Update and extension of the labour market model : final report.
Date: 2024-07-24
Institutions: Directorate-General for Employment, Social Affairs and Inclusion
Subjects: EU employment policy, data collection, demography, economic model, education, health expenditure, job security, labour market, macroeconomics, social security, tax on income, unemployment, unemployment insurance

Update and extension of the Labour 
Market Model 

Final report 

Written by Berger, J., Strohner, L., Graf, N., Köppl-Turyna, M. 
May 2024 

 
EUROPEAN COMMISSION 

Directorate-General for Employment, Social Affairs and Inclusion 
Directorate F — Employment and social governance, analysis 
Unit F.4 — Analysis and statistics 

E-mail:  EMPL-F4-unit@ec.europa.eu 

European Commission 
B-1049 Brussels 

 
 
 
EUROPEAN COMMISSION 

Update and extension of the Labour 
Market Model 

Final Report 

Directorate-General for Employment Social Affairs and Inclusion 

 
 
 
 
Manuscript completed in March 2023 

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PDF 

ISBN 978-92-68-19789-9   

doi:10.2767/609214 

KE-02-24-830-EN-N 

 
 
 
 
 
 
 
 
 
 
EUROPEAN COMMISSION 

Table of Contents 

1. 

Introduction ....................................................................................................................... 8 

2. 

Calibration and Institutional Details .............................................................................. 11 

2.1.  Macroeconomic Data ................................................................................................... 11 

2.2.  Educational Attainment and Demography ................................................................... 18 

2.3.  Consumption Profile ..................................................................................................... 21 

2.4.  Public Revenues from Taxes and Social Security Contributions ................................. 22 

2.5.  Effective Corporate Tax Rates ..................................................................................... 24 

2.6. 

Income Taxation and Social Security Contributions .................................................... 25 

2.7.  Employment Protection Legislation (EPL) ................................................................... 34 

2.8.  Unemployment Benefits ............................................................................................... 36 

2.9.  Pension Benefits .......................................................................................................... 63 

2.10.  Other Social Benefits ................................................................................................... 82 

2.11.  Update of Empirical Estimates ................................................................................... 113 

3. 

List of Variables ............................................................................................................ 119 

4. 

Illustrative Scenarios .................................................................................................... 121 

4.1.  Tax Structure: Tax Shift from Income to Consumption Taxes ................................... 121 

4.2.  Enhancing Employment of Older Workers ................................................................. 135 

4.3.  Migration .................................................................................................................... 142 

5. 

Annex: Specific Information for Modelling Experts .................................................. 151 

5.1.  Corrections for Ireland and Countries with a High Trade Balance ............................ 151 

5.2. 

Income Taxation and Social Security Contributions .................................................. 151 

5.3.  Revenue Statistics ..................................................................................................... 154 

5.4.  Pension System ......................................................................................................... 157 

Literature .................................................................................................................................. 161 

Directorate-General for Employment Social Affairs and Inclusion 

 
 
 
 
 
 
Figures and Tables 

Figure 1: Public revenues as in LMM, as share of GVA, average 2015–2019 ........................... 23 

Figure 2: Cross-country employment effect of a PIT cut ........................................................... 124 

Figure 3: Average participation elasticity and employment effect of a PIT cut ......................... 125 

Figure 4: Cross-country real investment effect of a PIT cut ...................................................... 126 

Figure 5: Cross-country real GDP effect of a PIT cut................................................................ 127 

Figure 6: Private consumption and GDP impact of a PIT cut ................................................... 127 

Figure 7: Cross-country employment effect of a tax shift .......................................................... 130 

Figure 8: Cross-country real investment effect of a tax shift ..................................................... 131 

Figure 9: Cross-country real GDP effect of a tax shift............................................................... 131 

Figure 10: GDP effect of a PIT reform and a tax shift reform ................................................... 132 

Figure 11: Change of working-age population (upper part) and old-age dependency ratio (lower 
part), 2035 and 2060 compared to 2019 ................................................................................... 136 

Figure 12: Implicit retirement tax vs. participation rate effect of in-work benefit for older workers (for 
medium-skilled workers aged 55 to 69 years) ........................................................................... 138 

Figure 13: Cross-country employment effect of in-work benefit for older workers .................... 139 

Figure 14: Cross-country GDP impact of in-work benefit for older workers .............................. 142 

Figure 15: Unemployment rate impact of ‘standard migration shock’, EU-model ..................... 144 

Figure 16: Employment impact of ‘standard migration shock’, EU-model ................................ 145 

Figure 17: Wage impact of ‘standard migration shock’, EU-model ........................................... 145 

Figure 18: Macroeconomic impact of ‘standard migration shock’, EU-model ........................... 146 

Figure 19: Employment impact of ‘standard migration shock’, individual MS ........................... 148 

Figure 20: Wage impact of ‘standard migration shock’, individual MS ...................................... 149 

Figure 21: Difference in skill structure vs. wage impact in year 3, ‘standard migration shock’ . 149 

Figure 22: GDP impact of ‘standard migration shock’, individual MS ....................................... 150 

Table 1: Data sources for major parameters for updating LMM ................................................. 10 

Table 2: Definition of gross value added and gross domestic product in LMM .......................... 11 

Table 3: GDP, taxes and subsidies on products and GVA (2019, in millions, national currency)12 

Table 4: Capital share based on calculations by ourselves and AMECO database ................... 14 

Table 5: Capital stock as a percentage of GVA (average 2015–2019)....................................... 14 

Table 6: Investment ratio (average 2015–2019, as a percentage of GDP) ................................ 15 

Table 7: Subsidies on production (average 2015–2019, as a percentage of GVA) .................... 16 

Table 8: External balance (average 2015–2019, as a percentage of GVA) ............................... 17 

Table 9: Gross government debt (2015–2019, as a percentage of GVA) .................................. 18 

Table 10: Distribution of educational groups (25–64 year olds), 2020........................................ 19 

Table 11: Demographic distribution (as a percentage of individuals aged 15 and older), 2019 . 20 

Table 12: Consumption profile .................................................................................................... 22 

Table 13: Effective marginal corporate tax rates (EMTR), 2020 ................................................. 24 

Table 14: Modified EPL index; share of severance pay costs among total firing costs (2019) .. 35 

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Table 15: Unemployment benefit eligibility and gross replacement rate in Belgium ................... 38 

Table 16: Unemployment benefit eligibility and gross replacement rate in Bulgaria .................. 39 

Table 17: Unemployment benefit eligibility and gross replacement rate in Czechia ................... 40 

Table 18: Unemployment benefit eligibility and gross replacement rate in Denmark ................. 41 

Table 19: Unemployment benefit eligibility and gross replacement rate in Germany ................. 42 

Table 20: Unemployment benefit eligibility and gross replacement rate in Estonia .................... 43 

Table 21: Unemployment benefit eligibility and gross replacement rate in Ireland ..................... 44 

Table 22: Unemployment benefit eligibility and gross replacement rate in Greece .................... 45 

Table 23: Unemployment benefit eligibility and gross replacement rate in Spain ...................... 46 

Table 24: Unemployment benefit eligibility and gross replacement rate in France .................... 47 

Table 25: Unemployment benefit eligibility and gross replacement rate in Croatia .................... 48 

Table 26: Unemployment benefit eligibility and gross replacement rate in Italy ......................... 49 

Table 27: Unemployment benefit eligibility and gross replacement rate in Cyprus .................... 49 

Table 28: Unemployment benefit eligibility and gross replacement rate in Latvia ...................... 50 

Table 29: Unemployment benefit eligibility and gross replacement rate in Lithuania ................. 51 

Table 30: Unemployment benefit eligibility and gross replacement rate in Luxembourg............ 52 

Table 31: Unemployment benefit eligibility and gross replacement rate in Malta ....................... 53 

Table 32: Unemployment benefit eligibility and gross replacement rate in Hungary .................. 53 

Table 33: Unemployment benefit eligibility and gross replacement rate in the Netherlands ...... 54 

Table 34: Unemployment benefit eligibility and gross replacement rate in Austria .................... 56 

Table 35: Unemployment benefit eligibility and gross replacement rate in Poland .................... 57 

Table 36: Unemployment benefit eligibility and gross replacement rate in Portugal .................. 58 

Table 37: Unemployment benefit eligibility and gross replacement rate in Romania ................. 59 

Table 38: Unemployment benefit eligibility and gross replacement rate in Slovenia .................. 60 

Table 39: Unemployment benefit eligibility and gross replacement rate in Slovakia .................. 60 

Table 40: Unemployment benefit eligibility and gross replacement rate in Finland .................... 62 

Table 41: Unemployment benefit eligibility and gross replacement rate in Sweden ................... 63 

Table 42: Unemployment benefit eligibility and gross replacement rate in EU-27 ..................... 63 

Table 43: Pension expenditures as in the LMM as a percentage of GVA, average 2015–2017 82 

Table 44: Total expenditures for education allowances as a percentage of GVA ...................... 84 

Table 45: Total public expenditures for different social events as a percentage of GVA ........... 84 

Table 46: Intensive and extensive labour supply elasticities in LMM........................................ 115 

Table 47: Simulation results for a PIT cut (0.2 percent of GDP) ............................................... 128 

Table 48: Simulation results for a tax shift ................................................................................ 133 

Table 49: Simulation results in-work benefit for older workers ................................................. 140 

Table 50: Simulation results ‘standard migration shock’, EU-model ......................................... 147 

Directorate-General for Employment Social Affairs and Inclusion 

 
 
 
 
 
Update and Extension of the Labour Market Model – Final Report 

1.  Introduction 

The  current  project  is  financed  under  the  European  Programme  for  Employment  and  Social 

Innovation  ‘EaSI’  2014-2020.  EaSI  is  a  financing  instrument  at  the  EU  level  managed  directly  by 

the European Commission, which contributes to the implementation of the Europe 2020 strategy. It 

provides  financial  support  for  the  Union’s  objectives  in  terms  of  promoting  a  high  level  of  quality 

and  sustainable  employment,  guaranteeing  adequate  and  decent  social  protection,  combatting 

social exclusion and poverty, as well as improving working conditions. The aim of this project is an 

update, extension and refinement of the existing Labour Market Model (LMM). 

Striving to improve the European Commission’s understanding of the transmission mechanisms of 

labour market  policies in the context of  the  European  Employment  Strategy,  the  Commission  has 

developed LMM through contracted external experts in the project ‘Modelling of Labour Markets in 

the  European  Union’  (see  Berger  et  al.,  2009).  The  model  coverage  was  further  extended  in  the 

project  ‘Development/Maintenance  of  the  Labour  Market  Model’  (Berger  et  al.,  2012).  The  third 

external  project,  ‘Updating  of  the  Labour  Market  Model’  (Berger  et  al.,  2016),  involved  a 

comprehensive update of the underlying data and the model calibration for eight Member States, a 

careful  documentation  of  all  steps  taken,  as  well  as  the  simulation  and  analysis  of  an  illustrative 

policy scenario.  

LMM is a dynamic computable general equilibrium model with a detailed description of the labour 

market.  The  model  is  based  on  an  in-depth  micro-foundation  for  the  actors  involved,  namely 

households and firms. The model is applied to assess how an economy might react to changes in 

labour  market  policies,  other  policy  reforms,  or  external  factors.  LMM  is  used  to  provide  a 

theoretical  and  empirical  basis  for  identifying  the  possible  direction  and  intensity  of  the  effects  of 

policies,  rather  than  to  make  forecasts/projections  of  future  developments.  For  instance,  such 

policies  can  comprise  changes  in  direct  and  indirect  taxation,  active  and  passive  labour  market 

policies,  employment  protection  legislation  (EPL),  training  subsidies,  pension  regimes,  direct 

support  to  vulnerable  groups  (such  as  low-income  employment),  and  demographic  shocks  (e.g., 

migration). 

Based  on  an  Overlapping  Generations  approach  in  the  spirit  of  Samuelson  (1958)  and  Diamond 

(1965)  and  refined  by  Gertler  (1999)  and  Grafenhofer  et  al.  (2007),  household  behaviour  and  all 

relevant labour market variables are modelled for eight different age groups. Four of these groups 

belong  to  the  working-age  population,  three  have  already  reached  retirement  age  and  do  not 

participate  in  the  labour  market,  while  the  so-called  mixed  age  group  includes  people  of  working 

age  who  are  already  eligible  to  retire.  Importantly,  the  model  features  three  different  skill  groups 

(low-,  medium-,  and  high-skilled  persons),  endogenous  skill  choice,  as  well  as  complementarity 

between capital formation and skills. 

Decisions of households and firms are the result of an optimisation of lifetime utility and firm value, 

respectively. Households decide on the allocation of private consumption over the life-cycle, labour 

supply  along  several  margins  (participation  in  the  labour  market,  the  intensity  of  job  search  if 

unemployed, number of hours worked if employed, and retirement age) and investment in human 

capital  (educational  decisions  at  the  beginning  of  a  lifetime  and  lifelong  learning  decisions  during 

active life). Firms choose the optimal amount of physical investment (according to the q-theory of 

Hayashi,  1982),  the  number  of  vacancies,  the  lay-off  rate,  and  the  amount  of  investment  in  firm-

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Update and Extension of the Labour Market Model – Final Report 

sponsored training. The model applies a static search model, as in Boone and Bovenberg (2002), 

which is based on the pioneering search unemployment approach reviewed by Mortensen (1986). 

The  specific  structure  of  the  model  allows  for  age-  and  skill-specific  labour  markets  and 

unemployment rates. Wages are the result of a bargaining process between firms and households. 

The model captures a detailed description of public revenues and expenditures, as well as relevant 

institutions (e.g., passive labour market policies or EPL). 

Simulation  results  indicate  the  effects  of  policy  reforms  on  macroeconomic  and  labour-market 

specific  variables  (such  as  GDP,  investment,  private  consumption,  unemployment,  employment, 

and wages). Household-specific variables can  either  be  presented on an aggregate level or  on a 

more disaggregated level, such as age- and/or skill-dependent. Based on the model, inter- as well 

as intra-generational and inter-temporal effects can be analysed. 

Simulation analysis with the LMM regularly feeds into the ‘Employment and Social Developments in 

Europe’ review, the Directorate General of Employment, Social Affairs and Inclusion’s (DG EMPL’s) 

annual  flagship  publication.  In  addition,  the  model  is  used  to  provide  supporting  evidence  for  the 

European  Semester  impact  assessments,  as  well  as  for  ad-hoc  requests  by  colleagues  from  DG 

EMPL and other Directorates General. 

The model derives firms’ and worker’s labour market and economic behaviour from some general 

intertemporal utility/profit maximisation problems, as described in Part II of the Berger et al. (2009) 

project  report.  Most  of  the  resulting  equations  are  assumed  to  be  similar  across  the  different 

Member States, while country-specific differences are implemented via different values of the same 

parameter. 

To calibrate the model, a considerable amount of data input from various data sources is required. 

To  the  extent  possible,  we  use  harmonised  data.  Basically,  part  of  the  calibration  procedure  is 

based  on  methods  that  are  similar  across  countries  (e.g.,  age-  and  skill-specific  labour  market 

variables  derived  from  disaggregated  household  micro  data  or  macroeconomic  indicators),  while 

other  parts  of  the  calibration  method  (e.g.,  institutional  settings)  require  considerable  additional 

effort for each country. 

As  the  model  differentiates  several  age  and  skill  groups,  there  is  a  need  for  individual  and 

household  data.  Since  most  of  the  data  are  not  available  from  published  official  statistics  in 

sufficiently disaggregated detail, we calculate them from micro-data, including the EU Labour Force 

Survey  (LFS),  the  EU  Statistics  on  Income  and  Living  Conditions  (EU-SILC),  and  the  Household 

Budget Survey (HBS). As the breakdown into several age and skill groups reduces the sample size 

of the datasets, we merge several years of micro-data. 

Due  care  is  taken  to  update  institutional  details  in  the  different  countries.  We  mainly  rely  on  the 

MISSOC  database,  OECD  publications  such  as  Pensions  at  a  Glance  or  Taxing  Wages,  and 

national  sources.  The  aggregate  structure  of  taxes  and  social  contributions  is  taken  from  OECD 

Revenue  Statistics.  As  in  the  previous  projects,  we  derive  the  breakdown  of  income  tax  and 

employee and employer social security contribution rates into age and skill groups by merging the 

results of the TaxBEN model of the OECD with income data from the EU-SILC. Values that reflect 

the  strictness  of  EPL  are  updated  using  information  from  the  OECD’s  EPL  Index.  The  system  of 

national accounts (SNA) is used to update major macroeconomic aggregates, such as private and 

public consumption, as well as the capital and labour income share. 

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Update and Extension of the Labour Market Model – Final Report 

The  empirical  literature  provides  estimates  for  several  behavioural  parameters  to  reflect  the 

behaviour  of  households  and  firms  in  the  LMM.  In  the  current  project,  we  update  the  main 

parameters by taking into account recent empirical research results. 

In addition to the severe health issues caused by the global COVID-19 pandemic, it also resulted in 

an  economic  disruption  and  ‘put  a  sudden  stop  to  the  continuous  improvements  in  EU  labour 

markets and social situations’ (European  Commission, 2020).  Russia’s war of aggression against 

Ukraine entailed significant economic consequences, in particular concerning energy markets. The 

resulting boost of energy prices and the ongoing disruption of trade relations led to a pronounced 

increase  of  prices  throughout  the  world,  challenging  growth  perspectives  and  social  cohesion. 

Uncertainty about the extent to which these crises affect medium-term labour market and economic 

prospects remains. On the other hand, the LMM is used to provide a theoretical and empirical basis 

for  identifying  the  possible  direction  and  intensity  of  the  effects  of  labour  market  policies,  rather 

than  to  make  short-term  forecasts/projections  of  future  developments.  This  issue  is  taken  into 

account for the calibration of LMM. We usually refer to data from 2015 to 2019 for the calibration of 

the  model,  partly  due  to  the  lack  of  availability  of  more  recent  data,  partly  in  order  to  ‘adjust’  for 

these extraordinary circumstances and partly to smooth out business cycle fluctuations. 

An overview of major parameters of the model and sources used to gather this information can be 

found in Table 1. 

Table 1: Data sources for major parameters for updating LMM 

Section 2 of this Final Report provides information on the calibration and institutional details for the 

update of LMM as well as the extension to all 27 Member States. A comprehensive list of variables 

is presented in Section 3. Section 4 provides the analysis of three illustrative policy scenarios, i.e., 

a  change  in  the  tax  structure  in  the  Member  States,  a  policy  reform  to  enhance  employment  of 

older workers and a migration scenario. The annex provides specific information for the European 

Commission’s modelling experts on the implementation of country-specific institutional details and 

data issues. In addition to this Final Report, the updated LMM is sent electronically to the European 

Commission. 

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Update and Extension of the Labour Market Model – Final Report 

2.  Calibration and Institutional Details 

2.1.  Macroeconomic Data 

In this section, we discuss the different macro(economic) data used to calibrate the model. 
They  are  generally  based  on  officially  available  harmonised  data  and  can  be  updated 
easily. 

Output 

In  the  model,  we  differentiate  output,  gross  value  added  (GVA),  and  gross  domestic 
product  (GDP).  Given  labour-  and  capital  input,  the  production  function  determines  the 
output  (𝑦).  This  function  defines  the  maximum  output  possible  given  input  factors.  We 
apply  several  deductions,  reflecting  different  types  of  costs,  as  stated  below,  to  derive 
GVA.  These  costs  can  be  primarily  seen  as  time  devoted  to  tasks  other  than  the 
production of value added. These tasks are: 

•  Costs incurred for opening a vacancy (𝜅); 
•  Costs incurred for firm-sponsored training (‘firmskillcost’); 
•  Costs incurred for managerial effort to keep workers (‘probcost’); 
•  Administrative firing costs (𝜏𝐶). 

GDP is derived by adding ‘Taxes on Products’ and deducting ‘Subsidies on Products’ from 
GVA. The definitions are shown in Table 2. Values for taxes on products are taken from 
the  OECD  revenue  statistics  (see  Section  2.4),  and  subsidies  on  products  from  the 
national accounts. 

Table 2: Definition of gross value added and gross domestic product in LMM 

The values for GDP, taxes on products, subsidies on products, and GVA for the year 2019 
can be found in Table 3. In the model, ‘gva’ is normalised to 100 in the calibration in each 
country. For this reason, we define a parameter (‘scalingfactor’) to be able to derive values 
in billions of national currency. For example, multiplying ‘gva’ by ‘scalingfactor’ gives GVA 
measured in billions of national currency. 

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Update and Extension of the Labour Market Model – Final Report 

Table 3: GDP, taxes and subsidies on products and GVA (2019, in millions, national currency) 

Required Rate of Return, Capital Stock, Investment Ratio, and Capital Share 

Production  involves  capital  input  and  required  investment  and  provides  compensation 
(capital  compensation)  to  its  owners,  including  the  required  rate  of  return,  ‘r’,  and 
compensation for depreciation of the capital stock ‘δ𝑘’. Therefore, it is necessary to define 
some of these values, whereas others are determined in the calibration procedure. Data 
are available for capital stock and the level of investment. Capital compensation cannot be 
determined directly from national accounts as gross operating surplus also includes mixed 
income, which is the remuneration for work carried out by owners (or family members) of 
an unincorporated enterprise. However, there are ways to approximate the capital share.  

We suggest the following calibration procedure. Information is available or can be derived 
for capital stock, capital share, the investment ratio, and the corporate tax rate. Using this 
information leaves the depreciation rate, the required rate of return, and taxes on capital 
available  to  replicate  the  aforementioned  variables.  In  a  steady  state,  the  following 

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Update and Extension of the Labour Market Model – Final Report 

optimality  condition  must  hold  in  LMM  (for  more  information  see  Berger  et  al.  (2009)  – 
Final Report Part II, p. 37): 

𝑌 =

𝐹𝐾

(1 − 𝑡𝑝𝑟𝑜𝑓𝑠𝑢𝑏𝑖)(𝑟 + 𝛿𝐾) − 𝑡𝑝𝑟𝑜𝑓𝛿𝐾
(1 − 𝑡𝑝𝑟𝑜𝑓)

− 𝑡𝑐𝑎𝑝 

The  steady  state  investment  equation1  pins  down  the  depreciation  rate,  decreasing  the 
degree of freedom to set parameters. The required real rate of return is set to the same 
value of 3 percent in about half of the member states. For the other countries we deviate 
from  a  common  interest  rate  assumption  to  replicate  the  investment  ratio.  Especially, 
these  are  countries  which  joined  the  EU  after  2004  with  a  higher  than  average  capital 
share,  like  Czechia,  Poland,  Slovenia,  and  Slovakia.  In  addition,  for  several  southern 
European  countries,  Italy,  Portugal  or  Spain,  a higher  required  rate  of  return  is  set.  The 
difference  follows  to  a  large  extent  the  interest  rate  differential  of  long-term  government 
bonds  compared  to  Germany,  reflecting  additional  country-specific  risk.  In  some  cases, 
we also use the tax rate on capital, tcap, to replicate the investment ratio of the economy.  

One possible source of information about the adjusted2 labour share (capital share  =  1 −
adjusted labour share) is the AMECO database. In addition, we derive a second measure 
for the  labour  share  by adding  compensation  of  employees (Source:  System  of  National 
Accounts) and payroll taxes and multiply this value by a factor to reflect the labour input of 
self-employed persons. The factor is derived in the following way: 

𝑓𝑎𝑐𝑡𝑜𝑟  =

No.  of employees ∗ AWe + No.  of self_employed ∗ AWs
No.  of employees ∗ AWe

, 

where AWe reflects average working hours of employees, and AWs average working hours 
of self-employed persons. 

