Overcoming the inactivity trap in Spain: The work incentive reform of the Ingreso Mínimo Vital

The Ingreso Mínimo Vital (Minimum Vital Income), Spain's nationwide minimum income scheme introduced in 2020, offers beneficiaries a unique national guaranteed income as a last-resort benefit. However, the scheme's design featured a lack of work incentives for low earners, potentially leading to inactivity traps. To address this flaw the Spanish government introduced an earnings disregard in 2022, enabling beneficiaries to keep all or part of the benefit when their earnings increase up to a certain limit. This paper provides an ex ante assessment of this reform, looking into its expected fiscal, distributional and labour market effects using the tax-benefit microsimulation model EUROMOD, and the behavioural labour supply model EUROLAB. Our results show that the reform has the potential to incentivise work for very low earners, particularly lone parents, mainly by promoting part-time employment. The reform and its subsequent employment effects are also expected to slightly reduce inequality and poverty. While this is a step in the right direction, we discuss some avenues for improvement.