of spending, its structure, and the way it impacts in a particular national context – affect the outcomes to varying degrees.