The  capital  shares  for  both  methods  are  presented  in  Table  4.  For  most  countries,  the 
capital  share  based  on  AMECO  is  higher.  For  most  countries  both  methods  produce 
similar  results,  for  some  other  countries  the  difference  is  very  high.  Large  deviations 
emerge in Bulgaria, Greece, and Sweden. For the calibration, we rely on calculations by 
ourselves  for  the  capital  share  for  the  majority  of  countries.  AMECO  based  shares  are 
applied  if  they  fit  better  to the  other  parameters  in  the  calibration.  A  capital  share  within 
the  range  of the two  sources  is  applied  for  Belgium  and  Austria.  Although  both methods 
coincide  in  Lithuania  and  Poland,  a  somewhat  lower  value  is  applied  to  replicate  the 
investment  share.  For  Slovenia and  the  Netherlands,  a slightly  higher  share  of  33.8 and 
37.5 percent is applied, which delivers the right level of investment and depreciation of the 
capital stock.  

1 Neglecting the exogenous growth trend ‘𝑔’. 

2 Adjusted means that the labour input of self-employed persons is treated as labour input.  

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Update and Extension of the Labour Market Model – Final Report 

Table 4: Capital share based on calculations by ourselves and AMECO database 

Table 5: Capital stock as a percentage of GVA (average 2015–2019) 

The  capital  share  of  the  EU-27  in  total  is  derived  from  the  individual  country’s  capital 
shares used in LMM and amounts to about 37 percent of GVA. The result is very similar to 
the capital share based on AMECO with 37.5 percent and a little bit higher than the value 
derived by own calculations.  

The System of National Accounts and the AMECO database are possible sources for the 
capital  stock  in  the  modelled  countries.  Both  provide  information  about  the  net  capital 
stock  for  the  total  economy  for  a  longer  time  horizon  for  all  considered  countries.  The 
average ratio of capital stock to GVA for the countries can be found in Table 5. In contrast 
to the capital share, calculations of the stock differ to a large extent in some countries. In 
general,  we apply  the  one  which  fits  better  to  replicate  aggregate  variables in LMM.  For 
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Update and Extension of the Labour Market Model – Final Report 

Malta,  Lithuania,  and  Poland,  both  estimates  are  too  low  in  comparison  to  the  capital 
share in these countries. For this reason, we apply a higher capital stock, as in previous 
updates  of  the  model.  The  capital  stock  for  the  EU-27  is  derived  from  the  applied  LMM 
values  for  the  individual  Member  States  and  aggregated  across  them.  The  resulting 
capital  input  is  about  350  percent  of  GVA  and  very  similar  to  the  ones  based  on  the 
National Accounts and on the AMECO database.  

The  investment  ratio  is  calculated  as  the  level  of  investment  as  percent  of  GDP.  The 
information  is  based  on  national  accounts.  We  use  the  average  investment  ratio  of  the 
period  2015  up  to  2019.  The  average  level  for  the  modelled  countries  can  be  found  in 
Table 6. The investment ratio is considerably lower in a lot of Southern-European member 
states, like Greece, Portugal, Italy or Cyprus, and exceptionally high in Ireland, which is a 
result  of  the  depreciation  of  inward  foreign  direct  investment  assets,  like  intellectual 
property and leased aircrafts3. There is no necessary one-to-one-relationship between the 
investment  ratio  and  level  of  capital  stock  in  the  economy  as  the  depreciation  rate  can 
vary  widely  as  a  matter  of  different  composition  of  capital  stock  (buildings,  machinery, 
patents, etc.). The depreciation rate in the modelled countries is derived in the calibration 
procedure and does not need to be set. 

Table 6: Investment ratio (average 2015–2019, as a percentage of GDP) 

Subsidies on Production 

Subsidies  do  not  only  arise  as  subsidies  on  products  but  also  in  production.  Annual 
national accounts contain data about this type of subsidy, labelled as d.39. In the model, 
subsidies on production are implemented as transfers to firms. From an economic point of 
view, the higher the subsidies on production, the less capital in production needs to earn 

3 See Ireland’s national statistics office, https://www.cso.ie/en/releasesandpublications/in/nie/in-mgnicp/. According to the 
statistics office, GDP in Ireland is distorted for two reasons, (i) a high level of investment due to depreciation of foreign 
direct investment assets and (ii) a high trade balance caused by a high negative factor income from the rest of the 
world. The statistics office shows that both aspects distort GDP to a large extent in Ireland. The corrections lead to a 
decrease of the investment ratio by 19.5 percent of GDP. 

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to yield the required rate of return on capital that is determined on the capital markets. The 
share of subsidies on production relative to Gross Value Added ranges from 0.4 percent in 
Cyprus to 3.6 percent in Bulgaria (see Table 7). 

Table 7: Subsidies on production (average 2015–2019, as a percentage of GVA) 

External Balance of Goods and Services 

Produced  goods  and  services  can  either  be  consumed  (private  or  public  consumption), 
invested  or  exported  to  other  countries.  Consumption  and  investment  consist  of 
domestically  produced  and  imported  goods.  The  difference  between  exported  and 
imported  goods  results  in  the  external  balance  of  goods  and  services.  Data  for  the 
external balance, which is used for the calibration of the model, is available in the System 
of  National  Accounts  provided  by  Eurostat.  The  average  external  balance  of  the  years 
2015 to 2019 as a percentage of GVA is provided in Table 8.  

In  some  countries,  the  external  balance  is  higher  than the  steady  state  assumption  in  a 
calibration would suggest. The reasons for this differ across countries. In Ireland, the high 
level of external balance is mainly driven by factor income of direct investment to the rest 
of  the  world.  Correcting  for  this  issue  leads  to  a  trade  balance  lower  by  20  percentage 
points.  In  Luxembourg,  the  trade  balance  is  adjusted  for  two  reasons.  The  first  corrects 
the trade balance for the export of investment income of persons living in other countries, 
which in turn leads to a very high negative primary income in the current account balance. 
The second adjustment deals with the high share of cross-border workers in Luxembourg, 
working  in  Luxembourg  but  living  in  another  country.  According  to  the  current  account 
balance,  compensation  of  employees  who  are  cross-border  workers  amounts  to  about 
one-third  of  total  employment  compensation.  As  cross-border  workers  consume  a  high 
fraction of income outside of Luxembourg, this leads to a high trade balance. In the model, 
we  assume  that  cross-border  workers  live  in  Luxembourg  and  therefore  also  consume 
there, leading to a smaller trade balance. The second adjustment leads to a higher level of 
private  consumption  than  the  System  of  National  Accounts  reports.  The  resulting  trade 
balance in the model is reduced to 0.5 percent of GVA.  

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Table 8: External balance (average 2015–2019, as a percentage of GVA) 

For the  Netherlands, the  reduction  of the trade  balance amounts to  4.1  percent  of GVA. 
The  reason  is  a  high  share  of  unexplained  components  in  the  trade  balance4  (maybe  a 
result  of  the  Rotterdam-Antwerp  effect).  The  trade  balance  of  Malta  is  assumed  to  be 
lower by 1.7 percent of GVA as a result of an important financial sector (decreasing by the 
balance of investment income of the current account; the same way as for Luxembourg). 
And for Slovenia, a longer period is taken into account, reducing the trade balance by 1.5 
percent of GVA.  

Similar  results  for  corrected trade  balances can be  found  in Torslov  et  al.  (2022)  and  Di 
Nino and Ekstam (2020). In the model, the corrected trade balance is used for calibration. 
To  derive  “correct”  values  for  GVA  and  GDP  these  correction  terms  are  added.  For 
simulation scenarios it is assumed that these terms are kept constant and assumed to be 
independent of national economic activity.  

Government Debt 

Private  savings  can  either  be  held  in  domestic  firm  assets,  government  debt,  or  foreign 
assets. Foreigners in turn can hold assets from the modelled countries. These can be firm 
assets  or  government  debt.  The  external  balance  of  financial  assets  is  defined  by  the 
external  balance  of  goods  and  services.  The  model  does  not  distinguish  which  of  the 
assets  in  the  home  country  are  held  by  domestic  households  and  which  are  held  by 
foreigners. The value of government debt in the period 2015 to 2019 as a percentage of 
GVA can be found in Table 9. 

4 See IMF (2021), p. 37. 

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Table 9: Gross government debt (2015–2019, as a percentage of GVA) 

2.2.  Educational Attainment and Demography 

LMM includes a detailed breakdown of the population with respect to age and educational 
attainment,  which  enables  analysis  of  both  age-  and  skill-dependent  impacts  of  policy 
reforms.  The  model  differentiates  three  groups  of  educational  attainment.  The  group  of 
low-skilled individuals includes individuals with pre-primary, primary, and lower-secondary 
education (ISCED 0-2), individuals with completed tertiary education (ISCED 5+) are high-
skilled,  and  medium-skilled  individuals  have  an  upper-secondary  (and  post-secondary 
non-tertiary) level of education (ISCED 3-4). The distribution of the working age population 
(aged between 25 and 64 years) according to the highest level of educational attainment 
is  based  on  Eurostat  data  and  is  shown  in  Table  10.  In  2020,  the  share  of  low-skilled 
individuals  ranges  from  less  than  10 percent  in  several  countries  (Czechia,  Latvia, 
Lithuania,  Poland,  Slovenia,  Slovakia,  and  Finland)  to  37 percent  in  Spain  and  Italy, 
41 percent  in  Malta  and  45 percent  in  Portugal.  On  the  other  hand,  the  share  of  high-
skilled  individuals  ranges  from  around  20 percent  in  Romania  and  Italy  to  nearly 
50 percent in Ireland. 

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Table 10: Distribution of educational groups (25–64 year olds), 2020 

LMM  is  calibrated  to  a  balanced  growth  path  that  assumes  a  stationary  demographic 
structure  which  implies  that  the  demographic  structure  in  the  model  deviates  from  the 
actual  demographic  structure.  We  use  current  (2019)  mortality  rates  for  each  one-year-
cohort from Eurostat and derive average mortality rates for the different age groups in the 
model.  Table  11  illustrates  the  actual  demographic  structure  and  the  initial  LMM 
demographic structure. We underestimate the group of medium-aged individuals (40 to 64 
years old) in each of the countries and overestimate the group of older individuals in most 
of  the  countries  (apart  from  five  Eastern  Member  States).  However,  we  adjust  the  flat 
pension ‘p00’ in order to derive actual pension expenditures in the countries (see Section 
2.9). 

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Table 11: Demographic distribution (as a percentage of individuals aged 15 and older), 2019 

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2.3.  Consumption Profile 

In LMM, individuals optimally decide how much to consume now or save for later periods, 
determined  by  the  optimal  marginal  propensity  to  consume  (‘mpc’)  out  of  expected  total 
lifetime wealth (consisting of financial wealth and the present value of future labour market 
and pension income and transfers). As described in the LMM documentation, the ‘mpc’ is 
age-dependent  and  determined  by  different  variables  such  as  preference  parameters 
(e.g.,  the  subjective  discount  factor  and  the  intertemporal  elasticity  of  substitution),  the 
interest rate, policy parameters such as consumption tax rates, and mortality rates. Thus, 
combined  with  future  earnings  and  transfers,  the  ‘mpc’  determines  the  intertemporal 
distribution of consumption expenditures of households. 

This means that the model’s consumption profile (i.e., expenditures per age group relative 
to  a  reference  group)  would  potentially  deviate  from  the  profile  actually  observed  in  the 
data. This is one reason why LMM incorporates inter-vivo transfers between households. 
We  calibrate  these  transfers  such  that  the  consumption  profile  observed  in  the  data 
corresponds to optimal household behaviour in the model.5 Data on private consumption 
expenditures  per  adult  equivalent,  according  to  the  age  of  the  household’s  reference 
person,  are  derived  from  Eurostat’s  Household  Budget  Survey  (HBS)  2015  micro-
dataset.6 As this dataset contains few observations for very young and very old household 
reference persons, we estimate a quadratic consumption age profile. 

As can be seen in Table 12, this results in the expected hump-shaped profile for each of 
the countries (except Bulgaria). Some countries, such as Belgium, Germany, and Spain, 
exhibit  a  fairly  steep  consumption  profile  (i.e.,  consumption  expenditures  of  individuals 
aged  40  to  69  years  are  high  compared  to  younger  and  older  individuals).  In  other 
countries  (Ireland,  Poland,  Slovenia,  and  Slovakia;  i.e.,  notably  Eastern  European 
countries), the consumption profile is much flatter and/or private consumption of younger 
age groups is high compared to older age groups. 

5 Given calibrated values for income and transfers and the consumption profile, the profile of financial assets is 

endogenously determined as a result of the intertemporal budget constraint of individuals. 

6 The micro-dataset does not include data for Austria. Therefore, we refer to data from Statistik Austria. 

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Table 12: Consumption profile 

2.4.  Public Revenues from Taxes and Social Security Contributions 

Public revenues from taxes and social security contributions in the different countries are 
derived  using  detailed  data  from  OECD’s  database  on  Revenue  Statistics  (see  e.g., 
OECD,  2021).  We  group  the  detailed  items  into  five  categories  according  to  their 
economic  function:  Personal  Income,  Capital  Gains,  Corporate  Income,  Social  Security 
Contributions, and Consumption.  

Results are presented in Figure 1. Note that the presented data may deviate from officially 
published  OECD  revenue  data  because  some  items  (such  as  occupational  pension 
schemes) are included in LMM but are sometimes not included in the Revenue Statistics. 
Background  information  on  these  adjustments  that  may  be  relevant  for  the  European 
Commission’s modelling experts is provided in the annex (see Section 5.3). 

The amount of public revenues varies widely between the different countries. The share of 
‘total  revenues  as  in  the  LMM’  (including  revenues  from  taxation  and  social  security 

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contributions and the additional items mentioned above) ranges from 25 percent of Gross 
Value  Added  (GVA)  in  Ireland to 60  percent  in  Denmark.  Among  the  three largest  items 
(i.e.,  Income,  Social  Security,  and  Consumption),  revenues  vary  significantly  for  Income 
and Social Security, whereas there is less variation of revenues from consumption taxes. 

Figure 1: Public revenues as in LMM, as share of GVA, average 2015–2019 

The ‘LMM Revenues’ in the five different categories are used to calibrate LMM’s tax rates. 
Some tax rates (taxes on consumption and capital gains taxes) are calculated directly by 
relating  these  revenues  to  the  respective  assessment  base  (i.e.,  consumption  or  capital 
gains). For instance, the effective consumption tax rate is equal to revenues from taxes on 
consumption  divided  by  the  assessment  base  for  consumption  tax,  consisting  of  total 
private  consumption  and  a  share  of  public  consumption  (intermediate  consumption  and 
consumption  of  fixed  capital).  Income  tax  rates  and  social  security  contribution  rates  of 
employers,  employees  and  retirees  according  to  education  and  age  are  derived  via  the 
method  described  in  Section  9.2.3  of  Part  II  of  ‘Modelling  of  Labour  Markets  in  the 

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European Union’ (Berger et al. 2009). To put it simply, we derive age- and skill-specific tax 
and social security contribution rates using the OECD’s TaxBEN model7 and the EU-SILC. 
For LMM’s calibration, these rates are adjusted for all groups so that we replicate public 
revenues as in Figure 1 (only minor adjustments are necessary for most of the countries). 
For  corporate  taxation,  we  use  effective  corporate  tax  rates  of  the  ZEW  (2020);  see 
Section 2.5. In a second step, we calibrate the necessary deductions of the tax base so 
that LMM revenues correspond to revenues based on OECD data. 

2.5.  Effective Corporate Tax Rates 

The calibration of corporate tax rates is based on results of a ZEW (2020) research report 
for  DG  TAXUD  of  the  European  Commission.  Among  other  indicators,  the  report 
computes  effective  marginal  corporate  tax  rates  (EMTRs)  for  a  mean  of  different  asset 
types  and  sources  of  finance  for  the  Member  States  based  on  the  method  of  Devereux 
and Griffith (2003). The EMTRs for the LMM countries are presented in Table 13. 

Table 13: Effective marginal corporate tax rates (EMTR), 2020 

There is a wide range of effective rates between countries. According to the ZEW report, 
the  highest  EMTR  can  be  found  in  Spain  (32.5 percent)  and  France  (29 percent).  Given 
that  the  EMTR  is  negative  for  Malta  and  Portugal  according  to  the  ZEW,  but  corporate 
income  tax  revenues  are  robustly  positive  in  these  two countries,  we  refer  to the  EMTR 
2016 (for MT) and the EATR 2020 (for PT). For the EU-27-model, we calibrate an EMTR 

7 This means that we perform own calculations based on the OECD tax-benefit model, http://oe.cd/TaxBEN. 

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of  21 percent  based  on  a  weighted  average  of  the  27  Member  States  (the  weights  are 
based on assessment bases for corporate taxation according to EU-LMM). 

2.6.  Income Taxation and Social Security Contributions 

LMM’s  detailed  breakdown  of  households  according  to  age  and  skill  groups  enables 
implementation of, for example, progressive income tax systems, maximum thresholds for 
social  security  contributions  or  earned  income  tax  credits.  The  drawback  is  the 
considerable calibration effort. As described by Berger et al. (2009), the calibration relies 
on a sophisticated (and rather time-consuming) application of the OECD’s TaxBEN model 
(using  institutional  details  based  on  the  year  2019)  in  combination  with  EU-SILC  micro-
data. 

This section gives a very brief overview of the institutional background of personal income 
taxes and social security contributions in the different countries. The information is mainly 
drawn from editions of Taxing Wages (OECD), Benefits and Wages (OECD), the MISSOC 
database and, if necessary, national sources. The annex provides specific information that 
might be relevant for the European Commission’s modelling experts. 

Belgium 

Spouses are taxed separately in Belgium. However, a notional amount of income can be 
transferred between spouses if one of them earns less than 30 percent of the combined 
income.8  Individuals  can  deduct  social  security  contributions  and  some  work-related 
expenses for  income  taxation and there  is  an  amount  of  exempt  income that  varies with 
regards  to family  situation.  The  model  also takes  into  account  the  local  government  tax. 
(e.g., 
Employees  and  employers  contribute 
unemployment,  health  insurance,  health  care,  pensions).  A  reduction  of  employer  and 
employee social security contributions, a special social security contribution, as well as tax 
credits for low-income workers are also taken into account in the model. Pension benefits 
are  subject  to  income  taxation  and  to  social  security  contributions  amounting  to  3.55 
percent (above a certain threshold) and are also subject to a ‘solidarity’ contribution if they 
exceed a certain threshold. 

to  several  social 

insurance 

items 

Bulgaria 

Income  taxes  are  paid  on  an  individual  basis  in  Bulgaria  and  income  tax  is  not 
differentiated  according  to  marital  status.  Parents  can,  however,  make  a  deduction  from 
their taxable income according to the number of children. Social security contributions are 
deductible from taxable income. A flat income tax rate without a tax-free range is applied. 
Social 
for  pensions-,  general  disease-,  motherhood-, 
unemployment-,  and  health-insurance  are  levied  from  employees  and  employers  with  a 
maximum  monthly  insurance  income  of  BGN 3,000  in  2019.  According  to  MISSOC,  old 
age and disability pension benefits are not subject to income taxation and social security 
contributions. 

contributions 

security 

8 This system is called the non-earning spouse allowance or ‘quotient conjugal’. 

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Czechia 

Spouses  are  taxed  separately  in  Czechia,  but  some  tax  credits  are  dependent  on 
household  characteristics.  Non-standard  tax  reliefs  include,  for  instance,  supplementary 
pension  scheme  contributions,  private  life  insurance  premiums  and  charitable  donations 
allowances.  It  is  important  to  note  that  taxable  income  is  comprised  of  gross  earnings 
augmented  by  employers’  social  security  contributions  (in  most  other  Member  States, 
taxable  income  is  comprised  of  gross  earnings  minus  employees’  social  security 
contributions). In 2008, a progressive system of taxation was replaced by a single tax rate 
of  15 percent.  However,  tax  credits  for  each  taxpayer,  for  a  spouse  (depending  on  their 
income)  and  for  children  lead  to  modest  progressivity  in  the  system.  Employees  and 
employers  both  contribute  to  health  and  social  insurance  based  on  gross  earnings. 
However, the overall contribution rate is much higher for employers (34 percent in 2019) 
than  for  employees  (11 percent).  Pension  benefits  are  exempted  from  social  security 
contributions  and  only  high  pensions  which  annually  exceed  a  multiple  of  36  of  the 
minimum monthly wage are subject to income taxation. 

Denmark 

The  income  of  an  individual  taxpayer  is  split  into  three  categories:  personal  income 
(consisting  of,  e.g.,  employment  income,  business  income,  pensions,  unemployment 
benefits), capital  income  (e.g.,  interest  payments  and capital  gains),  and taxable income 
(personal  plus  capital  income  minus  deductions).  Spouses  are  taxed  separately  in 
Denmark,  but  some  unutilised  personal  allowances  can  be  transferred  between  them. 
Work-related  expenses  (e.g.,  transportation  or  unemployment  premiums)  can  be  fully 
deducted  from  wage  or  salary  earnings.  Taxable  income  is  subject  to  a  central 
government  income  tax  as  well  as  state  and  local  income  taxes.  Standard  tax  reliefs 
include, for instance, expenses in order to earn income, an extra employment allowance 
for  single  parents,  as  well  as  different  tax  credits  depending  on  the  amount  of  earned 
income.  In  addition,  individuals  pay  an  8 percent  Labour  Market  Contribution  which, 
following  Taxing  Wages  and  Revenue  Statistics,  are  included  in  the  income  tax  rate  in 
LMM. 

to  an  unemployment 

Concerning  social  security  contributions,  employees  make  earnings-independent 
contributions 
insurance  and  an  early  retirement  scheme. 
Furthermore,  employees  and  employers  contribute  to  the  Labour  Market  Supplementary 
Pension Scheme ATP. Pension benefits are subject to income taxation and there are no 
special  reliefs. Old-age pensioners  do  not  pay  social  security contributions,  but  disability 
pensions are subject to the ATP. 

Germany 

Spouses  are  generally  assessed  jointly  for  income  taxation  in  Germany,  but  they  also 
have the option of being assessed separately. Income tax liability is calculated by applying 
the splitting method: the income tax is calculated on basis of one-half of the joint taxable 
income, the resulting amount is doubled to obtain the joint tax liability. Essentially, even if 
two partners have a different income, they share the same income tax rate determined by 

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their joint income. Tax reliefs include reliefs for children, for lone parents, for work-related 
expenses and for special expenses. Social security contributions and other expenses for 
financial security (e.g., life insurance) are deductible up to specific limits. The tax schedule 
is formula based in Germany. A solidarity surcharge of 5.5 percent of income tax liability is 
additionally 
to  sickness,  pension, 
unemployment, care and work injury insurance. 

levied.  Employers  and  employees  contribute 

The  gradual  transition  of  the  income  tax  system  to  deferred  taxation  of  pension  benefits 
implies several changes. First, a gradually increasing share of employee contributions can 
be  deducted  from  their  income  tax  base.  Second,  the  share  of  pension  benefits  taxed 
gradually increases over time for each new retiree cohort (starting from 50 percent of the 
benefits in the year 2005 to 80 percent in 2020 and to 100 percent in 2040). Retirees pay 
social security contributions for sickness and care. 

Estonia 

In  Estonia,  the  income  tax  unit  has  been  the  individual  since  2017,  but  some  tax  reliefs 
(e.g., the general and the child allowance) depend on household characteristics such as 
the spouse’s income. Employee social security contributions (including contributions to the 
second  pension  pillar)  are  deductible  for  income  taxation.  Social  security  contributions 
consist  of  pension,  health  and  unemployment  insurance.  While  compulsory  employee 
contributions  amount  to  only  1.6 percent,  employer  contributions  amount  to  33.8 percent 
of  gross  earnings.  For  employer  contributions,  there  is  a  minimum  monthly  assessment 
base  of  EUR 500  per  month.  No  social  security  contributions  are  applied  to  pension 
income  in  Estonia.  While  public  old-age  pension  benefits  are  subject  to  general  income 
taxation  rules,  disability  pensions  (according  to  MISSOC)  are  not  subject  to  income 
taxation. 

