Income Distribution Effects of a Finnish Work Incentive Trap Reform

The present study concentrates on the income distribution effects of A Finnish Work Incentive Trap Reform started in 1996. I estimate how the reforms made have affected income levels and income inequality - the distribution of economic wellbeing. I look at the effects both without and with behavioral response. The data used is the Income Distribution Statistics of Statistics Finland from the years 1996 and 1998. The empirical part of the study is based on a microsimulation model. The method of microsimulation is a powerful tool for the analysis of ex post evaluation of policy reforms. However, the method is rarely and on very few occasions applied in Finland. The results drawn without behavioral response show that the 1996 data with the 1998 legislation produces lower values for income inequality measures and higher average income levels for almost all income decile groups compared to those with the 1996 legislation. However, the changes are very small. When the labor supply effect is included, the lowest incomes rise only very little (in fact, hardly at all) and the Gini coefficient remains unaltered.