Ireland 

Income  tax  is  levied  on  the  combined  income  of  spouses  in  Ireland.  However,  spouses 
can  opt  for  a  separate  assessment.  It  should  be  noted,  though,  that  a  combined 
assessment does not imply a splitting system as in Germany, for example. However, the 
amount  of  standard  tax  credits  for  couples,  for  example,  is  twice  the  amount  as  for  a 
single  person  and  the  tax  schedule  differs  depending  on  family  situation.  Social  security 
contributions are not deductible for income taxation. Non-standard tax reliefs include, for 
instance,  work-related  expenses  and  medical  insurance.  In  addition  to  income  tax,  the 
‘Universal Social Charge’ (USC) is based on gross income.9 

Employees’  social  security  contributions  (to  pension  and  social  insurance)  amount  to  4 
percent.  Employers’  contributions  are  10.95  percent  (for  pension  and  social  insurance, 
occupational  injuries  and  a  redundancy  contribution),  with  a  reduced  rate  for  earnings 
below a threshold. Pension benefits are taxable and subject to the USC, but there are no 
social security contributions. 

9 Following the TaxBEN model and Revenue Statistics, we model the USC as an income tax. 

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Greece 

Individuals are taxed separately in Greece. Spouses file a joint return but each spouse is 
liable for the tax to be paid on their share of the joint income. The amount of a tax credit is 
determined  by  the  number  of  dependent  children  in  the  household.  Apart  from  this  tax 
credit, standard tax reliefs include, in particular, employee social security contributions. In 
addition to the standard progressive income tax, there is a special solidarity contribution, 
which is also progressive. Social security contributions to the Unified Social Security Fund 
(EFKA), the Supplementary Insurance Branch (ETEAEP) and ‘other funds’ are levied from 
employees  and  employers  up  to  a  ceiling  of  EUR 6,500  per  month from  February  2019. 
Pension  payments  are  subject  to  general  personal  income  taxation  rules  and  subject  to 
health care and solidarity contributions. 

Spain 

Individuals are taxed separately in Spain, but families also have the option of being taxed 
as  married  couples  or  as  heads  of  households.  Taxpayers  can  claim  several  standard 
reliefs like a basic relief, an employment-related allowance, and tax credits depending on 
household characteristics, as well as several non-standard reliefs (like investment in own 
housing). Social security contributions are fully deductible for income taxation. In addition 
to the central government income tax, there are also substantial regional surcharges. We 
follow the OECD TaxBEN model for the calibration of LMM and apply the tax schedule of 
the  Madrid  region.  Employers’  social  security  contribution  rates  (29.9 percent)  are 
substantially higher than those of employees (6.35 percent). Pension benefits are subject 
to  income  taxation  but  there  are  some  reductions  for  people  aged  65  years  and  older. 
Social security contributions for pension benefits do not arise. 

France 

In France, the tax base is aggregate family income, but children over 18 are included only 
if  their  parents  claim  them  as  dependents.10  The  ‘family  quotient’  system  takes  into 
account  the  household situation  by  dividing  net  taxable  income  into  a  certain  amount  of 
shares.11  The total tax levied  is  equal  to the  income tax  with respect to one  share times 
the number of shares. In the French income tax system, there are standard reliefs such as 
work-related expenses. The universal social contribution (‘contribution sociale généralisée 
–  CSG’)  and  the  contribution  to  the  reimbursement  of  social  debt  (‘contribution  au 
remboursement  de  la  dette  social  –  CRDS’)  are  assigned  to  the  personal  income  tax 
system  (and  are  not  treated  as  social  security  contributions)  in  the  OECD  publications 
Taxing  Wages  and  Revenue  Statistics  and  in  LMM.  There  are  several  different  types  of 
employee  and  employer  social  security  contributions  that  have  different  ceilings  and 
thresholds  and  there  are  also  some  reductions  for  employer-paid  social  security 
contributions. In addition, there is an in-work benefit to promote the return to full-time work 
for low-paid workers. Pension and invalidity benefits are subject to income taxation (with a 

10 Since 2004, the law allows for joint taxation of partners in a French civil union (‘PACS’). 

11 For example, one share for singles, two shares for couples, and an additional half a share for each dependent child. 

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Update and Extension of the Labour Market Model – Final Report 

special allowance), to CSG and CRDS. In addition, occupational pensions are subject to a 
small social security contribution for illness. 

Croatia 

Income  taxes  are  paid  individually  in  Croatia.  Apart  from  a  general  allowance,  there  are 
family allowances if a taxpayer provides support to an immediate family member, and for 
tax 
dependent  children.  Furthermore,  employee  social  security  contributions  are 
deductible. In addition to the central government income tax, towns and municipalities can 
prescribe a surtax to taxpayers. Employees pay social security contributions to (first and 
second  pillar)  pension  insurance,  while  health  insurance  contributions  are  levied  from 
employers  –  other  types  of  contributions  were  abolished  from  2019.  According  to 
MISSOC, pension and disability benefits are subject to income taxation (the tax allowance 
is the same as the general allowance for employed individuals). Pensions exceeding the 
average monthly national net wage in the preceding year are subject to a health insurance 
contribution of 3 percent. 

Italy 

Spouses  are  taxed  separately  in  Italy,  but  certain  reliefs  depend  on  household 
characteristics.  Social  security  contributions  due  by  law  can  be  deducted  from  taxable 
income. There are several tax credits, for example, a basic employee tax credit, the PAYE 
tax credit, as well as tax credits for family dependents (spouse and child tax credit). There 
are  also  several  non-standard  tax  allowances  and  credits,  for  example,  for  charitable 
donations or certain expenses. In addition to the central government income tax, there are 
regional  and  local  surcharges.  In  accordance  with  the  OECD  TaxBEN  model,  we  apply 
the  tax  rate  paid  in  the  capital  Rome  in  our  model.  In  2019,  employee  contributions 
amounted  to  9.49  percent  up  to  EUR  47,143  and  10.49  percent  up  to  EUR  102,543, 
whereas employer contributions amounted to 31.58 percent. Pension benefits are subject 
to taxation  and there are no  special  reliefs  for  these benefits.  They are subject  to social 
security  contributions  for  the  National  Institution  for  Italian  Pensioners  amounting  to 
EUR 0.01 per month. 

Cyprus 

The income tax  system in Cyprus refers to individual  persons.  The main tax relief  is the 
deduction  of  social  security  contributions  from  gross  income  and  there  is  a  progressive 
income tax schedule with a zero income tax bracket (of up to EUR 19,500 in 2019). Social 
security contributions are comprised of the Social Insurance Fund (which featured a gross 
income ceiling of EUR 54,648 in 2019) and the Redundancy Fund. In addition, the Social 
Cohesion Fund and the Industrial Training Fund are funded by payroll taxes. Contributions 
to  the  medical  and  provident  funds  are  voluntary  and  not  implemented  in  the  OECD 
TaxBEN model and in the LMM. According to MISSOC, pension and disability benefits are 
subject  to  income  taxation  with  no  special  reliefs,  but  there  are  no  social  security 
contributions on these benefits. 

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Update and Extension of the Labour Market Model – Final Report 

Latvia 

Each  individual  is  taxed  separately  in  Latvia,  but  some  tax  reliefs  (in  particular,  an 
allowance  for  dependents)  differ  according  to  household  characteristics.  Standard  tax 
reliefs  include, for  instance,  a  general  allowance  and, most  importantly, employee social 
security contributions. From 2018, progressive income taxation has been implemented in 
Latvia.  Social  security  contributions  cover  state  pension,  unemployment,  disability, 
maternity and sickness, parental and health insurance, and accidents at work. From 2016, 
a  solidarity  tax  was  introduced  that  is  paid  for  income  exceeding  the  maximum 
assessment  base  for  social  security  contributions.  Pension  payments  granted  or 
recalculated  since  1996  are  subject  to  income  taxation  with  general  taxation  rules  while 
benefits  already  granted  before  are  exempt  from  taxation.  Pension  benefits  are  not 
subject to social security contributions. 

Lithuania 

The tax unit in Lithuania is the individual. Compared to other Member States, household 
characteristics  are  less  reflected  in  income  taxation  rules,  but  mostly  in  family  benefits. 
There  is  a  general  allowance  that  amounts  to  EUR 3,600  for  individuals  whose  annual 
income does not exceed twelve-times the minimum wage, which is gradually phased out 
for  higher  income. Other  tax reliefs  exist, for  instance,  for  disadvantaged  individuals  and 
for second pillar pension and voluntary social security contributions. However, according 
to  Taxing  Wages,  mandatory  employee  contributions  are  not  deductible  for  income 
taxation.  Social  security  contributions  consist  of  pension-,  health-,  sickness-,  maternity-, 
unemployment-,  and  accidents-at-work  insurance.  In  2019,  a  labour  taxation  reform  was 
introduced  that  shifted  most  employer  contributions  to  employees  and  income  taxation, 
accompanied by a compulsory gross salary increase of 28.9 percent. In addition, there are 
payroll taxes to the Guarantee fund and the Long-term employment benefit fund. Each of 
these  two  contributions  corresponded  to  0.16 percent  of  the  gross  wage  in  2019.  As  we 
include  Lithuania’s  funded  pension  scheme  in  the  LMM,  we  add  the  contribution  of 
3 percent  to  employee  social  security  contributions.  Public  pension  benefits  are  not 
subject to income taxation and social security contributions. 

Luxembourg 

Spouses and partners’ income is taxed jointly in Luxembourg. This means that individual 
tax liability is calculated on the basis of one-half of the joint taxable income; the resulting 
amount is doubled to obtain the joint tax liability. Standard tax reliefs include, for instance, 
deductions  for  work-related  expenses  and  for  commuting  expenses.  Social  security 
contributions  paid  to  compulsory  health  insurance  and  pension  schemes  are  deductible, 
but  contributions  to  the  dependency  insurance  are  not  deductible.  In  addition  to  these 
reliefs,  there  is  a  tax  credit  for  wage-earners  and  pensioners,  a  single-parent  tax  credit 
and  a  new  tax  credit  for  social  minimum  wage  earners  which  was  introduced  in  2019. 
Furthermore,  the  tax  schedule  is  applied  to  an  adjusted  taxable  income  for  some 
taxpayers  (widow(er)s,  taxpayers  with  a  dependent  child  and  persons  over  64  years). 
Income  tax  is  subject  to  an  additional  ‘solidarity  surtax’  to  finance  the  employment  fund. 
Social  security  contributions  are  levied  for  pension  and  disability,  health,  dependency, 

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Update and Extension of the Labour Market Model – Final Report 

health in the workplace, and accident insurance. In addition, employers make payments to 
the  Employers’  Mutual  Insurance  Scheme.  Pension  and  disability  benefits  are  subject  to 
income  taxation  and  pensioners  benefit  from  similar  tax  reliefs  as  employees  (although 
some  amounts  are  different).  Social  security  contributions  on  pension  benefits  include 
health care and long-term care insurance. 

Hungary 

The  tax  unit  in  Hungary  is  the  individual  person.  The  main  standard  relief  for  income 
taxation is a family tax allowance, which is dependent on the number of children and may 
be  claimed  by  one  spouse  or  be  split  between  spouses.  From  2014,  the  family  tax 
allowance  was  extended  with  the  consequence  that  families  whose  income  is  not 
sufficient  to  claim  the  maximum  amount  can  deduct  the  remaining  amount  from  social 
security  contributions.  Social  security  contributions  are  levied  for  pension,  sickness  and 
unemployment  insurance  and  are  not  deductible  for  income  taxation.  From  2012, 
employer  contributions  were  merged  into  a  new  social  contribution  tax.  In  addition, 
employers pay a training levy. Pension and disability payments are not subject to personal 
income tax and not subject to social security contributions. 

Malta 

Each  person  is  considered  individually  for  income  taxation  in  Malta.  However,  persons 
who are married and live together or parents can opt for a ‘married rate’ assessment if this 
is  more  beneficial  for  them.12  According  to  the  TaxBEN  model,  social  security 
contributions  are  not  deductible  for  income  taxation.  Social  security  contributions  are 
levied on employees and on employers. For individuals born after 1962, they were levied 
up to a ceiling of EUR 465.27 per week in 2019. In 2015, a (non-taxable) means-tested in-
work  benefit  was  introduced,  whose  amount  depends  on  household  composition  and 
income.  Pension  and  disability  benefits  are  subject  to  income  taxation  with  no  special 
reliefs, but there are no social security contributions on pension benefits. 

Netherlands 

There  are  three  categories  of  taxable  income  in  the  Netherlands.  Similar  to  Taxing 
Wages,  we  focus  on  the  category  ‘taxable  income  from  work  and  owner-occupied 
housing’.  Spouses  are  taxed  separately  in  the  Netherlands,  but  some  tax  credits  and 
exemptions  depend  on  the  family  situation.  Several  different  tax  credits  of  the  Dutch 
system,  such  as  the  general  tax  credit,  a  work  credit,  and  the  income-dependent 
combination credit, are taken into account in the calibration of LMM. In addition, there are 
several  non-standard  tax  reliefs  (such  as  for  some  travelling  and  medical  expenses  or 
contributions  to  private  pension  schemes).  In  contrast  to  most  other  Member  States, 
employee  social  security  contributions  are  not  deductible  for  income  tax  purposes. 
Contributions  to  occupational  pension  schemes  as  well  as  employee  contributions  to 
health  insurance  (paid  to  private  insurance  companies)  and  employer  contributions  for 
medical care are treated as NTCP (‘non-tax-compulsory-payments’) in Taxing Wages and 
are  included  in  the  calibration  of  LMM.  Pension  benefits  are  subject  to  income  taxation 

12 The calibration of the LMM follows the OECD TaxBEN model here, which chooses the better option. 

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Update and Extension of the Labour Market Model – Final Report 

and social security contributions, but they are not subject to contributions for the old age 
pension system. 

Austria 

Each  person  is  taxed  separately  in  Austria,  but  some  of  the  tax  reliefs  and  tax  credits 
(e.g.,  sole  earner's  or  sole  parent's  tax  credits)  depend  on  household  characteristics. 
Standard  tax  reliefs  include,  for  instance,  work-related  expenses  and,  most  importantly, 
employee  social  security  contributions.  There  is  a  preferential  taxation  of  the  Christmas 
and leave bonus. Several tax credits, such as the family tax credit, a commuting tax credit, 
a  sole  earner  and  a  single  parent  tax  credit  exist.  Social  security  contributions,  for 
example  for  pension,  health,  and  unemployment  insurance  are  levied  upon  employees 
and employers up to a ceiling of EUR 5,220 per month (14 times because of holiday and 
Christmas  pay)  in  2019.  In  addition,  payroll  taxes  include  contributions  to  the  Family 
Burden  Equalisation  Fund  (at  a  rate  of  3.9 percent  in  2019)  and  the  Community  Tax 
(3 percent).  Pension  payments  are  subject  to  the  same  personal  income  tax  schedule 
(even  though  the  tax  credit  for  retired  persons  is  slightly  different),  social  security 
contributions on pension benefits only include health insurance. 

Poland 

Married  couples  can  opt  to  be  taxed  on  their  joint  income  in  Poland.  In  that  case,  the 
splitting method system applies, i.e., the tax bill for a couple is twice the income tax due 
on half of the joint income. Furthermore, single parents with dependent children are also 
entitled  to  use  the  splitting  system.  There  is  a  basic  tax  credit  as  well  as  reliefs  for 
children.  Social  security  contributions  of  employees  include  contributions  to  old  age, 
disability and sickness/maternity insurance, and the National Health Fund. Social security 
contributions  other  than  health  insurance  contributions  are  deductible  from  taxable 
income. The contribution of 9 percent of earnings to the National Health Fund is taken into 
account via a tax credit of 7.75 percent. Employers pay contributions to social insurance 
(pension and disability payments and an industrial accident fund), to the Labour Fund, the 
Solidarity  Support  Fund  for  Disabled  Persons,  and  the  Guaranteed  Employee  Benefit 
Fund.  Old-age  pension  and  early  retirement  benefits  are  subject  to  income taxation  and 
there  are  no  special  reliefs  available  for  those  benefits.  Old-age  and  early  retirement 
recipients pay health care insurance. 

Portugal 

Income  is  taxed  individually  in  Portugal,  but  families  can  opt  for  joint  taxation,  in  which 
case an income-splitting system is applied. There was a standard deduction of EUR 4,104 
in 2019. If compulsory social security contributions exceed that limit, the deduction equals 
the  amount  of  these  contributions.  Other  reliefs  include,  for  instance,  tax  credits  for 
dependent  children,  for  persons  with  disabilities,  and  for  households’  general  expenses. 
Social security contributions (for health, old age, maternity, family and unemployment) are 
levied  upon  employees  and  employers  with  no  income  ceiling.  According  to  MISSOC, 
pension  and  disability  benefits  are  subject  to  the  same  amount  of  the  standard relief  as 
employee’s income and not subject to social security contributions. 

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Update and Extension of the Labour Market Model – Final Report 

Romania 

Each  person  is  taxed  individually  in  Romania.  However,  the  new  income  deduction  that 
came into force in 2018 is based on monthly income and the number of persons in care. 
In  addition,  employee  social  security  contributions  are  deductible  for  income  taxation.  In 
2018, a major part of employer contributions was transferred to employees, compensated 
by higher gross nominal earnings. Thus, employees contribute to the health (10 percent) 
and  social  security  (25 percent)  scheme  up  to  a  ceiling  of  five-times  average  gross 
earnings,  while  employers  contribute  2.25 percent  to  the  general  budget.  Besides  that, 
there  is  a  risk  and  accident  fund  (contributions  depend  on  the  risk  class)  and  there  are 
some  exceptions  for  certain  sectors.  Both  features  are  not  implemented  in  the  TaxBEN 
calculation but implicitly reflected in the LMM calibration – as the LMM calibration is based 
on aggregate revenues. According to information from DG EMPL, income tax and health 
insurance contributions are levied on pension income exceeding certain income levels. 

Slovenia 

Income is taxed on an individual basis in Slovenia, but some tax reliefs (in particular family 
allowances)  depend  on  household  characteristics.  Standard  tax  reliefs  are  a  general 
(basic) allowance as well as an additional allowance for low-income earners. Employee’s 
compulsory  contributions  for  the  social  security  system  are  deductible  for  income  tax 
purposes.  In  addition,  there  are  several  non-standard  tax  reliefs  such  as  reliefs  for 
reimbursement of expenses associated with work. The income tax schedule for 2019 has 
five tax brackets and there are no regional or local income taxes. The compulsory social 
security  insurance  system  consists  of  four  schemes:  pension  and  disability  insurance, 
health  insurance,  unemployment  insurance,  and  parental  leave  insurance.  In  2019, 
employee  and  employer  social  security  contribution  rates  amount  to  22.1 percent  and 
16.1 percent, respectively.13 

According  to  MISSOC,  (old-age  and  disability)  pensions  are  subject  to  social  security 
contributions (for health services and refund of commuting expenses in case of sickness) 
of 5.96 percent. Pension benefits are entitled to a tax credit amounting to 13.5 percent of 
to 
the  pension/compensation  received 
information  provided  by  the  Slovenian  research  institute  IMAD,  severance  pay  on 
redundancy is exempt from income taxation up to a certain amount. 

the  compulsory  pension.  According 

from 

Slovakia 

Individuals are taxed separately in Slovakia, but there are some reliefs that depend on the 
family situation. Apart from that, a basic relief and employee social security contributions 
are deductible for income taxation. As from 2013, the previous flat tax rate of 19 percent 
was replaced by a new tax schedule that includes a second bracket above 177-times the 
MLS  –  Minimum  Living  Standard  (which  corresponds  to  EUR  36,257  in  2019). 
Compulsory  social  security  contributions  are  paid  by  employees  and  employers.  The 

13 In addition, Slovenia implements a minimum assessment base for social security contributions. For gross earnings below 
the minimum income threshold, social security contributions are calculated on the basis of the minimum social security 
contribution base and not actual gross wage earnings. 

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Update and Extension of the Labour Market Model – Final Report 

introduction  of  a  health  insurance  contribution  allowance  in  2015  basically  implies  that 
employee  contributions  are  reduced  for  low-income  earners.  In  2005,  a  privately 
managed, fully funded pension pillar has been introduced. A given proportion of employer 
contributions  (4.75  percent  in  2019,  increasing  to  6  percent  from  2024)  is  paid  to  these 
funds  instead  of  the  public  social  insurance  agency  for  those  covered.  Pension  benefits 
are not taxable and not subject to social security contributions. 

Finland 

Spouses  are  taxed  separately  in  Finland.  Income  taxation  is  comprised  of  a  central 
government  and  a  local  income  tax.  The  main  reliefs  for  the  central  government  tax  are 
work-related  expenses,  an  earned  income  tax  credit  and  several  non-standard  reliefs 
(such  as  membership  fees  or  travelling  expenses).  Local  income  taxes  account  for  a 
major share of income tax revenues in Finland, and we follow the OECD by assuming an 
average local tax rate of 19.88 percent. The tax base for local income taxes is the same 
as for the central government tax, but an earned income tax allowance can be considered 
for  local  income  taxation.  Social  security  contributions  are  paid  by  employers  and 
employees.  For  employees,  they  are  comprised  of  pension  insurance,  unemployment 
insurance  and  a  health  insurance  contribution.  In  addition,  employers  contribute  to  an 
accident  and  group  life  insurance.  Pension  benefits  are  subject  to  income  taxation 
(whereby  the  income  tax  allowances  for  retirees  differ  to  some  extent  from  those  of  the 
working-age population) and health insurance contributions. 

Sweden 

Spouses  are  taxed  separately  in  Sweden.  There  is  a  basic  allowance  that  varies  with 
income  and  there  are  several  non-standard  reliefs.  Employees  are  granted  a  tax  credit 
equal  to  100 percent  of  compulsory  employee  social  security  contributions.  In  addition, 
there is an Earned Income Tax Credit (EITC) worth up to SEK 30,400. These tax credits 
are wastable in the sense that they do not reduce an individual’s tax payment below zero. 
Apart  from  the  central  government  income  tax,  which  is  progressive  and  levied  from 
taxable  income  of  approximately  SEK  500,000,  Sweden  has  local  government  income 
taxes (with the same tax base and an average rate of 32.19 percent in 2019 according to 
the OECD). Employees and employers pay social security contributions. In addition, there 
are  quasi-mandatory  occupational  pension  schemes  that  cover  more  than  90 percent  of 
employees. Pension benefits are taxable with general taxation rules, but no social security 
contributions are levied. 

2.7.  Employment Protection Legislation (EPL) 

A literature review of both theoretical and empirical EPL research is presented in Part I of 
Berger et al. (2009), Part II contains a more detailed description of the calibration. In LMM, 
the  elasticity  of  the  layoff  rate  with  respect  to  (w.r.t.)  EPL  is  based  on  OECD  (2004) 
estimates.  Applying  a  cross-country  GLS  estimation,  this  study  finds  that  the  flow  into 
unemployment  decreases  by  0.165  percentage  points  if  the  OECD  EPL  index  increases 
by 1 point. 

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Update and Extension of the Labour Market Model – Final Report 

We implement the relative strictness of EPL in the Member States in LMM by calculating a 
Modified EPL Index. Starting from version 3 of the EPL Index for 2019 and weighing the 
sub-indices for regular and temporary workers with their actual share in the labour market 
(taken from Eurostat) produces the modified EPL index, provided in Table 14. For Croatia, 
the  calibration  is  based  on  the  most  recent  OECD  EPL  Index  for  2015.  For  Bulgaria, 
Cyprus,  Malta  and  Romania,  there  exists  no  OECD  EPL  Index.  However,  the  World 
Bank’s  EWI  (Employing  Workers  Index)  provides  information  for  several  items  that  are 
closely related to items of the EPL Index and we approximate EPL for these countries by 
using EWI information. Finally, we use the index value of the 27 Member States and the 
number of employees as weights to calculate an EU-27 value. 

Among the countries modelled, the Netherlands, Latvia, Belgium, and France feature the 
strictest  EPL (with index  values  of  around  3),  whereas  the  lowest  values  are  derived  for 
Denmark and Ireland (values below 2).  

Table 14: Modified EPL index; share of severance pay costs among total firing costs (2019) 

LMM differentiates severance payments and administrative firing costs. We calculate the 
share of severance payments of total firing costs by classifying the different items of the 
EPL  index  according  to  whether  they  can  be  associated  to  severance  payments  or 
administrative costs. 

As we have more detailed information on firing costs in Germany based on Grund (2003) 
and  Goerke  and  Pannenberg  (2005),  the  calibration  of  firing  costs  in  all  countries  is 
implemented by comparing the modified EPL index with the (historic) value for Germany. 
Using these estimates and the average tenure for each age and skill group from the LFS, 

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Update and Extension of the Labour Market Model – Final Report 

we  derive  average  severance  payments  for  each  group.  Administrative  costs  are  a 
multiple  of  severance  payments  and  can  be  derived  from  the  share  in  Table  14.  In  our 
view, this calibration approach results in a useful approximation of firing costs in LMM. 

2.8.  Unemployment Benefits 

The unemployment system is an important part of the public social system, which provides income 

in  case  of  unemployment,  but  also  influences  the  behaviour  of  economic  agents.  According  to 

economic  theory,  higher  unemployment  benefits  imply  positive  incentives  to  participate  in  the 

labour market, but negative incentives to search for a job, if a person is unemployed. Furthermore, 

unemployment  benefits  influence  the  wage  bargaining  process  between  workers  and  firms  as 

wages in general will rise as a consequence of higher reservation wages if the replacement rate in 

the unemployment system increases. Unemployment regulations differ widely among countries. In 

this section, we discuss the systems country by country. The information is mainly drawn from the 

MISSOC database and the OECD Benefits and Wages publication. We focus on the regulations of 

January  2019.  For  the  calibration  of  the  model,  we  rely  on  EU-SILC  data  as  it  is  not  possible  to 

translate institutional regulations into the model one by one. Institutional regulations by themselves 

do  not  provide  information  on  whether  a  person  is  eligible  for  unemployment  payments,  or  about 

the replacement rate, as the rate often depends on the length of the unemployment spell or other 

aspects.  

Furthermore, 

this  section  provides 

information  on  how 

the  variables  which  reflect 

the 

unemployment system in the model are calibrated. These variables are ‘xi1’, ‘brepl’ and ‘b00’. ‘xi1’ 

reflects  the  share  of  unemployed  persons  receiving  benefits  depending  on  labour  income  before 

unemployment (‘earnings-related benefits’). Other individuals either receive benefits independent of 

previous labour income, like social assistance in most of the countries, or no public unemployment 

benefits.  ‘brepl’  reflects  the  gross  replacement  rate  in  the  public  or  private  mandatory 

unemployment  insurance  and/or  assistance  system.  If  unemployment  insurance  as  well  as 

unemployment assistance benefits both depend on prior labour income then ‘brepl’ reflects both of 

them  and  the  generosity  depends  on  the  shares  of  persons  eligible  for  unemployment  insurance 

and  unemployment  assistance  (if  eligibility  differs  between  these  two  types,  which  is  usually  the 

case).  In  general,  ‘brepl’  and  ‘xi1’  are  based  on  EU-SILC  data.  However,  if  unemployment 

insurance  is  dependent  on  labour  income  but  unemployment  assistance  is  not,  then  additional 

information is necessary to derive them. This is the case in nine of the EU member states, namely 

Belgium,  Germany,  Estonia,  Spain,  France,  Lithuania,  Portugal,  Finland,  and  Sweden.  In  several 

countries,  unemployment  insurance  benefits  are  flat,  that  is,  independent  of  previous  labour 

income. In this case ‘xi1’ is set to zero and unemployment insurance benefits are included in ‘b00’. 

The  reason  for  the  division  of  these  types  of  benefits  is  the  different  impact  on  the  incentives  of 

unemployed  persons.  If  replacement  income  depends  on  previous  labour  income,  higher  wages 

will induce a higher replacement income, which is not the case for a fixed flat replacement income. 

For  this  reason,  unemployment  benefits  are  divided  into  the  income-dependent  unemployment 

insurance and the income-independent unemployment assistance in the model.  

‘b00’  also  includes  social  assistance  benefits  in  the  model,  but  these  are  not  discussed  in  this 

section  and  therefore  also  not  included  in  the  values  for  ‘b00’  in  the  following  tables.  For  this 

reason, the values may differ from the ones which can be found in ‘DataInputXX.xls’ files. However, 

sources of ‘b00’ are shown in the ‘DataInputXX.xls’ files.  

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Update and Extension of the Labour Market Model – Final Report 

In  order  to  derive  the  rate  of  eligibility  and  the  replacement  rate,  we  refer  to  the  variable 

unemployment benefits PY090G in the EU-SILC, where G stands for gross income. This variable 

contains  the  annual  income  of  a  person  received  from  several  sources,  like  full  and  partial 

unemployment  benefits,  early  retirement  benefits,  vocational  training  allowances,  mobility  or 

resettlement  benefits,  severance  payments  and  others,  but  excludes  family  allowances.  This 

income  category  is  broader  than  required,  but  no  better  sources  are  available.  As  the  income 

variable represents income received across the whole year, we divide it by the number of months 

spent in unemployment represented by the variable PL080 to calculate monthly income. To get rid 

of  very  low  and  very  high  benefits  (which  might,  for  example,  result  from  high  severance 

payments), we set very low benefits equal to zero and high benefits to an upper bound. The upper 

bound is set by institutional specifications (upper bound of benefits).14 Eligibility for unemployment 

compensation  is  defined  as  the  number  of  persons  with  months  spent  in  unemployment  and 

receiving  positive  unemployment  benefits  in  relation  to  the  aggregate  number  of  persons  with 

months spent in unemployment.  

The  relation  of  average  monthly  unemployment  benefit  payments  to  average  monthly  income  for 

the different age and skill groups gives the gross replacement rate for the unemployment period. To 

derive monthly employee cash or near cash income we divide the income variable PY010G by the 

number of months spent in full- or part-time work (PL073, PL074). 

In the following, the unemployment systems in the considered countries are discussed. The rate of 

eligibility  for  unemployment  payments  (total  of  unemployment  insurance  and  unemployment 

assistance) as well as the gross replacement rate (weighted average of unemployment insurance 

benefits and assistance benefits as a percentage of average gross labour income of the respective 

age  and  skill  group)  will  be  presented  in  each  country’s  section.  The  latter  are  compared  to 

important parameters of the system to check for plausibility. 

Belgium 

Unemployment insurance in Belgium is compulsory and pays earnings-related benefits (lump-sum 

benefits for young persons), dependent on family status. The qualifying period depends on the age 

of the insured persons and is between 312 working days within the last 21 months and 624 working 

days  within  the  previous  42  months.  No  waiting  period  must  be  considered.  The  duration  of 

eligibility for unemployment benefits is unlimited if an unemployed person provides enough search 

effort for a new job. Accumulation with work-income is possible to a certain extent if the activity is 

subordinate.  Other  income  from  work  reduces  benefits  proportionally  to  the  number  of  days 

worked.  

The unemployment system in Belgium distinguishes three periods. The first period covers the first 

year of unemployment. The second period lasts two months extended by an additional two months 

for each year of previous employment. The maximum duration in the second period is 36 months. 

In the third period, unemployed individuals receive a flat unemployment benefit.  

In the first  period the replacement rate  equals 65 percent of  last  income  in the first three  months 

and 60 percent afterwards. Upper and lower ceilings for unemployment benefits are defined. The 

lower  ceiling  for  cohabitants  with  dependants  amounts  to  average  daily  earnings  of  EUR  48.89 

14 The lower bound is set to EUR 30 or EUR 100 per month. Lower values are generally used for Member States with lower 

average wages.  

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Update and Extension of the Labour Market Model – Final Report 

(2019),  the  upper  ceiling  to  EUR  66.78  (2019).  For  single  persons  and  cohabitants  without 

dependants, the lower ceiling amounts to EUR 40.48 and EUR 29.46 (2019 both), respectively. The 

upper  ceiling  decreases  stepwise.  In  the  second  period,  the  replacement  rate  still  amounts  to  60 

percent for cohabitants with dependants but decreases to 55 percent for single persons (40 percent 

for cohabitants without dependants). The upper and lower ceilings decrease further stepwise. The 

flat benefit in the third period amounts to EUR 48.89 (2019) for cohabitants with dependants, EUR 

40.48 for single persons, and EUR 21.17 for cohabitants without dependants.  

For  young  individuals,  lump-sum  daily  benefits  are  defined,  for  older  workers  there  exist  age 

supplements. Unemployment benefits are subject to taxation. Social security contributions are 6.5 

percent for monthly unemployment benefits above EUR 1,449.73 (2019, EUR 1,746.22 for persons 

with dependants). 

The  third  period  benefit  requires  separation  of  unemployment  benefits  into  income-dependent 

benefits  (‘xi1’,  ‘brepl’)  and  flat  benefits  (‘b00’).  We  distinguish  these  two  types  by  the  duration  of 

unemployment.  Persons  searching  for  a  job  for  more  than  two  years  are  assigned  to  the  third 

period, other unemployed persons to the first two periods.  

The  share  of  persons  receiving  unemployment  insurance  benefits,  as  a  percentage  of  all 

unemployed persons, is reflected in the policy parameter ‘xi1’. The policy parameter ‘brepl’, which 

stands  for  benefit  replacement,  captures  the  gross  replacement  rate  in  the  unemployment 

insurance. The  variable  ‘b00’  reflects  the  income  of  persons  receiving  unemployment  assistance. 

These inputs are necessary for countries with an income-independent unemployment replacement 

income.  For  other  countries,  only  values  for  ‘xi1’  and  ‘brepl’  are  needed  as  unemployment 

insurance as well as unemployment assistance are income dependent. 

In  Table  15,  one  can  find  eligibility  for  income-dependent  unemployment  benefits  (‘xi1’)  and  the 

corresponding  replacement  rate  (‘brepl’)  in  Belgium.  The  replacement  rate  is  lower  than  the 

aforementioned 50 to 60 percent, which may be the consequence of the upper ceiling. According to 

data from the Office National de l’Emploi, the share of persons receiving flat benefits is higher than 

35  percent. As  this  share  is  rather  high,  ‘b00’,  the  flat  rate  unemployment  benefits  are  also  very 

important in Belgium, as shown in Table 15. 

Table 15: Unemployment benefit eligibility and gross replacement rate in Belgium 

Bulgaria 

The Bulgarian unemployment system is a compulsory insurance scheme covering employees and 

financed  by  contributions.  Unemployment  can  be  voluntary  or  involuntary,  and  eligible  persons 

must be registered,  available  and actively searching  for work. The qualifying period  is at  least  12 

months of insurance during the last 18 months before unemployment. There is no waiting period in 

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Bulgaria.  Unemployment  benefits  depend  on  previous  gross  earnings  and  the  reason  for 

unemployment.  

The unemployment benefit amounts to 60 percent of the average income of the 24 months before 

unemployment, but not less than BGN 9 (EUR 4.6) per working day. The maximum amount is BGN 

74.29  (EUR  38)  per  working  day.  The  benefit  is  also  capped  at  60  percent  of  the  maximum 

contributory  income,  which  was  BGN  3,000  (EUR  1,534)  per  month  in  2019.  However,  as  the 

maximum amount is lower, this cap is not binding. If termination of the labour contract is voluntary, 

unemployment  benefits  equal  the  minimum  amount.  The  same  happens  in  cases  of  collective 

dismissals.  

The duration of benefit payments ranges from four months for an insurance period less than three 

years  up  to  12  months  for  an  insurance  period  of  more  than  15  years.  If  the  labour  contract  is 

terminated  voluntarily  or  in  the  case  of  a  collective  dismissal,  the  maximum  duration  of  eligibility 

amounts  to  four  months.  An  unemployment  assistance  scheme  does  not  exist  in  Bulgaria. 

Unemployment benefits are neither taxable nor subject to social security contributions.  

Table 16: Unemployment benefit eligibility and gross replacement rate in Bulgaria 

EU-SILC data show, as provided in Table 16, that the rate of eligibility is significantly lower for low-

skilled than for other skill groups, for which it amounts to one-quarter to one-third. The replacement 

rate is considerably lower than the statutory replacement rate of 60 percent, which can result from 

the  lower  benefits  in  cases  of  voluntary  termination  of  a  contract.  As  unemployment  benefits 

generally are wage dependent, ‘b00’ from unemployment is set to zero.  

Czechia 

In Czechia, persons qualify for unemployment insurance benefits not only in the case of previous 

employment but also for other reasons, for example in case of rehabilitation or care responsibilities. 

The  necessary  period  of  contributions  to  the  unemployment  scheme  amounts  to  twelve  months 

within the last two years. The entitlement for unemployment benefits ends after five months if the 

beneficiary’s  age  is  below  50.  For  persons  older  than  50  years,  the  maximum  duration  raises  to 

eight months (eleven in case of 55 years).  

The  benefit  ratio  amounts  to  65  percent  of  previous  net  earnings  (net  of  tax  and  social  security 

contributions) in the first two months, 50 percent in the following two months and 45 percent in the 

remaining months. During retraining of disabled persons, the benefit recipient receives 60 percent 

of  the  last  net  earnings.  In  case  of  termination  of  the  last  job  by  the  employee  or  by  agreement 

without valid reason,  the unemployment benefit shall  be set to  45  percent of previous income for 

the entire support period. The maximum benefit equals 58 percent of the national average wage or 

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Update and Extension of the Labour Market Model – Final Report 

65  percent  in  case  of  retraining.  Benefits  received  are  not  taxable  and  exempted  from  social 

security contributions.  

Table 17: Unemployment benefit eligibility and gross replacement rate in Czechia 

Eligibility and the replacement rate for the different age and skill groups are presented in Table 17. 

The eligibility rate is rather low, which can be explained by the short benefit duration in comparison 

to other countries. The replacement rate also seems to be rather low, but one must keep in mind 

that  unemployment  benefits  are  not  taxable  and  are  exempted  from  social  security  contributions, 

which  implies  a  low  replacement  rate  as  benefits  are  related  to  gross  labour  income. The  rate  is 

higher if compared to net income. 

Denmark 

In  contrast  to  most  other  European  countries,  unemployment  insurance  is  voluntary  in  Denmark 

and  accessible  for  employees  and  self-employed  persons.  Even  though  the  system  is  voluntary, 

about 80 percent15 of employed persons participate in the system. Benefits are eligible for persons 

between  18  and  retirement  age.  For  qualification,  a  minimum  insured  income  of  DKK  233,376 

(2019) during three preceding years is required. For part-time workers the minimum income equals 

DKK  155,580  (2019).  If  the  job  loss  was  voluntary,  benefits  can  be  claimed  three  weeks  after 

getting unemployed.  

The  benefit  of  the  unemployment  insurance  amounts  to  90  percent  of  gross  earnings  received 

before  the  unemployment  spell,  after  deduction  of  8  percent  social  security  contributions.  The 

maximum  monthly  benefit  amounts  to  DKK  18,866  (2019).  Young  unemployed  persons  with 

graduate rights receive 71.5 percent (82 percent with a child) of the maximum amount; other young 

persons receive 50 percent. The maximum total benefit duration is two years (considering repeated 

unemployment events) within a three-year period. An extension by an additional year is possible if 

the  recipient  works  at  least  half  a  year.  To  qualify  for  a  new  benefit  period,  1,924  hours  of  work 

within 36 months for full-time insurance are necessary. An unemployment assistance system does 

not exist in Denmark. Unemployment benefits are subject to taxation but not to the labour market 

contribution.  In  addition,  they  are  subject  to  contributions  to  the  supplementary  pension  scheme 

(ATP). 

15 See https://www.a-kasser.dk/stigende-andel-af-de-unge-er-medlem-af-en-a-kasse/index.html. 

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Table 18: Unemployment benefit eligibility and gross replacement rate in Denmark 

Table 18 provides the relevant information about eligibility and the replacement rate for the model 

calibration. It shows that eligibility is very high with the exception of younger persons. This results 

from the required qualifying period. The high eligibility rate is also a consequence of a lower share 

of  long-term  unemployed  persons  in  Denmark.  The  replacement  rate  based  on  EU-SILC 

calculations shows a much lower replacement rate as the statutory replacement rate of 90 percent 

would suggest. The maximum amount seems to dampen the replacement rate considerably. 

Germany 

In  Germany,  two  types  of  unemployment  benefits  are  available,  unemployment  insurance  and 

unemployment  benefits  II.  Unemployment  insurance  is  compulsory  and  entitlement  for  benefits 

lasts between six and 24 months depending on the duration of the contribution period, as well as 

the  age  of  the  beneficiary.  For  eligibility,  at  least  twelve  months  of  contributions  to  the  public 

unemployment  system  during  the  last  two  and  a  half  years  before  unemployment  are  necessary. 

The ceiling for the reference income differs between the new and old federal states, amounting to 

EUR  6,700  for  the  new  and  EUR  7,100  for  the  old  federal  states  in  2019.  If  a  person  receives 

unemployment  insurance  benefits,  income  from  part-time  work  (at  most  15  hours  per  week) 

reduces entitlement to unemployment benefits. An amount of EUR 165 is not considered. After the 

expiration of unemployment benefits, unemployed persons are eligible for unemployment benefits 

II. This benefit is a combination of unemployment assistance and social assistance with the aim to 

increase the labour force. Furthermore, unemployment benefit II is needs-based and means-tested.  

The replacement rate in the unemployment insurance is 60 percent of previous net earnings or 67 

percent  for  unemployed  with  at  least  one  dependent  child.  Unemployment  benefits  II  is  flat  rate, 

i.e.,  independent  of  former  labour  income,  but  dependent  on  the  number  of  persons  in  the 

household and other social factors. It consists of a standard benefit to secure livelihood, additional 

needs  allowances  (e.g.,  for  expectant  mothers  from  the  13th  week  of  pregnancy),  housing  and 

heating  costs16,  one-off  benefits  and  insurance  contributions.  An  additional  benefit  is  paid  for 

support  of  school  attendance.  The  lump-sum  standard  benefit  for  a  single  person  amounts  to 

EUR 424  (2019)  per  month  and  between  58  and  90  percent  of  this  value  for  other  household 

members. Unemployment insurance and unemployment benefits II are exempted from taxation and 

social security contributions. 

16 Housing and heating costs are not included in the data presented here as it seems that they are not included in the 
unemployment benefits in the EU-SILC. They are taken into account as income maintenance benefits and partially 
allocated to ‘b00’. 

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Table 19: Unemployment benefit eligibility and gross replacement rate in Germany 

Table 19 provides the calculated values for eligibility for unemployment insurance in Germany for 

different  age  and  skill-groups,  the  replacement  rate  in  the  unemployment  insurance  and  the 

average  replacement  income  of  persons  not  eligible  for  unemployment  insurance  benefits.  The 

division  of  unemployed  persons  into  those  who  receive  unemployment  insurance  and  those  who 

receive unemployment assistance or no benefit is based on data of the ‘Bundesagentur für Arbeit’ 

(Federal  Employment  Agency),  which  provides  information  about  unemployment  insurance  and 

unemployment assistance for different age groups and education levels in annual reports.  

The share of unemployed persons receiving unemployment insurance benefits is comparably low, 

especially  for  low-skilled  persons,  it  is  markedly  higher  for  high-skilled  unemployed.  Long-term 

unemployment plays an important role in all groups.  

Fixed payments from unemployment assistance are calculated by using information on dependent 

children living in the household. Information concerning the amount of unemployment benefits II is 

drawn from MISSOC  and  OECD  Benefits and Wages and relevant  information  about other social 

benefits  is  provided  by  the  Federal  Employment Agency.  The  corresponding  nominal  values  are 

then related to the average gross labour income in the age and skill groups. 

Estonia 

The  unemployment  system  in  Estonia  is  a  compulsory  social  insurance  system  for  employees, 

financed  by  contributions.  Voluntary  insurance  is  not  possible.  The  benefit  is  available  for 

involuntarily  unemployed  persons  between  16  and  pensionable  age.  Beneficiaries  must  reside  in 

Estonia  and  be  available  for  work.  To  qualify  for  benefits,  an  employee  must  be  insured  for  12 

months in the 36 months before unemployment. The qualifying period is independent of age. The 

waiting period for benefits is seven calendar days.  

The unemployment benefit depends on previous earnings nine months before unemployment with 

a ceiling  of three-times the national average  income.  It is  based on the  income  used to calculate 

unemployment  insurance  contributions.  The  benefit  amounts  to  50  percent  of  reference  earnings 

for the first 100 days of unemployment and 40 percent thereafter. There is also a minimum amount 

set to half of the national minimum earnings of the previous year.  

The benefit is paid for 180 days for an insurance period of less than five years and up to one year 

for persons with an insurance period of ten years and longer.  

Aside  from  the  unemployment  insurance  an  unemployment  allowance  is  provided  in  Estonia. 

Persons  who  are  voluntarily  unemployed  are  eligible  for  the  unemployment  allowance.  It  is  also 

available for persons with expired unemployment insurance and a benefit duration of less than 270 

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days. To qualify, 180 calendar days of work within 12 months before unemployment are required. 

The  waiting  period  is  also  seven  days.  The  unemployment  allowance  is  a  flat-rate  benefit  and 

amounts to EUR 5.65 per day (35 percent of the minimum wage of the previous year). The duration 

is  generally  270  calendar  days  (including  days  of  unemployment  insurance  benefits).  Longer 

periods are available for older unemployed persons.  

The  unemployment  insurance  benefit  is  taxable;  the  unemployment  allowance  is  not  subject  to 

taxation. Social security contributions are paid by the unemployment insurance fund (13 percent for 

health insurance and 2 percent to the mandatory pension fund).  

Table 20: Unemployment benefit eligibility and gross replacement rate in Estonia 

The  unemployment  system  in  Estonia,  with  income-dependent  unemployment  insurance  and  flat 

unemployment  assistance,  requires  additional  information  about  the  composition  of  unemployed 

persons. According to the open-data portal in Estonia, the majority of unemployed persons receive 

unemployment  insurance  benefits,  except  for  younger  unemployed  persons.  Data  about  the  skill-

structure  is  not  available.  It  is  assumed  here  that  low-skilled  individuals  are  less  eligible  for 

unemployment insurance benefits than higher educated groups, a  pattern which prevails in  many 

countries.  Eligibility  for  unemployment  insurance  benefits  for  low-skilled  people  is  therefore  very 

low. The replacement rate in the unemployment insurance in the model is close to the statutory rate 

of 40 to 50 percent. Unemployment assistance, reflected in ‘𝑏00’, is rather low as beneficiaries are 

only a minor share of all unemployed persons.  

Ireland 

The unemployment system in Ireland distinguishes between a jobseeker’s benefit based on social 

insurance  and  a  tax-financed  jobseeker’s  allowance.  In  contrast  to  many  other  Member  States, 

both benefit schemes are flat rate benefits. Insurance is provided to all employees aged 16 years 

and  older,  with  exception  of  public  servants  (recruited  before  1995)  and  persons  with  very  low 

income.  

To  qualify  for  benefits,  a  person  must  have  paid  contributions  for  104  weeks,  of  which  39  weeks 

must  be  allotted  to  the  year  before  unemployment  or  26  weeks  to  each  of  the  two  years  before 

unemployment.  The  benefit  is  not  available  if  an  unemployed  person  quit  their  job  without 

reasonable  cause  or  received  a  high  redundancy  payment.  The  jobseeker’s  weekly  benefit 

amounts  to  EUR 198  if  previous  weekly  income  was  above  EUR 300.  If  income  was  lower,  the 

benefit decreases more than proportionally. The benefit is paid for nine months (six months in case 

of a short insurance period).  

The jobseeker’s allowance is dependent on residence and available for all jobseekers aged 18 and 

above. There is no qualifying period and the duration of the benefit is not limited. The allowance is 

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Update and Extension of the Labour Market Model – Final Report 

subject  to  a  means  test.  The  allowance  amounts  to  EUR  198  per  week,  the  same  as  the 

jobseeker’s insurance. For new claimants aged between 18 and 25 the allowance is reduced. For 

tax  reasons  the  first  EUR  13  of  the  weekly  benefit  are  tax  exempted,  the  remaining  benefit  is 

taxable. The allowance is completely tax exempted. Neither benefits nor allowance are subject to 

social security contributions.  

The  corresponding  values  for  the  calibration  of  the  model  for  Ireland  are  shown  in  Table  21. As 

there exist only flat unemployment benefits, ‘xi1’ is set to zero. The flat part ‘b00’ therefore reflects 

eligibility  for  insurance  and  assistance  as  well  as  the  replacement  rate  in  case  of  eligibility.  The 

eligibility rate (not shown here) amounts to about two-thirds and is lower especially for young low-

skilled  unemployed  (as  a  result  of  qualifying  restrictions  described  above).  The  replacement  rate 

decreases with age and skill-level given that the benefit and allowance are flat.  

Table 21: Unemployment benefit eligibility and gross replacement rate in Ireland 

Greece 

The unemployment insurance system in Greece covers employees and consists of unemployment 

insurance and unemployment assistance. It is not possible to insure voluntarily.  

Eligibility  for  unemployment  insurance  requires  being  unemployed  involuntarily.  To  qualify,  an 

insurance period of 125 days within 14 months or 200 days within two years for first-time claimants 

before  unemployment  is  necessary.  There  is  also  a  maximum  of  400  days  for  insurance  claims 

within a four-year period. The waiting period for insurance benefits is six days.  

The unemployment insurance benefit is flat (basic unemployment benefit), but the flat rate depends 

on previous wage income. If earnings before unemployment were higher than 12-times the average 

daily wage of a blue-collar worker (EUR 26.18) then the monthly benefit amounts to 55 percent of 

the  daily  blue-collar  worker  wage,  times  25;  that  is,  EUR 360  in  2019.  If  wage  income  is  six-to-

twelve–times  the  daily  wage,  the  rate  is  75  percent  of  six-times  the  daily  wage  for  25  days 

(EUR 270).  For  lower  incomes,  the  replacement  rate  is  50  percent  of  six-times  the  daily  wage 

(EUR 180).  For  each  dependent  family  member,  the  benefit  rises  by  10  percent.  The  benefit 

duration ranges from five months for 125 days of employment before unemployment to 12 months 

for 250 days of employment.  

Two different kinds of unemployment assistance exist in Greece, both flat rate.  There is a special 

allowance for those unemployed subsequent to unemployment insurance eligibility, paid only once, 

and  a  special  allowance  for  people  registered  as  unemployed  (without  unemployment  insurance 

benefits) after a three-month waiting period and 60 days of work before unemployment, paid three 

times  at  most.  In  both  cases,  annual  net  family  income  must  be  lower  than  EUR 11,445.34.  The 

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unemployment  assistance  amounts  to  13-times  the  daily  unemployment  benefit  (in  total 

EUR 187.20)  in  the  first  case  and  15-times  the  daily  unemployment  benefit  in  the  second  case 

(EUR 216).  

Unemployment benefits increase by 12.5 percent (one-and-a-half additional months of income) for 

Christmas and  Easter financial  aid. For long-term unemployed  individuals,  an additional  period  of 

12  months  of  unemployment  benefit  of  EUR 200  can  be  claimed.  Unemployment  benefits  are 

subject  to  taxation  if  annual  personal  income  is  higher  than  EUR 10,000;  social  security 

contributions do not arise.  

Table 22: Unemployment benefit eligibility and gross replacement rate in Greece 

As  unemployment  insurance  and  unemployment  assistance  are  both  independent  of  previous 

labour income, ‘xi1’ is set to zero. The variable ‘b00’ therefore includes both. However, the values 

are very low, especially due to the low share of unemployed individuals receiving benefits. For most 

age  and  skill  groups,  the  share  lies  between  10  and  15  percent  of  unemployed  persons.  Total 

expenditures  for  unemployment  benefits  in  Greece  amount  to  less  than  half  a  percent  of  GDP, 

although unemployment is very high. This supports the low values for replacement benefits in  the 

case of unemployment, as shown in Table 22.  

Spain 

The  unemployment  system  in  Spain  can  be  characterised  as  a  system  of  two  types  of  support, 

unemployment 

insurance  and  unemployment  assistance,  where  assistance 

is  granted 

subsequently to insurance. In Spain, persons who voluntarily quit their employment do not qualify 

for  unemployment  benefits.  The  eligibility  criterion  is  a  minimum  of  360  working  days  in  the  six 

years preceding unemployment. Unemployment insurance benefits are paid at most for 720 days, 

where  the  duration  depends  on  the  number  of  days  contributed  to  the  system  within  the  last  six 

years.  The  minimum  duration  amounts  to  120  days.  Subsequently,  an  unemployed  person  may 

qualify  for  unemployment  assistance  (especially  older  workers),  which  is  income-tested.  To  be 

eligible, other earnings per household  member must  be below 75 percent of the interprofessional 

minimum wage. The benefit duration for unemployment assistance is between six and 18 months 

in most cases. Special regulations exist for certain groups and regions. 

The unemployment insurance benefit amounts to 70 percent of reference earnings (average gross 

earnings  over the  last  180 days) for the first 180  days and 50 percent  afterwards. The  maximum 

contribution base is EUR 4,070.10 (2019). In addition, there exist minimum and maximum benefits, 

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Update and Extension of the Labour Market Model – Final Report 

which  are  defined  as  a  percentage  of  the  defined  reference  income  IPREM.17  For  unemployed 

persons with no  dependent child, the  minimum amounts to 80  percent, and the  maximum to 175 

percent  of  the  reference  income  IPREM.  With  two  or  more  children  the  minimum  and  maximum 

increase to 107 and 225 percent. Unemployment assistance amounts to 80 percent of IPREM but 

excludes  bonus  payments  of  one-sixth.  Unemployment  insurance  benefits  are  taxable  and  social 

security  contributions  amount  to  4.7  percent  (contributions  for  pension/sickness  and  invalidity 

insurance). Unemployment assistance benefits are also taxable; social security contributions do not 

arise. 

Table 23: Unemployment benefit eligibility and gross replacement rate in Spain 

Table 23 provides the results of the calibration of the Spanish unemployment system. Compared to 

other countries, eligibility for benefits is low. The qualifying restrictions, especially the requirement 

of  involuntary  job  separation,  may  explain  these  differences.  A  relatively  large  share  of  all 

beneficiaries  receives  unemployment  assistance.18  The  replacement  rate  in  the  unemployment 

insurance  system  ‘brepl’  decreases  moderately  across  age  and  skill-groups.  Only  for  older 

unemployed  persons  does  it  decrease  as  a  result  of  the  maximum  benefit  like  in  most  other 

countries. The amount of unemployment assistance income is comparable to other countries. 

France 

Unemployment  benefits  in  France  consist  of  unemployment  insurance  and  unemployment 

assistance,  which  is  paid  subsequently.  Eligibility  for  unemployment  insurance  requires  either  an 

involuntary separation from the last job or a resignation for good cause. Unemployment insurance 

benefits are based on previous labour income, whereas unemployment assistance benefits are flat. 

The qualifying period for unemployment insurance is 610 working hours (88 days full-time) during 

the last 28 months (36 months for persons aged 53 and older). In general, unemployed individuals 

receive benefits after a waiting period of at least seven days. Longer waiting periods are foreseen if 

severance  payments  are  higher  than  legally  required.  Unemployment  insurance  benefits  are  not 

means-tested.  The  duration  for  which  unemployment  insurance  benefits  are  paid  corresponds  to 

the  duration  of  contribution  to  the  system  with  a  minimum  of  four  months  and  a  maximum  of  24 

months (36 months for persons aged 55 and older).  

Unemployment insurance benefits are the maximum of 40.4 percent of the reference daily wages 

with additional EUR 11.92 (2019) per day (at most 75 percent of the reference daily wage) and of 

17 For 2019, the reference income IPREM amounts to EUR 537.84 per month. The reference income is increased by one-

sixth to consider 13th and 14th bonus payments.  

18 Nearly 50 percent in the age group 25-to-54 and considerably more than 70 percent for older workers.  

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57  percent  of  the  reference  daily  wage. Additionally,  the  minimum  daily  benefit  amounts  to  EUR 

29.06 (2019) per day. 

Qualification  for  unemployment  assistance  (allowance  of  specific  solidarity)  requires  five  years  of 

activity during the last ten years preceding unemployment. The benefit is granted for a period of six 

months  but  is  renewable  such  that  a  longer  duration  is  possible.  The  unemployment  assistance 

pays a maximum of EUR 16.48 per day (2019, 30 days per month).  

Benefits  are  subject  to  taxation  with  no  special  relief  scheme.  In  addition,  social  security 

contributions must be paid for unemployment insurance benefits, consisting of 6.2 percent for the 

generalised social contribution, 0.5 percent for the contribution for the repayment of social debt and 

3  percent  for  complementary  pension  contributions.  In  case  of  unemployment  assistance  these 

contributions do not arise. 

France  is  among  the  group  of  countries  with  a  non-income  dependent  unemployment  assistance 

scheme  which  requires  the  calculation  of  ‘b00’.  To  proxy  the  share  of  persons  receiving 

unemployment assistance benefits of all persons receiving benefits, we use the share of long-term 

unemployed  of  all  unemployed  persons,  defined  as  being  unemployed  for  more  than  one  year. 

Using  EUR  16.48  per  day  or  EUR  494.4  per  month  as  a  basis  for  unemployment  assistance 

benefits, this enables calculation of  ‘b00’ by taking  into  account  the share of unemployed without 

any unemployment claims of all unemployed individuals. The relatively low level of ‘b00’ across all 

age  and  skill  groups  is  also  a  matter  of  the  comparably  low  share  of  unemployed  persons  with 

unemployment benefit claims. The policy parameter ‘xi1’ is derived by using EU-SILC information 

about  eligibility  and  the  share  of  short-  and  medium-term  (less  than  one  year)  unemployed 

persons.  The  replacement  rate  in  the  unemployment  insurance  ‘brepl’  is  calculated  by  using  the 

average replacement rate of all persons receiving unemployment benefits, ‘b00’ and the according 

shares for unemployment insurance and unemployment assistance. The replacement rate fits very 

well to the statutory replacement rate of at least 57.4 percent and is similar across age and skill-

groups. The values are presented in Table 24. 

Table 24: Unemployment benefit eligibility and gross replacement rate in France 

Croatia 

Unemployment  insurance  benefits  in  Croatia  are  available  for  employees  and  self-employed 

persons;  unemployment  assistance  does  not  exist.  Conditions  for  eligibility  of  benefits  are 

involuntary  unemployment  and  registration  with  the  employment  service.  To  qualify  for  benefits, 

nine  months  of  employment  or  insurance  contributions  within  the  previous  24  months  are 

necessary. There is no waiting period. 

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The  reference  income  for  unemployment  benefits  is  the  average  gross  earnings  for  the  three 

months  before  unemployment.  The  replacement  rate  amounts  to  60  percent  for  the  first  90  days 

and 30 percent thereafter. The maximum benefit equals 70 percent (HRK 4,365.90) of the average 

net  wage  of  the  previous  year  for  the  first  90  days  and  35  percent  (HRK  2,182.95)  for  longer 

unemployment  spells.  The  minimum  benefit  equals  50  percent  of  the  minimum  salary,  minus 

mandatory insurance contributions (HRK 1,500).  

The duration of unemployment insurance benefits is at least 90 calendar days and increases by 30 

days for every two years of employment for employment spells of less than  ten  years. For longer 

employment spells, the duration increases by 30  days for every five years of  employment,  with a 

maximum of 450 days. Unemployment insurance benefits are neither taxable nor subject to social 

security contributions.  

Table 25: Unemployment benefit eligibility and gross replacement rate in Croatia 

The  eligibility  for  unemployment  benefits  and  the  gross  replacement  rate  are  shown  in  Table  25. 

The  restriction  on  the  duration  of  unemployment  benefits  and  the  requirement  of  involuntary 

unemployment  lead  to  a  small  share  of  unemployed  persons  receiving  insurance  benefits  in 

Croatia.  In  general,  less  than  10  percent  receive  benefits. The  replacement  rate  is  lower  than  30 

percent, which can be attributed to the cap on unemployment benefits.  

Italy 

In Italy, unemployment insurance is a compulsory scheme, and unemployment assistance does not 

exist. The unemployment insurance benefit (Nuova Assicurazione Sociale per l’Impiego – NASpI) is 

available  for  persons  being  involuntary  unemployed  and  having  matured  at  least  13  weeks  of 

unemployment  insurance  during  four  years  before  unemployment  and  30  days  within  the  last  12 

months. A waiting period of eight days is implemented. The benefit (NASpI) is granted for half the 

number of weeks of contributions paid during the last four years.  

Benefits  are  calculated  on  the  basis  of  average  monthly  gross  income  during  the  last  four  years 

before unemployment with a monthly ceiling of EUR 1,314.30 (2018). The replacement rate in the 

NASpI  amounts  to  75  percent  of  monthly  reference  earnings  below  the  ceiling  of  EUR  1,221.44 

(2019)  and  25  percent  of  income  above  the  ceiling.  The  maximum  payable  amount  is  EUR 

1,328.76  (2019).  After  three  months  the  replacement  rate  is  gradually  reduced  by  3  percentage 

points every month. All benefits are taxable but not subject to social security contributions.  

Eligibility  for  unemployment  benefits  and  the  replacement  rates  for  the  different  age  and  skill 

groups in Italy can be found in Table 26. Eligibility for unemployment benefits is low compared to 

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other  countries19  and  increases  with  age  (with  the  exception  of  the  last  age  group).  Given  the 

maximum  benefit  criterion,  the  replacement  rate  is  considerably  lower  than  the  statutory 

replacement rate of 75 percent. 

Table 26: Unemployment benefit eligibility and gross replacement rate in Italy 

Cyprus 

Unemployment insurance in Cyprus  is available for employees and  benefits are earnings-related. 

Unemployment can be voluntary and involuntary. To qualify for benefits, a person must have been 

insured  for  at  least  26  weeks  before  unemployment  and  paid  at  least  26-times  the  weekly  basic 

insurable amount of EUR 175.11 (equals 0.5 insurance points). The waiting period is three days. An 

unemployment assistance scheme is not available.  

The  unemployment  insurance  benefit  is  split  into  two  components,  the  basic  benefit  and  the 

supplementary  benefit.  The  basic  benefit  amounts  to  60  percent  of  the  weekly  value  of  an 

insurance  point  times  the  number  of  insurance  points.  The  replacement  rate  increases  by  20 

percentage points for the first dependant and by 10 percentage points for further dependants. The 

supplementary  benefit  equals  50  percent  of  the  weekly  value  of  insurance  points.  The  maximum 

amount  of  the  supplementary  benefit  cannot  be  higher  than  basic  insurable  earnings.  The 

maximum duration of unemployment benefits equals 156 days. Unemployment insurance benefits 

are not taxable and not subject to social security contributions.  

Table 27: Unemployment benefit eligibility and gross replacement rate in Cyprus 

The  unemployment  insurance  provides  earnings-related  benefits.  For  this  reason,  information  for 

the flat  part in the model  is not necessary. The eligibility rate for  benefits increases with  age and 

19 This result is also provided by the LFS.  

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skill in general, except for older low-skilled persons. The replacement rate decreases with age and 

skill as the replacement rate is capped. The values for Cyprus are shown in Table 27. 

Latvia 

Latvia provides  unemployment insurance  for all employees  and allows for voluntary membership. 

To be eligible for unemployment insurance, a person must be registered at the public employment 

service and available for work. An unemployment assistance scheme does not exist. 

To qualify for benefits, an unemployed person must be insured for at least one year and have paid 

contributions  for  at  least  12  months  in  the  16  months  before  unemployment.  In  the  case  of 

involuntary  unemployment,  there  is  no  waiting  period;  for  voluntary  unemployment,  the  waiting 

period is two months. The average contribution wage is based on the 12-month period ending two 

months prior to the month of unemployment.  

The  replacement  rate  depends  on  the  insurance  record  and  the  duration  of  unemployment.  For 

insurance periods less than ten years, the replacement rate amounts to 50 percent and it increases 

by 5 percentage points for every ten years of employment with a maximum of 65 percent. For the 

first  three  months  of  unemployment,  the  replacement  rate  equals  100  percent  of  this  value,  then 

decreases  to  75  percent  for  the  fourth  to  sixth  months  of  unemployment,  and  to  50  percent 

thereafter. The maximum duration of benefit claims is nine months. Benefits are neither taxable nor 

subject to social security contributions.  

Table 28: Unemployment benefit eligibility and gross replacement rate in Latvia 

The share of persons eligible for unemployment insurance benefits increases significantly with the 

educational level as shown in Table 28. For high-skilled persons, about half of unemployed persons 

receive benefits whereas the share is less than one-fifth for low-skilled persons. The replacement 

rate  is  similar  across  skill  groups  and  increases  with  age  for  low-  and  medium-skilled  persons, 

reflecting longer employment and shorter unemployment spells.  

Lithuania 

Lithuania  has  a  compulsory  social  insurance  scheme  covering  employees  and  providing 

unemployment  insurance  benefits.  An  unemployment  assistance  scheme  is  not  available.  The 

benefit is provided in cases of involuntary and voluntary unemployment from 16 to retirement age. 

The  qualifying  period  is  12  months  of  insurance  during  30  months  before  unemployment.  The 

waiting period is eight days in the case of involuntary unemployment and three months in cases of 

voluntary unemployment.  

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The  unemployment  insurance  benefit  consists  of  two  parts.  A  non-earnings-related  fixed 

component which equals 23.27 percent of the minimum monthly wage (EUR 129.15 in 2019) and a 

variable  component  depending  on  the  average  of  previous  insured  income  30  months  prior  to 

unemployment.  The  replacement  rate  of  the  variable  component  depends  on  the  length  of  the 

unemployment  spell.  For  the  first  three  months,  the  replacement  rate  equals  38.79  percent;  it 

decreases to 31.03 percent for the next three months; and to 23.27 percent for the months seven 

to nine. The maximum benefit is 75 percent of the average national wage.  

The maximum duration of eligibility is nine months but can be prolonged for two further months for 

elderly  persons.  Benefits  are  neither  subject  to  taxation  nor  to  social  security  contributions.  The 

period of unemployment is considered for pension insurance.  

Table 29: Unemployment benefit eligibility and gross replacement rate in Lithuania 

Unemployment benefits in the model are divided across non-earnings-related and earnings-related 

benefits  (the  latter  are  reflected  in  ‘xi1’  and  ‘brepl’).  The  share  of  unemployed  persons  receiving 

earnings-related insurance benefits increases with the skill level and generally ranges between 10 

and  50  percent.  The  gross  replacement  rate  is  about  10  percent.  The  non-earnings-related  part 

plays a minor role, but increases with the skill level.  

Luxembourg 

The  unemployment  system  in  Luxembourg  is  financed  by  taxes  and  available  for  employees, 

young persons after education and self-employed persons. Voluntary insurance is not possible. To 

be  eligible,  unemployment  must  be  involuntarily. An  unemployment  assistance  scheme  does  not 

exist. The qualifying period amounts to 26 weeks of employment during the previous 12 months; a 

waiting  period  does  not  exist.  After  the  benefit  has  expired,  repeated  eligibility  is  possible  12 

months thereafter at the earliest.  

The reference income for the unemployment benefit is the average of gross earnings three months 

before unemployment, with no cap. The replacement rate amounts to 80 percent of the reference 

income.  In  the  case  of  a  dependent  child,  the  replacement  rate  is  increased  to  85  percent.  The 

maximum benefit in 2019 is initially EUR 5,177.75 per month and decreases to EUR 4,142.20 after 

182  days  of  benefit  claim. The  maximum  duration  of  eligibility  is  365  calendar  days.  For  persons 

particularly ‘difficult’ to place, 182 extra days are available and there are special rules for persons 

older than 50. In these cases, the maximum benefit decreases to EUR 3,106.65.  

Unemployment  benefits  are  subject  to  taxation  and  to  health  care,  long-term  care  and  pension 

insurance contributions.  

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Table 30: Unemployment benefit eligibility and gross replacement rate in Luxembourg 

Eligibility and the gross replacement rate are higher than in many other Member States. In contrast 

to other countries, eligibility decreases  to some degree with skill level, the replacement rate  from 

about 60 percent for low-skilled to about 40 percent for high-skilled persons. As no flat benefits are 

granted, the unemployment part of ‘b00’ is set to zero. Table 30 shows the results for Luxembourg.  

Malta 

The  unemployment  system  in  Malta  covers  all  employees  and  provides  an  unemployment 

insurance and assistance system. Benefits are flat rate in both schemes; voluntary insurance is not 

possible.  

The qualifying period for unemployment insurance is 50 weeks, of which 20 must have been paid in 

the previous two years. In cases of involuntary unemployment there is no waiting period; in cases 

of voluntary unemployment the waiting  period is set to  six months. The  unemployment insurance 

benefit amounts to EUR 12.61 per day (if the spouse is not full-time employed) and EUR 8.24 per 

day for a single person. The benefit is paid for  six days per week. The duration of unemployment 

insurance  in  days  equals  the  number  of  weeks  of  contributions  with  a  maximum  of  156  days. A 

special  unemployment  benefit  is  granted  if  a  means  test  is  satisfied.  In  this  case  the  benefit 

amounts  to  EUR 21.17  per  day  for  a  married  or  single  parent  and  EUR 13.97  per  day  for  other 

persons.  

An unemployment assistance scheme is available for heads of household who are registered and 

who satisfy a means test. The unemployment assistance equals social assistance and amounts to 

EUR 105.93  per  week;  it  increases  with  the  number  of  persons  in  the  household.  EUR 8.15  per 

week is paid for each additional member of the household. Twice a year, beneficiaries also receive 

a government bonus of EUR 135.10.  

Unemployment  insurance  and  assistance  benefits  are  subject  to  taxation.  Social  security 

contributions do not arise.  

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Table 31: Unemployment benefit eligibility and gross replacement rate in Malta 

As  unemployment  insurance  and  unemployment  assistance  are  flat  and  independent  of  previous 

earnings, eligibility for earnings-related benefits is set to zero for all age and skill groups, as shown 

in  Table  31.  Benefits  are  fully  reflected  in  ‘b00’.  Benefits  play  a  role  for  low-skilled  unemployed 

persons, with gross replacement rates between 10 and 20 percent. For medium- and high-skilled 

persons, replacement income is significantly lower.  

Hungary 

The unemployment system in Hungary is a social insurance scheme covering employees and self-

employed  persons  with  an  earnings-related  insurance  pillar  and  no  unemployment  assistance 

scheme. Benefits can also be claimed in cases of voluntary unemployment. The qualifying period is 

at least 360 days of insurance during the three years before unemployment; a waiting period does 

not exist.  

The  unemployment  benefit  is  based  on  average  contributory  earnings  in  the  four  quarters  before 

unemployment  with  no  ceiling  on  reference  earnings. The  replacement  rate  equals  60  percent  of 

reference earnings with a maximum benefit equal to the minimum wage (HUF 149,000 or EUR 463 

in 2019). If reference earnings cannot be determined, they are set to 130 percent of the minimum 

wage.  

Table 32: Unemployment benefit eligibility and gross replacement rate in Hungary 

The maximum duration of benefit eligibility is one day for every ten days of prior insurance, up to a 

maximum of 90 days. It is independent of the reason for unemployment. The unemployment benefit 

is subject to a taxation and pension contribution of 10 percent, deducted from the benefit. 

The  model  parameters  for  Hungary  are  shown  in  Table  32.  The  eligibility  for  unemployment 

insurance is highest for low-skilled unemployed persons and decreases with skill level. The same 

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holds  for  the  gross  replacement  rate,  with  more  than  30  percent  for  low-skilled  and  about  20 

percent for high-skilled persons as benefits are capped at the minimum wage.  

Netherlands 

Unemployment  insurance  benefits  in  the  Netherlands  are  earnings-related  and  insurance  is 

compulsory for employees, unemployment assistance is not available. Supplementary benefits may 

be granted if the replacement income is below the minimum income. For eligibility, a person must 

have worked at least 26 within the last 36 weeks. This qualifies for a three-months benefit duration. 

Childcare  activities  for  children  under  six  years  of  age  are  treated  as  half  a  year  of  employment 

(under  conditions).  The  benefit  duration  depends  on 

the  employment  duration  before 

unemployment. From 2016 on, the maximum duration was reduced from 38 to 24 months in 2019. 

One month of unemployment benefit is accrued for each year worked for the first ten years and half 

a month beyond that. As the replacement rate is based on gross income, unemployment benefits 

are taxable and social security contributions for the General Surviving Relatives Act (0.1 percent), 

the General Old-Age Pensions Act (17.9 percent), and the Long-Term Care Act (9.65 percent) are 

deducted.  

The  replacement  rate  in  the  unemployment  insurance  amounts  to  75  percent  of  former  gross 

earnings  in  the  first  two  months  and  70  percent  in  the  following  months  up  to  a  maximum  of  the 

daily wage of EUR 214.28 (2019).  

In addition, the benefits amount to at least a certain fraction of the gross minimum wage per month 

if the total income of a beneficiary and their partner is less than the minimum guaranteed income. 

For a single person, the fraction amounts to 70 percent and for married persons and couples the 

benefit corresponds to the full amount.  

Table 33: Unemployment benefit eligibility and gross replacement rate in the Netherlands 

Compared  to  other  EU-15  countries  with  income-related  benefits,  eligibility  for  low-  and  medium-

skilled  persons  is  rather  low,  as  shown  in  Table  33.  This  modest  rate  may  be  a  result  of  the 

dependence  of  benefit  duration  on  the  number  of  years  in  employment.  However,  this  does  not 

explain why the rate of older workers is not considerably higher. One reason may be the absence 

of  an  unemployment  assistance  scheme.  The  replacement  rate  fits  very  well  to  the  statutory 

replacement rate considering the maximum benefit. It decreases with age and skill-level as labour 

income rises.  

Austria 

The Austrian  public  unemployment  system  is  a  compulsory  insurance  scheme  for  all  employees 

with  monthly  earnings  of  more  than  the  so-called  ‘Geringfügigkeitsgrenze’  (monthly  minimum 

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income  limit)  which  amounts  to  EUR  446.81  (2019).  The  upper  ceiling  of  income  considered 

amounts  to  EUR  4,860  (2019).  Self-employed  persons  can  insure  voluntarily;  no  such  insurance 

exists  for  civil  servants.  To  qualify  for  unemployment  benefits,  a  person  must  have  been  in 

dependent contributory employment for at least one year in the last two years, or 28 weeks in a row 

in  case  of  a  repeated  unemployment  period.  For  persons  aged  below  25,  only  26  weeks  of 

employment  in  the  last  12  months  are  necessary  to  qualify  for  benefit  payments. The  duration  of 

eligibility depends on employment duration and the age of an unemployed person. It starts from 20 

weeks and can  be  extended to 52 weeks if the unemployed  person  is aged  50 or more and  was 

employed  for  at  least  468  weeks  in  the  previous  15  years20.  For  specific  active  labour  market 

programmes  longer periods are possible. In case of  a resignation without good reason,  a waiting 

period  of  four  weeks  takes  effect. After  the  exhaustion  of  eligibility  for  unemployment  insurance 

benefits, a person qualifies for unemployment assistance if this person is in need.21 Unemployment 

assistance is granted for 52 weeks but can be extended repeatedly for further 52 weeks. 

Unemployment  insurance  benefits  are  based  on  the  average  net  income  in  the  year  before  the 

unemployment spell and amount to 55 percent of the reference income. For low income persons, 

the  replacement  rate  is  raised  to  60  percent  (80  percent  in  households  with  dependants)  if  55 

percent  of 

the 

reference 

income 

is  below 

the 

supplementary  pension  amount 

(‘Ausgleichszulagenrichtsatz’).  In  addition,  for  each  dependent  person  an  extra  daily  amount  of 

EUR  0.97  is  paid.  Beneficiaries  are  allowed  to  receive  work-related  earnings  up  to  the  monthly 

minimum  income  limit  (‘Geringfügigkeitsgrenze’)  without  any  consequences  for  qualification  for 

unemployment benefits. Unemployment assistance benefits, which are paid after the exhaustion of 

unemployment  insurance  benefits,  amount  to  92  percent  of  the  basic  unemployment  insurance 

benefits,  or  95  percent  for  low-income  groups.  Family  supplements  are  also  available  in  the 

unemployment  assistance  scheme.  Unemployment 

insurance,  as  well  as  unemployment 

assistance benefits, are exempted from income taxation and social security contributions (as they 

are based on net income).  

The  data  from  the  EU-SILC  are  presented  in  Table  34.  They  show  that  across  all  age  and  skill 

groups  eligibility  is  rather  high,  so  that  most  of  the  unemployed  persons  receive  payments.  The 

eligibility  rate  is  lower  only  for  young  low-skilled  persons,  which  reflects  the  presence  of  the 

required  minimum  contribution  period.  The  replacement  rate  seems  to  be  rather  moderate, 

however  one  must  keep  in  mind  that  no  taxes  and  social  security  contributions  are  levied  on 

unemployment benefits, or on unemployment assistance payments. The much lower rate for older, 

medium and high-skilled individuals results from tax exemption as well as the upper ceiling in the 

unemployment insurance. 

20 The duration may be extended to 78 weeks if the unemployed person participates in rehabilitation measures.  

21 Since July 2018, spousal income is no longer considered.  

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Table 34: Unemployment benefit eligibility and gross replacement rate in Austria 

Poland 

Poland has a compulsory insurance scheme that provides a flat-rate benefit, but no unemployment 

assistance.  Persons  are  eligible  if  they  are  ready  to  work,  at  least  18  years  old,  and  have  not 

reached retirement age. To qualify, an unemployed person must have been employed for at least 

365  days  during  the  18  months  preceding  the  day  of  registration.  The  maximum  benefit  duration 

depends  on  the  unemployment  rate  in  the  region,  the  number  of  eligibility  periods,  and  family 

circumstances.  It  ranges  from  six  to  twelve  months.  Benefit  recipients  are  not  allowed  to  receive 

income in excess of 50 percent of the national minimum wage.  

If  qualified  for  benefits,  an  unemployed  person  receives  a  benefit  that  is  paid  monthly  as  a 

percentage of the ‘Basic Unemployment Allowance’, which was PLN 847.80 (year 2019) for the first 

three  months  and  PLN  665.70  thereafter.  Persons  insured  for  less  than  five  years  receive  80 

percent  of that benefit,  persons with five to 20 years receive 100 percent and  persons with  more 

than 20 years receive 120 percent of the basic unemployment allowance. Benefits are taxable and 

contributions  for  health  care,  old-age,  invalidity  and  survivors’  insurance  are  deducted  from  the 

benefit.  For  older  workers,  persons  aged  over  55  (women)  or  60  (men)  respectively,  specific 

arrangements exist. 

The  flat  nature  of  the  benefit  implies  that  ‘xi1’  is  set  to  zero  in  the  model;  that  is,  no  income-

dependent unemployment benefit. The flat part of the unemployment benefit, ‘b00’, is also very low. 

This  follows  from  the  very  low  rate  of  eligibility  for  unemployment  benefits,  also  confirmed  by  the 

low rate in the LFS.  

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Table 35: Unemployment benefit eligibility and gross replacement rate in Poland 

Portugal 

The  unemployment  system  in  Portugal  consists  of  an  earnings-related  unemployment  insurance 

and  a  flat  unemployment  assistance  scheme.  Both  schemes  are  financed  by  contributions  of 

employees  and  employers.  The  unemployment  insurance  scheme  is  available  for  persons 

involuntarily unemployed and for some groups of self-employed persons.  

The  qualifying  period  for  insurance  benefits  is  at  least  360  contributory  days  within  two  years 

before unemployment. As benefits are only available for involuntarily unemployed persons, there is 

no waiting period. The reference income is the average daily gross wage 12 months before the two 

months prior to the unemployment spell. The daily reference wage includes holiday and Christmas 

bonuses. There is no ceiling for the reference wage. The unemployment benefit equals 65 percent 

of the reference wage with a lower bound equal to the value of the reference social support index 

IAS (EUR 428.90). The amount is increased by 10 percent if both spouses with dependent children 

are unemployed. The maximum cannot be higher than 75 percent of the net value of the reference 

income or 2.5-times the IAS.  

The benefit duration depends on the age of the unemployed person and the length of contribution 

to the system. The maximum duration for a contribution period of less than 15 months ranges from 

150 days for persons aged less than 30 years to 270 days for a person aged 50 years or more. For 

a  contribution  period  of  more  than  24  months,  the  duration  is  330  days  for  young  unemployed 

persons  and  540  days  for  older  persons.  In  addition,  additional  duration  is  granted  for  every  five 

years of registered income.  

To be eligible for the unemployment assistance, at least 180 days of paid employment in the year 

before  unemployment  is necessary. The benefit is means tested (monthly household income less 

than 80 percent of IAS; moveable assets less than 240-times IAS). The benefit amounts to the IAS 

for  unemployed  people  with  dependants  and  80  percent  of  the  IAS  for  persons  living  alone.  The 

duration  of  the  benefit  is  the  same  as  the  duration  for  unemployment  insurance  benefits.  If 

unemployment  insurance  was  granted  before,  the  duration  is  halved  for  beneficiaries  aged  less 

than 40 years.  

Unemployment  insurance  and  assistance  benefits  are  not  taxable  and  no  social  security 

contributions are applied.  

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Table 36: Unemployment benefit eligibility and gross replacement rate in Portugal 

The division between unemployment insurance benefits and unemployment assistance is based on 

information  from  the  ministry  ‘Ministério  do  Trabalho,  Solidariedade  e  Segurança  Social’.  Data 

contain  information  about  the  age  structure  of  beneficiaries  for  the  different  benefit  schemes. 

Together with the eligibility ratio of benefits in general from the EU-SILC and assumptions about the 

skill  structure,  it  is  possible  to  derive  the  relevant  parameters  for  the  model.  Unemployment 

benefits are largely based on the unemployment insurance system, as shown in Table 36. About 80 

percent of unemployed beneficiaries receive unemployment insurance benefits.  

Romania 

The  unemployment  system  in  Romania  is  based  on  an  unemployment  insurance  scheme;  an 

unemployment  assistance  scheme  does  not  exist.  Unemployment  insurance  is  compulsory  for 

employees  and  civil  servants  and  voluntary  for  self-employed  people  and  their  spouses.  To  be 

eligible,  unemployment  must  be  involuntarily.  The  qualifying  period  amounts  to  12  months  of 

contributions  in  the  24  months  before  unemployment.  There  is  no  waiting  period.  Reference 

earnings are gross monthly earnings in the last 12-month contribution period. 

The  insurance  benefit  is  largely  flat.  It  amounts  to  75  percent  (for  graduates,  50  percent)  of  the 

reference social indicator (RON 500, EUR 107 in 2019) and 3 to 10 percent of the average gross 

income. For a contribution period of three-to-five years, the replacement rate amounts to 3 percent 

of  previous  income;  it  increases  to  5  percent  for  five-to-ten  years  contributions;  it  is  7  percent 

between 10 and 20 years, and 10 percent for longer contribution periods.  

The duration of eligibility for unemployment insurance also depends on the contribution period and 

ranges  from  six  months  (one-to-five  years  of  contributions),  to  nine  months  (five-to-ten  years  of 

contributions), up to 12 months for longer contribution periods. For graduates, the duration is set to 

six months. Unemployment insurance benefits are neither subject to taxation nor to social security 

contributions.  

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Table 37: Unemployment benefit eligibility and gross replacement rate in Romania 

Eligibility  for  unemployment  benefits  in  Romania  is  especially  low.  This  is  also  reflected  in 

considerably low expenditures for unemployment benefits at the aggregate level. As unemployment 

insurance  is  flat  and  independent  of  previous  earnings,  ‘xi1’  is  set  to  zero.  The  flat  part,  ‘b00’,  is 

also very  low.  Based on this data,  public  unemployment  benefits do not play  an important role  in 

replacing income in cases of unemployment.  

Slovenia 

The Slovenian public unemployment system is a compulsory insurance scheme, financed by taxes 

and contributions. It covers employees, self-employed and other recipients, like persons receiving 

sickness benefits. In addition, voluntary insurance is possible for certain groups but not relevant for 

the  model,  like  citizens  employed  in  a  foreign  country.  Persons  receiving  unemployment  benefits 

are  obliged  to  search  actively  for  a  job,  must  be  able  to  work,  registered  with  the  Employment 

Service,  and  willing  to  accept  appropriate  employment.  Farmers,  students,  retirees,  and  self-

employed  do  not  qualify  for  unemployment  benefits.  To  qualify  for  unemployment  benefits, 

recipients  must  have  been  insured  for  nine  months  in  the  previous  24  months.  If  an  unemployed 

person is younger than 30 years old, six months of insurance are sufficient.  

The duration of the  unemployment benefit depends on the length of insurance and on the age of 

insured persons. An insurance period of nine months up to five years leads to a benefit duration of 

at  most  three  months.  An  insurance  period  of  five  to  15  years  leads  to  benefit  duration  of  six 

months; and between 15 and 25 years, benefits are paid for nine months. For a longer insurance 

period, benefits are granted for 12 months (19 months if older than 50 and 25 months if older than 

55). For unemployed persons younger than 30 years old, an insurance period of six months leads 

to two months of benefits.  

Unemployment  benefits  are  based  on  monthly  earnings  eight  months  before  unemployment 

(reference earnings). For the first three months, 80 percent of reference earnings are granted, 60 

percent from the fourth to the twelfth month, and 50 percent afterwards. There are also lower and 

upper ceilings for benefits. The lower ceiling corresponds to EUR 350 per month (2019), the upper 

ceiling  to  EUR  892.50  (2019).  Benefits  are  not  means  tested  and  there  is  no  waiting  period  for 

payments. Unemployment benefits are subject to income taxation and social security contributions 

for health- (5.96 instead of 6.56 percent), pension- and invalidity-insurance (15.5 percent).  

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Table 38: Unemployment benefit eligibility and gross replacement rate in Slovenia 

Data  from  EU-SILC  and  calculations  by  the  authors  are  presented  in  Table  38.  They  reveal  that 

unemployment benefit eligibility is low for low-skilled unemployed persons. This may be explained 

by the maximum benefit duration. For older workers with longer contribution periods and therefore 

a longer maximum benefit duration, eligibility is much higher.  

Slovakia 

Unemployment  insurance  is  mandatory  for  employees  and  voluntary  for  self-employed  persons. 

Unemployment  insurance  is  also  mandatory  for  part-time  employees.  The  benefit  does  not  vary 

with  age  or  family  status  or  the  reason  of  the  job  loss  of  an  employee  (voluntarily  or  laid-off). An 

insured person is eligible for payments if she or he was insured for at least two years within the last 

four years. The benefit duration amounts to six months at most. After three months an unemployed 

person  can  cancel  their  registration  as  jobseeker  and  obtain  50  percent  of  the  remaining  three 

months.  

Unemployment insurance benefits amount to 50 percent of gross labour income in the contribution 

period. Benefits are restricted by a maximum daily assessment base of EUR 62.73 (year 2019). In 

addition, benefits are paid for persons participating in active labour market policy measures and for 

young  unemployed  persons.  The  benefits  are  not  taxable  and  not  subject  to  social  security 

contributions. 

Table 39: Unemployment benefit eligibility and gross replacement rate in Slovakia 

Table 39 contains the relevant information for the calibration of unemployment benefits in Slovakia. 

Eligibility is comparably low, like in other Member States that  joined the EU  in  2004  or later. One 

important reason is the short period of benefit duration with at most six months and no subsequent 

unemployment  assistance  period.  The  qualifying  condition  may  imply  the  low  eligibility  of  young 

workers. The replacement rate lies below the statutory rate of 50 percent.  

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Finland 

In Finland, unemployment insurance consists of two parts: a basic benefit, which is independent of 

former  earnings;  and  an  optional  earnings-related  benefit.  The  earnings-related  unemployment 

insurance  is  a  voluntary  insurance.  In  addition  to  unemployment  insurance,  an  unemployment 

assistance  (labour  market  subsidy)  is  available.  This  focuses  on  job  seekers  entering  the  labour 

market for the first time, as well as on persons re-entering the labour market or persons for whom 

the unemployment insurance has expired.  

To qualify for unemployment insurance payments, a minimum of 26 weeks of employment (at least 

18 hours per week) in the last 28 months must be fulfilled. For earnings-related benefits the same 

requirements apply.  

The basic benefit amounts to EUR 32.40 per day (2019), five days per week. The earnings-related 

benefit consists of the basic benefit plus 45 percent of the daily reference earning in excess of the 

basic benefit  up to a monthly reference earning of  EUR 3,078 (2019, 95-times  the basic amount) 

and 20 percent for the part of daily earnings in excess of it. The maximum amount is 90 percent of 

reference  earnings.  If  an  unemployed  person  participates  in  an  employment  promotion  measure, 

an increased benefit is paid (55 and 25 percent instead of 45 and 20 percent of reference income). 

In  addition  to  the  basic  and  earnings-related  benefit,  a  flat  child  supplement  is  granted.  The 

reference  earning  is  measured  as  gross  earning  minus  60  percent  of  employee  pensions, 

unemployment, and earned-income contributions.  

Unemployed  persons  can  work,  whereby  unemployment  benefits  are  reduced  by  50  percent  of 

earned gross income. The maximum amount of benefit and income must not exceed 100 percent 

of the reference earning.  

The  unemployment  insurance  is  granted  for  a  maximum  period  of  400  days  (300  days  if 

employment  history  is  shorter  than  three  years).  The  earnings-related  insurance  is  granted  for  a 

maximum of 500 days for unemployed persons aged 58 and older and meeting work requirements.  

The unemployment assistance scheme labour market subsidy is granted for persons not eligible for 

unemployment insurance benefits and willing to and actively seeking work. In general, benefits are 

subject to an income test,  which  is suppressed for older workers meeting  employment conditions 

before  unemployment  and  during  employment  promotion  measures.  The  maximum  benefit 

amounts 

to 

the  basic  benefit 

in 

the  unemployment 

insurance  plus  child  supplements. 

Unemployment benefits are subject to taxation and social security contributions of 1.45 percent.  

Finland  is  one  of  the  countries  with  a  wage-independent  unemployment  assistance  scheme.  In 

addition, the basic benefit is also independent from previous labour income, only income above the 

first  threshold  of  EUR  32.40  leads  to  additional  income-related  benefits.  Therefore,  more 

information  is  needed  to  derive  the  necessary  input  for  the  calibration.  For  this  reason,  we  use 

information  from  Suomen  virallinen  tilasto,  the  official  statistics  of  Finland,  to  disentangle  the 

different groups of beneficiaries according to age. This enables us to derive the income-dependent 

replacement  rate  ‘brepl’  as  stated  in  Table  40.  The  Table  shows  that  the  share  of  unemployed 

persons with income-related benefits increases considerably with age. In contrast, the replacement 

rate is similar across age and skill groups. This result depends on two counteracting effects. On the 

one hand, if income rises then a higher share of income will be considered in the calculation of the 

replacement rate, which raises the replacement rate as a percentage of gross labour income. On 

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the other hand, higher income will imply that a larger share of the income will be multiplied by the 

lower replacement rate of 20 percent, which decreases the overall replacement rate. Overall both 

effects seem to neutralise each other to a large extent. 

Table 40: Unemployment benefit eligibility and gross replacement rate in Finland 

The policy parameter ‘b00’ includes the labour market support benefit, as well as the basic benefit 

amount. For this reason, ‘b00’ as a percentage of gross labour income is rather high compared to 

other countries. This follows from the low share of unemployed with income-related benefits.  

Sweden 

The unemployment system in Sweden is based on an income-related and voluntary unemployment 

insurance  scheme  and  a  flat-rate  unemployment  assistance,  covering  uninsured  persons.  For 

unemployment  insurance,  a  beneficiary  must  have  worked  at  least  six  months  (with  at  least  80 

hours per month) during the last 12 months or 480 hours during a continuous period of six months 

(with  at  least  50  hours  each  month)  during  the  last  12  months.  In  addition,  an  insured  person 

(employee  or  self-employed)  must  be  a  member  of  the  ‘Unemployment  Insurance  Society’  for  at 

least 12 months. The maximum duration of benefits is 300 days (450 for persons with dependent 

children)  after a six-day waiting period. After the expiration of the benefit, an unemployed person 

can take part in the active labour market programme or in the job and development guarantee for 

an additional 450 days.  

The  gross  replacement  rate  in  the  unemployment  insurance  amounts  to  80  percent  of  previous 

earnings for the first 200 days and 70 percent afterwards. There is also a maximum daily benefit of 

SEK 910 for the first 100 days and SEK 760 for the remaining days and a minimum benefit of SEK 

365 (values for 2019). The benefit is reduced proportionally if the person worked part-time before 

unemployment. The job and development guarantee pays 65 percent of previous earnings with the 

same limits. Benefits in the unemployment assistance correspond to a daily flat-rate benefit of SEK 

365,  the  minimum  payment  in  the  unemployment  insurance  scheme.  For  part-time  workers  the 

benefit is reduced proportionally. Unemployment insurance and assistance benefits are taxable, but 

no social security contributions are deducted. 

Although unemployment insurance is voluntary, eligibility for this type of benefit is rather high and 

increases  with  age.  For  younger  persons  the  eligibility  is  markedly  lower.  Like  eligibility,  the 

replacement rate ‘brepl’ is similar for unemployed persons aged 25 and above. The decrease in the 

replacement rate for high-skilled individuals can be attributed to the maximum benefit level.  

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Table 41: Unemployment benefit eligibility and gross replacement rate in Sweden 

The  level  of  the  fixed  unemployed  assistance  is  calculated  by  dividing  the  monthly  replacement 

income of SEK 7,930 by average gross labour income in the different age and skill groups. In this 

calculation also the average number of hours worked in the different groups is taken into account 

as  unemployment  assistance  depends  on  the  number  of  hours  worked  before  unemployment.  In 

addition, as unemployed individuals without any benefits are considered in this calculation as well, 

with a replacement income of zero, ‘b00’ is very low. 

EU-27 

The EU-27 level of eligibility and replacement rate is derived from individual results for the Member 

States. The EU-27 value equals the weighted average, with weights based on income level (Mincer 

equation),  the  average  number  of  hours  worked,  the  number  of  unemployed  persons  and  𝑥𝑖1, 

𝑏𝑟𝑒𝑝𝑙 or 𝑏00. The parameters for the model are provided in Table 42. 

Table 42: Unemployment benefit eligibility and gross replacement rate in EU-27 

2.9.  Pension Benefits 

General Information 

Pension  systems  have  a  prominent  role  in  providing  social  security  to  households.  The  systems 

differ  significantly  across  Member  States,  for  instance  with  respect  to  their  generosity,  but  also 

concerning  the  breakdown  between  public  and  private  pension  provision  and  other  institutional 

settings.  In  many  European  countries,  the  pension  system  is  basically  a  public  PAYG  system 

financed by contributions and/or taxes. In some countries, the public system is complemented by a 

mandatory  or  voluntary  funded  pillar  that  is  often  managed  privately  or  by  occupational  pension 

systems. One should keep in mind, however, that even if a pension system is managed privately to 

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a  large  extent,  governments  still  play  an  important  role  by  setting  a  regulatory  framework  or  by 

subsidising private saving. 

The following short overview of  pension systems  in  the calibrated countries is  primarily based  on 

the  OECD’s  Pensions  at  a  Glance  2021  (OECD,  2021),  which  provides  information  on  country-

specific institutional settings in 2020, the MISSOC database of the European Commission as well 

as  country  fiches  prepared  by  the  Member  States  for  European  Commission’s Ageing  Report.  If 

necessary,  these  sources  are  complemented  by  national  sources.  We  do  not  intend  to  give  a 

complete  picture  of  pension  schemes  but  provide  a  basic  overview  and  present  necessary 

information how to set parameters in LMM. 

Many countries have reformed their pension systems in recent years or decades, often in order to 

improve  their  sustainability  given  demographic  ageing.  These  reforms  are  accompanied  by 

transition  periods  between  the  ‘old’  and  the  ‘new’  system,  which  poses  challenges  for  a 

macroeconomic  model. As  a  basic  approach,  we  implement  the  parameters  of  the  ‘new’  system 

which  is  in  place  after  the  transition  period  has  ended.  In  our  view,  this  method  ensures  an 

adequate  representation  of  labour  market  incentives  for  individuals  currently  participating  in  the 

labour  market.  In  order  to  reflect  the  fact  that  current  pension  systems  are  frequently  more 

generous  (resulting  in  higher  current  public  expenditures  and  household  income),  we  top  up 

pension benefits by a flat (non-earnings-related) pension amount. 

Given some standard assumptions that we also apply in LMM (such as rational expectations and 

perfect  capital  markets),  funded  pension  systems  can  be  seen  as  perfect  substitutes  to  private 

savings.  Households  will  reduce  private  savings  one-by-one  if  mandatory  contributions  to  the 

funded  system  increase.  In  addition,  as  shown  in  Keuschnigg  (2005),  a  funded  system  does  not 

distort labour market incentives under these conditions. One could therefore refrain from modelling 

funded  pension  systems.  Nevertheless,  our  approach  is  to  include  (quasi-)mandatory  funded 

respectively  occupational  pension  systems  in  the  model. This  is,  for  instance,  caused  by  the  fact 

that governments treat pension benefits as well as the taxation of contributions and benefits quite 

differently to private savings in many countries. 

LMM  is  a  macroeconomic  model  for  the  27  EU  Member  States  and  many  different  institutional 

features  of  the  individual  countries  (e.g.,  unemployment,  pension  and  social  benefits,  taxes  and 

social  security  contributions,  EPL)  are  modelled.  Given  this  broad  focus,  the  calibration  of  the 

model  needs,  to  some  extent,  to  abstract  from  too-detailed  institutional  settings  for  particular 

groups. Concerning pension benefits, this implies, for instance, that we implement parameters for 

the  largest  group  of  employees  (and  neglect,  for  example,  an  explicit  modelling  of  pension 

schemes for self-employed). Furthermore, we implement ‘standard’ deductions of benefits for early 

retirement (and do not take into account, for instance, special lower deductions for individuals with 

long careers). 

Belgium 

Belgium  has  an  earnings-related  public  pension  scheme  with  a  minimum  pension  and  a  means-

tested safety net. The statutory retirement age is currently 65 for men and women and increases to 

67 until 2030. Drawing a full pension requires a career of 45 years. The mandatory public system is 

complemented by occupational pension schemes. Given that  these  are voluntary (the decision to 

set  up  an  occupational  pension  plan  is  made  by  the  employer/sector),  they  are  not  modelled  in 

LMM. 

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Earnings-related pension benefits are based on lifetime income. The annual accrual rate depends 

on family status. It is 0.6/45 for a single or a married person without a dependent spouse, whereas 

it  is  0.75/45  for  a  married  person  with  dependent  spouse.  According  to  MISSOC,  the  ceiling  of 

annual pensionable earnings was EUR 58,447 in 2019. Basically, past earnings are revalued in line 

with prices. In addition, there is an annual holiday payment for pensions. 

Under certain conditions, non-contributory periods such as certain periods of career interruption or 

maternity  leave  are  credited  (‘assimilated  periods’).  Periods  of  unemployment  with  eligibility  for 

insurance  benefits  are  also  credited.  These  credits  are  based  on  earnings  prior  to  the  period  of 

unemployment.  For  subsequent  periods  of  unemployment  (apart  from  some  exceptions,  the  so-

called ‘3rd period’ and for new pensioners from 2019 also the ‘2nd period’), credits are based on the 

‘minimum annual credit’. According to the OECD, pensions in payment are indexed to a consumer 

price  index  (which  excludes  some  goods),  but  some  discretionary  adjustments  are  made 

frequently. 

Early  retirement  before  the  statutory  retirement  age  is  possible  under  the  condition  that  a  certain 

number  of  years  of  contributions  has  been  reached.  There  is  no  actuarial  reduction  of  pension 

benefits.  Disability  pensions  cover  workers  who,  as  a  result  of  sickness  or  infirmity,  cannot  earn 

more  than  one-third  of  the  normal  earnings  of  a  worker  in  the  same  category.  The  benefit  is 

dependent on the family situation and foregone earnings. 

Bulgaria 

The  Bulgarian  pension  system  has  been  subject  to  substantial  structural  reforms  since  the  late 

1990s.  The  traditional  pay-as-you-go  system  was  transformed  into  a  three-pillar  system  by 

introducing  mandatory  and  voluntary  funded  schemes.  The  statutory  retirement  age  is  gradually 

rising and will reach 65 years in 2037. In 2022, it is 64 years and five months for men and 61 years 

and ten months for women, with a required length of service of 39 years and  two months for men 

and  36  years  and  two  months  for  women.  Insured  persons  who  do  not  meet  these  qualifying 

conditions may be eligible for an old-age pension at an age of 66 years and ten months (men and 

women), with at least 15 years of insurance. 

The  pay-as-you-go  scheme  covers  all  economically  active  persons.  The  accrual  rate  currently  is 

set to 1.2 percent and the pension benefit is based on the relation of the individual and the average 

insurable income. The income ceiling to pension contributions was BGN 3,000 per month in 2019. 

Periods in which individuals receive social insurance benefits, e.g., for unemployment, are credited 

as  fully-insured  periods.  Given  the  calculation  formula  for  a  pension  benefit,  past  earnings  are 

implicitly  valorised  with  average  earnings  growth  rates.  Pensions  are  indexed  according  to 

50 percent of  the  increase  in CPI and 50 percent of the insurance  income growth of the previous 

year. 

The  second  pillar  is  a  supplementary  mandatory  funded  pension  scheme  managed  by  private 

insurance companies, with a possibility of opting out of this scheme into the first pillar since 2015. 

The  Universal  Pension  Funds  (UPF)  cover  all  persons  born  from  1960.  The  contribution  rate  is 

5 percent, which is deducted from the total pension contribution rate. In addition, the Professional 

Pension  Funds  (PPF)  are  mandatory  funds  financing  early  retirement  for  people  working  in 

hazardous environments, and there is also a supplementary voluntary pension scheme. 

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Apart  from  early  retirement  possibilities  for  persons  working  under  hazardous  and  unhealthy 

working  conditions,  or  special  groups,  a  reduced  early  retirement  possibility  was  introduced  for 

individuals within 12 months of the statutory retirement age, with a reduction of the pension benefit 

by  0.4 percent  per  month  of  early  retirement.  Disability  pensions  are  payable  to  insured  persons 

who  have  lost  at  least  50 percent  of  their  ability  to  work.  Benefits  are  based  on  the  individual 

income and the degree of disability. 

Czechia 

Public  pensions  in  Czechia  consist  of  a  basic  element  and  an  earnings-related  part  and  are 

complemented by voluntary private  pensions. The statutory retirement age of  men  and women is 

gradually increasing to  65  years. In 2022, the retirement age is 64 years for men and for women 

without children; the retirement age for women with children is lower. The minimum requirement for 

the  eligibility  of  pension  benefits  is  35  years  (or  30  years  without  non-contributory  periods),  but 

under  certain  conditions  individuals  can  receive  pension  benefits  with  lower  contributory  periods 

five years later than the statutory retirement age. 

The basic pension benefit was CZK 39,240 per year in 2019, which amounts to 10 percent of the 

average wage. The assessment base for the earnings-related benefit is starting from the calendar 

year  after  reaching  the  age  of  18.  In  principle,  the  accrual  rate  in  the  earnings-related  part  is  1.5 

percent.  However,  not  all  earnings  are  fully  included  in  the  assessment  base,  which  results  in  a 

progressive formula. Income is incorporated by 100 percent up to monthly earnings of CZK 14,388 

(in 2019) and by much lower values above. Earlier years’ earnings are revalued  by the growth  of 

economy-wide average earnings. 

Several non-contributory periods, such as childcare, education or invalidity are taken into account 

for the calculation of benefits. Periods of earnings-related unemployment insurance benefits as well 

as  unemployment  spells  without  entitlements  (for  a  certain  period)  are  credited. According  to  the 

OECD,  the  unemployment  period  credited  is  80  percent  of  the  actual  spell  of  unemployment. 

Pension benefits in payment are indexed to prices plus half of real wage growth. 

Under  certain  conditions,  it  is  possible  to  retire  three  years  before  the  statutory  retirement  age. 

According to the OECD, the actuarial adjustment for early retirement is 3.6 accrual points per year 

in the first 360 days of early retirement, 4.8 points in the next 360 days, and 6 points thereafter. In 

the  pension  system,  disability  is  handled  within  three  different  degrees  of  invalidity.  Disability 

benefits consist of two elements: a  basic amount and an earnings-related part  based on average 

earnings and the years of insurance. 

Denmark 

Denmark  has  a  rather  complex  pension  system  that  consists  of  a  public  basic  scheme  with  a 

targeted pension supplement; a mandatory, fully funded occupational scheme (ATP); and a ‘quasi-

compulsory' occupational scheme that covers around 90 percent of the employed workforce. Both 

the  ATP  scheme  and  the  occupational  scheme  are  taken  into  account  in  LMM.  In  2021,  the 

standard retirement age is 66.5 years, but it is set to gradually increase to 69 until 2035.  

In  2019,  the  full  basic  pension  amounts  to  DKK  75,924  and  the  full  pension  supplement  to 

DKK 83,076  per  year  for  singles  and  DKK  41,436  for  married  or  cohabiting  pensioners.  Both 

schemes  require  40  years  of  residence  in  Denmark  between  the  age  of  15  and  the  pensionable 

age,  with  a  proportional  reduction  for  shorter  periods  of  residence.  The  supplement  is  tested 

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against all sources of personal income (including ATP and occupational pensions) apart from public 

pensions.  According  to  OECD,  if  personal  income  is  in  excess  of  DKK  88,700  for  singles  (DKK 

177,700  for  couples;  2020  values),  the  pension  supplement  is  reduced  by  30.9  percent  (16 

percent) of the excess income. Public old-age pensions are adjusted annually in line with average 

earnings. 

The  occupational  schemes  are  fully  funded  defined-contribution  schemes  which  are  agreed 

between the social partners, and cover approximately 90 percent of the employed workforce. We 

follow the OECD by assuming that the average contribution rate for these schemes is 12 percent. 

ATP is a statutory, fully funded, defined-contribution scheme which covers almost all wage earners 

and  almost  all  recipients  of  social  security  benefits,  whereas  self-employed  individuals  can 

voluntarily join. According to the OECD, coverage is almost universal. The contribution to the ATP 

scheme is a fixed amount that varies only with the number of hours worked (and not with income). 

A  full-time  employee  contributed  DKK  3,408  in  2019,  two-thirds  of  which  is  paid  by  the  employer 

and one-third by the employee. The contribution is adjusted when the social partners decide to do 

so.  During  unemployment,  the  unemployment  insurance  takes  over  the  contributions  of  the 

employer and ATP contributions are paid at a double rate when receiving unemployment benefits. 

We assume that these funded schemes earn a usual rate of return. 

There  are  several  different  early  retirement  programmes  in  Denmark.  One  of  them  is  linked  with 

unemployment  insurance  and  pays  benefits  between  62  (gradually  increasing  to  65)  and  the 

normal  retirement  age.  In  order  to  qualify,  an  individual  must  have  been  a  member  of  the 

unemployment  insurance  system  for  at  least  30  years  and  have  paid  voluntary  early-retirement 

contributions during this period. The benefit corresponds to unemployment benefits, with a limit of 

91  percent  of  the  maximum  rate  of  unemployment  benefits.  It  is  also  possible  to  defer  old  age 

pensions. The increment for deferring public pension benefits is proportionate to the shortening of 

the expected pay-out period. 

Invalidity pensions offer a tax-financed universal protection for all inhabitants. They cover the risk of 

a  permanent  reduction  of  the  capacity  to  work  to  an  extent  that  the  person  cannot  ensure  their 

subsistence.  If  income  does  not  exceed  a  certain  level,  the  benefit  is  DKK  226,500  per  year  for 

persons living alone and DKK 192,528 for married or cohabiting pensioners in 2019. The pension is 

automatically converted into an old-age pension at the pensionable age. 

Germany 

The statutory public pension system in Germany is an earnings-related PAYG-system with means-

tested  supplements  for  low-income  pensioners.  Pension  eligibility  requires  at  least  five  years  of 

contributions. The statutory retirement age is gradually increasing to 67 until 2031. For people born 

in 1956, the retirement age is 65 years and 10 months. There is a complementary voluntary private 

pension system (‘Riester-Rente’). 

The  valuation  of  individual  contributions  is  dependent  on  personal  income  relative  to  average 

earnings: if a worker earns the average income, she earns one point in the public pension system. 

In  2019,  employees  contribute  up  to  a  ceiling  of  EUR  80,400  of  gross  annual  wage  earnings 

(respectively  EUR  73,800  in  the  new  federal  states).  At  retirement  age,  accumulated  points  are 

multiplied by the value of a point. In January 2019, the annual value of one point was EUR 384.36 

(the value in the new federal states is already close and the gap will be closed in 2024). 

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During the first period of unemployment (‘Arbeitslosengeld I’), entitlements are earned on the basis 

of 80 percent of previous gross earnings. If unemployment benefit II (‘Arbeitslosengeld II’) is paid, 

there  are  no  financial  contributions  to  the  pension  scheme,  but  the  time  period  is  accounted  for 

(‘Anrechnungszeiten’). In principle, pension payments are indexed to gross wages. However, there 

are  additional  factors  in  the  ‘Rentenanpassungsformel’  that  usually  result  in  lower  indexation  to 

improve the sustainability of the pension system. 

Early retirement is possible from an age of 63 (this requires 35 years of contributions). In this case, 

deductions  of  3.6  percent  per  year  of  early  retirement  are  applied.  In  addition,  there  are  further 

possibilities  (e.g.,  for  exceptionally  long-term  insured  persons)  to  retire  earlier  without  penalties. 

Each year of deferred pension benefit after the statutory retirement age leads to an increment of 6 

percent. Disability pensions are paid in case of reduced earnings capacity.  

Estonia 

The  Estonian  pension  system  combines  a  flat-rate  basic  element,  an  earnings-related  public 

scheme,  contributions  to  funded  pensions  and  a  safety  net.  The  statutory  retirement  age  is 

gradually increasing to 65 years by 2026 for both men and women and will be linked to increases in 

life  expectancy  thereafter.  The  qualifying  condition  for  a  pension  benefit  is  at  least  15  years  of 

pensionable service. 

The  base  amount  has  been  EUR 235.3  per  month  since April  2021.  The  earnings-related  part  of 

old-age pension is based on the amount of contributions paid on an individual’s behalf, relative to 

the  average  contribution  paid.  The  accumulation  of  these  insurance  components  is  multiplied  by 

the  value  of  one  year  of  pensionable  service  (which  was  EUR 7.104  in  April  2020)  to  calculate 

pension benefits. There is no income ceiling for contributions. Pensions in payment are indexed to 

20 percent of consumer price changes and 80 percent of contribution revenue growth. From 2021, 

the ‘compound’ part of the pension was introduced. Since the reform, a person who receives twice 

the  average  wage  will  be  granted  1.5  points  (instead  of  2  points  before  that),  while  a  person 

earning half  the  average  wage receives 0.75 points (instead  of 0.5). For the  second pillar funded 

pension,  an  individual  pays  2 percent  of  their  gross  salary  to  the  pension  fund,  which  is 

complemented by a 4 percent contribution rate from the social tax. Until 2021, participation in the 

funded pension system was mandatory for people born in 1983 or later but  since 2021 there  has 

been  a  possibility  of  opting  out.  However,  in  line  with  the AWG  pension  group,  we  still  treat  the 

second pillar as mandatory. According to the description of the unemployment system in MISSOC, 

the Unemployment Insurance Fund pays the contribution to the funded pension system for people 

receiving the unemployment insurance benefit (but not for those receiving the allowance). 

Pension  benefits  are  flexible  in  the  sense  that  individuals  can  choose  their  retirement  date, 

suspend their pension benefits or take only part of the pension and the pension benefit is adjusted 

in an actuarially neutral way in that case. Disability benefits are based on an assessment of work 

ability.  In  2019,  the  benefit  was  EUR 12.72  per  day  for  an  individual  with  no  working  ability,  but 

lower for persons with partial working ability or with income above a certain threshold. 

Ireland 

The public pension scheme in Ireland provides flat rate pension benefits for those individuals who 

meet  contribution  conditions.  In  addition,  there  is  a  means-tested  pension  for  low-income 

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individuals. Furthermore, voluntary occupational pension schemes have a coverage of around half 

of employees. 

Full entitlement to the basic State pension requires an annual average of 48 weeks’ contributions 

paid or credited over the entire working life and the pension is reduced for incomplete contribution 

histories. In 2019, the full  basic pension is EUR 243.3 per week. This amount  is increased by an 

extra allowance for pensioners aged 80 and over and a further allowance if the individual is living 

alone. Furthermore, there is an extra allowance if the pensioner has an adult dependent. For low-

income elderly, there is an additional means-tested State pension. 

The State pension is payable from the age of 66 years. The pensionable age was set to increase to 

68  years  by  2028  but  the  government  has  deferred  this  increase  and  set  up  a  Commission  to 

examine  sustainability  and  eligibility  issues.  The  State  pension  cannot  be  claimed  before  the 

pensionable age. 

Provided that at least 520 weeks of contributions are paid over the course of the working life, public 

pension  entitlement  is  not  affected  by  some  non-contributory  periods.  Subject  to  conditions, 

credited contributions may be rewarded, for instance, for periods of sickness, maternity, disability or 

unemployment periods. 

In addition to the State pension, there are private pensions which have a coverage of around half of 

employees. However, given that they are voluntary, they are not implemented in LMM. 

Invalidity Pension is a payment for insured people who are permanently incapable of work because 

of illness or incapacity. Like the State pension, it is a flat-rate payment (of EUR 203.5 per week in 

2019)  plus  a  Christmas  bonus  and  several  allowances  depending  on  the  family  situation  of  the 

pensioner. 

Greece 

Public  pensions  in  Greece  are  comprised  of  a  flat  part  (the  national  pension),  a  contributory 

earnings-related  pension  and  a  supplementary  public  and  mandatory  insurance.  The  statutory 

retirement  age  is  67  for  both  men  and  women  with  at  least  15  years  of  contributions;  insured 

persons with a long contribution record can retire at 62. 

The national pension is not earnings-related and is financed directly from the state budget. Its full 

amount  is  EUR 384  per  month  in  2019,  which  is  reduced  for  individuals  with  less  than  40  years 

residence in Greece or less than 20 years of insurance. Concerning the  contributory pension, the 

pensionable  earnings  ceiling  is  EUR 6,500  per  month  from  February  2019.  Accrual  rates  vary 

according to the number of insurance years; they increase from 0.77 percent for the first 15 years 

to  2.55 percent  for  the  36th-to-40th  year.  Beyond  40  years  of  insurance,  they  are  reduced  to 

0.5 percent.  Past  earnings  are  inflated  with  consumer  prices  for  the  period  until  2024  and  with 

wage  changes  from  2025  onwards.  The  indexation  of  benefits  in  payment  is  based  on  half  the 

change  of  GDP  and  half  the  change  of  consumer  prices  but  must  not  exceed  the  change  of 

consumer prices. The supplementary pension is based on an NDC (notionally defined contribution) 

system from 2015 onwards, where the contribution rate was reduced to 6.5 percent (3.25 percent 

employee  and  employer  each)  in  2019.  Periods  during  which  unemployment  (and  e.g.,  sickness) 

benefits  are  paid  are  credited  for  the  pension  system  but  they  are  only  used  for  the  purpose  of 

assessing entitlement to a pension and not for the calculation of the amount. 

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Early  retirement  with  reduced  pension  benefits  is  possible  from  the  age  of  62  with  a  reduction  of 

1/200 for each missing month. Similar to old age pensions, disability pensions are comprised of the 

flat national pension and an earnings-related part. 

Spain 

The  public  pension  system  in  Spain  consists  of  an  earnings-related  benefit  with  a  means-tested 

minimum  pension.  In  2021,  the  statutory  retirement  age  is  65  years  for  men  and  women  with  at 

least 37 years and three months of contributions and 66 years for others. In order to qualify for a 

benefit, 15 years of contributions are necessary.  

From  2022,  the  benefit  is  defined  by  dividing  the  last  300  months  (25  years)  of  earnings  prior  to 

retirement by 350. Earnings are valorised with prices (apart from the last two years which are not 

uprated).  The  contribution  ceiling  was  EUR  48,841  in  2019.  Benefits  accrue  according  to  a 

schedule so that maximum accrual of 100 percent is reached after 37 years of contributions, a rate 

of  50 percent  is  applied  after  15  years  (and  in  between,  each  additional  month  of  contributions 

increases the accrual). 

Several  non-contributory  periods  such  as  parental  leave  or  leave  to  take  care  of  relatives  are 

credited.  During  periods  of  receipt  of  unemployment  benefits,  the  government  takes  over  the 

employer’s  contributions  and  the  worker  pays  employee’s  contributions  to  the  pension  insurance 

scheme.  Accrual  is  based  on  previous  earnings.  Periods  of  unemployment  assistance  are  not 

credited  except  for  individuals  aged  52  years  or  older.  Pension  benefits  in  payment  are  indexed 

according to a new adjustment index calculated according to several different factors. 

Early retirement is possible in  Spain. Conditions depend on whether unemployment is involuntary 

or  voluntary.  Actuarial  reductions  of  pension  benefits  vary  from  6 percent  to  8 percent  per  year 

depending  on  the  length  of  contributions.  There  also  is  partial  retirement.  Disability  pensions  are 

dependent on the degree of incapacity and previous earnings. 

France 

The  French  pension  system  for  private  sector  employees  has  two  tiers:  a  defined  benefit  public 

pension  scheme  and  a  mandatory  occupational  tier. Additionally,  the  public  system  features  two 

kinds of minimum pensions. The minimum legal pension age for the earnings-related pension is 62 

years for individuals born in 1955 or later. 

The  public  pension  targets  a  replacement  rate  of  50 percent  after  a  full  career;  each  missing 

quarter of a year of contributions reduces the pension pro rata. Benefits are calculated on the basis 

of  the  25  years  of  highest  earnings,  where  earlier  years’  earnings  are  valorised  in  line  with  price 

inflation.  In  2019,  the  ceiling  for  eligible  earnings  was  EUR  40,524.  Periods  of  unemployment 

benefits  are  credited  for  the  state  pension  if  unemployment  benefits  are  received.  Periods  of 

unemployment  without  unemployment  payments  are  also  credited,  but  at  a  lower  rate.  Pension 

benefits in payment are indexed to price inflation. 

There  are  different  occupational  schemes.  In  line  with  the  OECD,  we  focus  on  the  Agirc-Arrco 

scheme,  which covers private  and agriculture sector  employees. Below the social security ceiling 

(EUR  40,524),  claims  accumulate  by  6.2 percent  of  earnings,  whereas  they  accumulate  by 

17 percent  of  earnings  between  the  ceiling  and  three-times  the  ceiling.  The  number  of  points 

earned per year  is determined by the value of these  contributions divided by the costs of a point 

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(EUR  17.3982  in  2020).  At  retirement,  the  accumulated  points  are  converted  into  benefits  by 

multiplying them with the value of a pension point (EUR 1.2714 in 2020). Uprating of the costs and 

the value is agreed between the social partners. Following the approach of the OECD, we assume 

that this implies an increase of the costs of a point in line with earnings and of the value in line with 

prices. This uprating policy affects both indexation of  pensions in payment and uprating of  earlier 

years’ earnings. Periods of unemployment entitle to pension benefits in the occupational system if 

the person had contributed to one of the plans prior to the unemployment period. These points are 

based on the last wage before unemployment. 

Early  retirement  is  possible  under  certain  conditions  in  the  public  scheme.  In  the  occupational 

schemes, early retirement is possible as well, subject to deductions depending on the age and/or 

the  years  of  contributions. According  to  MISSOC,  disability  benefits  are  provided  to  persons  who 

have  a  reduction  in  the  capacity  to  work  of  at  least  two-thirds.  The  benefit  is  dependent  on  the 

salary during the ten years with the highest income and the amount of incapacity. 

Croatia 

Following  comprehensive  structural  reforms  implemented,  inter  alia,  in  1999  and  2002,  Croatia’s 

pension  system  consists  of  three  pillars:  a  public  earnings-related  pay-as-you-go  scheme,  a 

mandatory private funded scheme and voluntary funded schemes. In 2022, the statutory retirement 

age  was  65  years  for  men  and  63  for  women.  The  pensionable  age  for  women  will  gradually 

increase  to  65  years  by  2030.  The  minimum  contributory  period  is  15  years,  for  both  men  and 

women. 

The earnings-related  first pillar is  mandatory for all employees and self-employed persons. It  is  a 

points  system  in  which  each  individual  earns  points  dependent  on  his/her  earnings  relative  to 

average  earnings.  As  individuals  can  opt  out  of  the  second  pillar  and  transfer  the  assets  to  the 

public scheme at the moment of retirement, the calculation of the earnings-related pension benefits 

differs  between  ‘mono-pillar’  and  two-pillar  claimants.  Given  that  the  public  scheme  mostly  has 

provided  more beneficial  pensions, the vast majority  of  individuals in the past decided to transfer 

their  assets  to  the  public  scheme.  The  AWG  pension  group  assumes  an  increasing  share  of 

individuals that keep their assets in the funded scheme in the future. According to information from 

the Croatian government, unemployed persons are entitled to pension insurance. The valorisation 

of  past  earnings  and  the  indexation  of  benefits  in  payment  is  determined  by  the  ‘actual  pension 

value’ (APV), which amounted to HRK 67.97 (per month) in the second half of 2019. According to 

the  AWG  group,  a  ‘simple  interpretation’  of  the  mechanism  is  that  it  is  adjusted  by  a  70–30 

proportion of wage and price increases, where the 70-percent weight is given to the indicator that 

increases more strongly. The second pillar is a mandatory (for all individuals born  in 1962 or later) 

fully-funded defined contribution scheme which was established in 2002 but, as mentioned above, 

individuals can opt out of the scheme and transfer their assets to the public scheme at retirement 

and a majority of individuals currently prefer this option. 

Early  retirement  is  possible  five  years  prior  to  the  statutory  retirement  age  upon  condition  of  a 

minimum contributory period of 35 years (or less for women until 2030). In this case, the pension 

benefit  is  reduced  by  0.2 percent  per  month  of  early  retirement.  Disability  pensions  are  paid  to 

individuals who have lost a certain amount of earning capacity. The benefit is calculated in a similar 

manner  as  the  earnings-related  old-age  pension,  but  takes  into  account  the  type  and  cause  of 

invalidity. 

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Italy 

The Italian pension system is in a transition from a defined benefit system to a notionally defined 

contribution (NDC) pension scheme. The NDC is fully effective for people who entered the labour 

market  after  1995.  Currently,  pro  rata  pension  benefits  are  paid  from  the  defined  benefit  and  the 

NDC scheme. The legal retirement age is 67 years for men and women in all sectors. 

The contribution-based NDC regime is financed by a rate of 33 percent, of which around one-third 

is  paid  by  the  employee  and  two-thirds  by  the  employer.  The  annual  salary  ceiling  was 

EUR 102,543  in  2019.  The  pension  benefit  is  calculated  as  a  product  of  accumulated  lifelong 

contributions  (past  contributions  are  valorised  with  the  nominal  GDP  growth  rate)  and  the 

transformation  coefficient.  The  coefficient  is  mainly  determined  by  the  probability  of  death,  the 

probability of leaving a widow or widower and the expected number of years that a benefit will be 

withdrawn.  It  is  possible  to  defer  pension  benefits  after  age  67  and  a  higher  transformation 

coefficient ensures that benefits increase to achieve actuarial adjustment.  

Non-contributory  periods  of  illness,  maternity,  military  service,  unemployment  and  the  receipt  of 

redundancy pay are credited in the public pension system. The indexation of pension payments is 

progressive  and  rather  complex.  In  2020,  benefits  below  a  threshold  of  three-times  the  minimum 

pension have full price indexation; higher pensions are only partly indexed to a so-called ‘cost-of-

life’ index. 

Invalidity  benefits  are  paid  to  people  who  have  a  reduced  ability  to  work  due  to  sickness  or 

disability (physical or mental). For periods of contributions accrued from 2012, the pension amount 

is calculated on basis of the total contribution amount and an actuarial coefficient. 

Cyprus 

The public pension system in Cyprus comprises the  General  Social Insurance  Scheme (GSIS),  a 

compulsory earnings-related pension scheme which covers everyone employed (in  the public and 

private  sectors,  including  self-employed  people),  an  income-tested  social  scheme  and  a 

supplementary  pension  scheme  for  civil  servants. The  pensionable  age  is  65  years  for  both  men 

and women in 2022, but an automatic adjustment of the statutory retirement age every  five years, 

in  line  with  changes  in  life  expectancy  at  the  retirement  age,  was  introduced  in  2018.  In  order  to 

qualify for a pension, a person must have been insured for at least 780 weeks and must have basic 

insurance of at least 15 insurance points, earned from paid contributions. 

In  2019,  the  maximum  insurable  earnings  for  GSIS  contributions  amounted  to  EUR 54,648. 

Insurable earnings are converted into insurance points by dividing an individual’s earnings by basic 

insurable  earnings  (which  is  EUR 9,106  in  2019).  The  first  insurance  point  grants  a  basic 

insurance,  while  insurance  points  in  excess  of  one  lead  to  supplementary  insurance. An  old-age 

pension  benefit  consists  of  (i)  a  basic  pension,  which  is  equal  to  60  percent  of  the  value  of  the 

average number of insurance points earned in basic insurance (this number is increased to 80, 90 

or 100 percent, depending on the number of dependants) and (ii) a supplementary pension, which 

is equal to 1.5 percent of the total number of insurance points earned in supplementary insurance. 

The basic pension is adjusted in line with the change of average earnings, while the supplementary 

pension  is  indexed  to  the  CPI.  Several  periods  of  replacement  income,  e.g.,  periods  of  receiving 

unemployment  benefits  or  invalidity  benefits,  represent  so-called  assimilated  insurance  earnings 

and contribute to higher pension benefits. 

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Early  retirement  is  currently  possible  at  the  age  of  63  years,  upon  condition  that  the  number  of 

points  in  the  basic  insurance  is  sufficiently  high,  with  an  actuarial  reduction  of  0.5 percent  per 

month  of  early  retirement.  Invalidity  pensions  are  payable  to  individuals  who  are  expected  to 

remain  permanently  incapable  of  work.  The  invalidity  benefit  is  calculated  similarly  to  old-age 

pension benefits, but takes into account the extent of the loss of earnings capacity. 

Latvia 

The  new  Latvian  pension  system  combines  an  earnings-related  notional  accounts  scheme  with 

mandatory contributions to a funded pension system. The schemes are complemented by a safety-

net pension. In 2022, women and men who  have reached the  age  of 64 years and  three months 

and who have  at least 15  years of insurance  were entitled to an  old-age  pension. The retirement 

age  will  increase  to  65  years  in  2025  and  the  minimum  insurance  period  will  be  extended  to  20 

years.  

Pension  contributions  of  20 percent  of  earnings22  are  devoted  to  the  NDC  scheme  and  the 

mandatory  funded  scheme.  The  contribution  rate  to  the  funded  scheme  has  been  changed 

frequently  in  recent  years.  It  was  set  to  6 percent  from  2016  so  that  the  NDC  rate  is  equal  to 

14 percent. The state covers social security contributions on behalf of recipients of unemployment 

benefits. To  derive  the  NDC  pension  benefit  at  retirement,  the  notional  capital  (past  contributions 

are  uprated  in  line  with  the  covered  wage  bill)  is  divided  by  the  ‘G-value’  (which  is  calculated 

annually  using  projected  life  expectancy  at  retirement  with  a  unisex  life  table).  The  part  of  the 

pension  in  payment  not  exceeding  50 percent  of  the  average  wage  is  indexed  with  inflation  and 

50 percent of the wage index for individuals with less than 30 years of insurance (the percentage of 

the wage index is higher for individuals with a higher number of insurance years). People under the 

age of 30 in 2001 must contribute to the funded pension scheme (people aged between 30 and 49 

in  2001  could  choose  whether  or  not  to  join  the  funded  system). At  retirement,  the  accumulated 

capital can be transferred into the notional accounts system or paid out as a life annuity. 

Early retirement is possible for individuals with longer insurance periods (not less than 30 years) or 

for  particular  groups  (such  as  individuals  who  have  worked  under  hazardous  conditions  or  who 

have  been  politically  repressed).  Invalidity  pensions  are  paid  to  people  with  a  certain  degree  of 

incapacity to work. Depending on the level of incapacity, there is a fixed amount or the amount is 

dependent on the contributions paid to the system. 

Lithuania 

The new Lithuanian pension system has a two-tier public scheme: a basic pension benefit and an 

earnings-related  part. In  addition, there is a quasi-mandatory defined contribution funded pension 

scheme.  The  pensionable  age  was  64  years  and  four  months  for  men  and  63  years  and  eight 

months for women in 2022 and  it will reach 65 years  by 2026. Individuals must  have 15 years of 

coverage to receive a pension. 

The  basic  pension  is  a  ‘flat-rate  contributory’  benefit.  In  2019,  the  monthly  full-rate  basic  pension 

was  EUR 164.59,  which  is  proportionally  adjusted  for  longer  or  shorter  contribution  periods.  The 

earnings-related  part  is  a  points-based  system.  Pension  points  are  calculated  as  the  ratio  of 

individual social security contributions to the average in the country. Since 2018, the average wage 

22 Further costs, such as for minimum pensions and administrative costs are included in the total pension contribution rate 

of 24.5 percent. 

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earner accrues 1 point per year theoretically, but practically this number is 1.1 because there is a 

lower  average  wage used  for the calculation. The  maximum ceiling per year is set to 5  points. In 

2019,  the  value  of  a  pension  point  was  EUR 3.52  per  month.  Periods  of  unemployment  benefit 

claims are taken into account (up to a maximum of nine months) both for the qualifying period and 

for  calculating  the  amount  of  the  pension.  The  basic  pension  and  the  pension  point  value  are 

adjusted each year by the growth of the wage fund in the economy. All employees below 40 years 

are  automatically  enrolled  in  the  funded  pension  scheme,  but  they  can  opt  out  under  some 

conditions.  From  2019,  the  contribution  rate  has  been  3 percent  of  the  gross  wage  and  the  state 

pays an additional contribution of 1.5 percent.  

In  cases  of  early  retirement,  pensions  are  reduced  by  0.32 percent  for  each  month  of  early 

retirement.  Analogously  to  old-age  pensions,  invalidity  pension  benefits  are  comprised  of  a  ‘flat’ 

basic and an earnings-related part. 

Luxembourg 

The public pension scheme in Luxembourg has a basic (flat-rate) and an earnings-related part with 

a minimum pension benefit. The standard retirement age is 65 years both for men and women with 

at  least  120  months  of  contributions.  Earlier  retirement  is  possible  with  substantially  longer 

contributory periods. 

The basic pension benefit is flat-rate and amounted to EUR 496.96 per month in 2019. In addition, 

there is an ‘end-of-year allowance’ which adds EUR 786.6 (per year) to the pension. Both of these 

amounts  are  valid  for  an  individual  with  40  years  of  insurance;  the  benefits  are  proportionally 

reduced  for  shorter  insurance  periods.  For  the  earnings-related  part,  the  accrual  rate  amounts  to 

1.788 percent in 2022 and is gradually declining to 1.6 percent by 2052. The accrual rate is higher 

for  older  workers  with  longer  contribution  periods.23  In  2019,  the  maximum  amount  subject  to 

contributions is EUR 10,355 per month. Unemployment benefits are subject to contributions so that 

these periods count for pension eligibility and affect the basic and the earnings-related part of the 

pension. For the calculation of a  new pension, the  total contributory  income  is  derived to a  given 

(past)  reference  year.  Then,  the  resulting  pension  benefit  is  fully  indexed  to  prices  and  mostly  to 

real  wage  evolution  (up  to  the  fourth  year  preceding  entitlement)  via  a  revaluation  mechanism. 

Pension  benefits  in  payment  are  indexed  to  changes  in  living  costs;  the  degree  of  adjustment  to 

real wage growth depends on the financial situation of the pension scheme.  

As  described  above,  early  retirement  is  possible  with  longer  contributory  periods.  There  is  no 

actuarial adjustment of the pension benefit apart from the higher accrual rate for longer periods and 

older individuals. Invalidity pensions are paid to insured persons who have lost working ability to a 

certain degree. Similar to old-age pension benefits, these pensions are comprised of a basic and 

an earnings-related part. 

Hungary 

The pension system in Hungary is a uniform pay-as-you-go system which combines an earnings-

related  pension  with  a  minimum  pension  benefit.  The  statutory  retirement  age  for  both  men  and 

women  is  increasing  gradually  and  was  65  years  in  2022.  In  order  to  qualify  for  the  earnings-

23 In 2022, it is increased by 0.014 percentage points for each year that the sum of the individual’s age and number of 

contributory periods exceeds 94, but the maximum accrual rate is 2.05 percent per year. 

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related and the minimum pension, 20 years of service are necessary (there is a partial pension with 

15 years). 

The accrual rate of the earnings-related pension depends on the number of insurance years. The 

pension  is  calculated  as  43 percent  of  average  earnings  for  an  individual  with  15  years  of 

coverage. Each additional year from 15 to 25 years adds 2 percent (1 percent for years from 25 to 

36,  1.5 percent  from  year  36  to  40,  and  2 percent  thereafter).  Differently  to  most  other  Member 

States, the earnings base is net salary (i.e., gross salary minus employee contributions and income 

tax).  Past  earnings  are  valorised  to  the  year  preceding  retirement  with  economy-wide  average 

earnings. There is a progressive reduction of the accrual rates’ assessment base in the sense that 

only  90  resp.  80 percent  of  earnings  are  taken  into  account  for  higher  earnings  (above 

HUF 372,000  per  month). As  from  2012,  pension  benefits  in  payment  are  indexed  to  the  CPI.  In 

2021, a 13th monthly pension was introduced (increasing from one-quarter of a monthly pension in 

2021 to one month of extra pension in 2024) and we follow the AWG group by assuming that this 

increase  is  valid  long-term.  Concerning  unemployed  individuals,  periods  of  unemployment  are 

qualified  as  pensionable  service  and  the  earnings  measure  is  the  more  favourable  of  (i)  the 

unemployment benefit and (ii) an average of previous and subsequent earnings. 

The payment of pension benefits before the statutory retirement age has largely been eliminated in 

recent  years;  a  large  exception  being  women  who  have  at  least  40  years  of  insurance.  Disability 

pension  benefits  are  financed  by  the  Health  Insurance  Fund  and  depend  on  previous  average 

income and the health/rehabilitation status of an individual. 

Malta 

The  current  public  pension  scheme  in  Malta  consists  of  two  basic  schemes,  a  universal 

Contributory  Scheme  and  a  Non-Contributory  Scheme  that  is  means-tested. The  pension  system 

has undergone several steps of reform and, analogously to other countries and as described in the 

introduction of this chapter, we focus on the description of the system that is valid for the working-

age  population.  In  Malta,  the  pension  system  differs  for  people  born  in  1962  or  later  from  those 

born  earlier.  The  statutory  pension  age  is  gradually  increasing  from  61  years  for  men  and  60  for 

women before the reform of 2006 to 65 years for people born in 1962 and later. In order to qualify, 

a claimant must have been employed or self-employed for at least ten years and made an average 

of at least 15 weekly contributions over a certain time. 

The contributory Two-Thirds Pension is defined as two-thirds of the pensionable income, corrected 

for the number of contributionary periods. For employees born in 1962 or later, pensionable income 

is defined as the average of the highest basic salaries earned in any ten years, adjusted by cost-of-

living increases. There is a maximum pensionable income that is increased annually by the change 

of  average  wages  (70 percent)  and  inflation  (30 percent)  and  amounted  to  EUR 24,194  in  2019. 

Credited  contributions  are,  inter  alia,  provided  for  a  person  who  is  entitled  to  sickness,  injury  or 

unemployment  benefits  or  to  an  invalidity  pension.  Pension  benefits  are  indexed  according  to 

70 percent  of  the  increase  of  the  average  wage  and  30 percent  of  the  inflation  rate  (for  an 

individual born in 1962 or later). 

Early  retirement  is  possible  from  the  age  of  61  for  individuals  who  have  paid/credited  sufficiently 

contributionary  periods.  In  that  case,  pension  benefits  are  reduced  by  5 percent  if  an  individual 

retires one year earlier (this number increases to 10.5, 16.5 and 23 percent for two-to-four years). 

Eligibility for disability pensions is based on the extent to which  a person’s ability to perform work 
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and everyday tasks is impaired. The benefit is flat in the sense that it is not dependent on previous 

earnings (but it varies with the contribution period and in accordance with the degree of invalidity). 

Netherlands 

The Dutch  pension system has three  main pillars: a  basic flat-rate public scheme (AOW); funded 

occupational  pension  plans;  and  individual  saving  schemes.  Even  though  there  is  no  statutory 

obligation for employers to offer an occupational scheme, coverage is almost universal (according 

to  the  OECD,  89  percent  of  employees).  The  statutory  retirement  age  is  66  years  and  seven 

months in 2022 and will rise to 67 years in 2024. 

For  each  year  an  individual  lives  or  works  in  the  Netherlands,  the  basic  benefit  accrues  at  two 

percent  of  the  full  amount.  According  to  the  Dutch  Ministry  of  Finance,  the  full  annual  pension 

benefit was EUR 15,578 for a single person and EUR 21,450 for a couple in 2019. The benefit is 

linked to changes of the minimum wage, which is uprated biannually. The basic pension is not paid 

before the pensionable age. 

We  basically  follow  the  OECD  in  setting  parameters  of  the  occupational  pension  scheme.  The 

majority of individuals have an earnings measure that is based on lifetime earnings. We assume an 

accrual  rate  of  1.875  percent.  The  ceiling  on  earnings  was  EUR  107,593  in  2019.  However, 

pensionable earnings are derived by subtracting a deductible amount (‘franchise’) of EUR 13,785 in 

2019. The idea is that the deduction is covered by the AOW pillar. There is no legal requirement for 

valorisation of earlier years’ earnings and indexation of pensions in payment. According to previous 

versions of  Pensions at  a  Glance, past  earnings  are  uprated with growth of average earnings for 

the majority of individuals, while inflation is used for the remainder. Around 28 percent of pensions 

in payment are indexed to wage growth and around 65 percent of pensions are indexed to prices. 

The  occupational  pension  plans  usually  do  not  provide  credits  for  periods  of  unemployment. The 

rules  on  pension  deferral  vary  between  the  different  occupational  plans.  For  the  modelling,  we 

assume actuarial adjustment of claims in case of early retirement. 

The current invalidity pensions scheme covers the risk of work incapacity for employees unable to 

work. Benefits depend, among other features, on previous wages of the disabled person. 

Austria 

Austria  runs  a  compulsory  pension  scheme  providing  earnings-related  pension  benefits,  in  large 

part  financed  by  contributions  of  employees  and  employers,  with  a  means-tested  top-up  for  low-

income  retirees.  Currently,  the  statutory  retirement  age  is  65  for  men  and  60  for  women,  but  the 

pension age for women will incrementally increase to 65 until 2033. The qualifying condition for a 

pension  benefit  depends on the year of birth and whether insurance  months  have been acquired 

before 2005. 

Benefits  are  determined  by  the  amount  of  income,  the  duration  of  insurance,  and  the  age  of 

application.  The  pension  benefit  currently  accrues  at  1.78 percent  of  the  calculation  base  (gross 

income),  more  generous  older  arrangements  have  been  transferred  to  the  new  system. 

Contributions are payable up to a ceiling of an annual income of EUR 73,080 (2019). Past earnings 

are  revalued  according  to  wage  growth.  Periods  in  which  an  individual  receives  unemployment 

benefits or assistance are treated as number of pensionable years and entitlements are based on 

70 percent  of  the  last  gross  labour  income  before  unemployment  (64 percent  in  case  of 

unemployment  assistance).  In  principle,  the  law  envisages  that  pension  benefits  in  payment  are 

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indexed  to  CPI  (even  though  there  are  discretionary  adjustments  frequently).  In  line  with  the 

OECD,  we  do  not 

take 

into  account  contributions 

to  and  benefits 

from 

the 

‘Mitarbeitervorsorgekasse’ that is replacing the former severance payment system and can be used 

for accumulating pension claims. 

Early  retirement  is  currently  possible  three  years  before  the  statutory  retirement  age,  under  the 

condition of at  least 40 years of insurance (‘Korridorpension’). For each year of retirement before 

the regular retirement age, benefits are reduced by 5.1 percent. In addition, certain groups benefit 

from  more  beneficial  types  of  early  retirement.  Disability  pensions  are  mainly  dependent  on 

previous labour income. 

Poland 

In  1999,  a  new  pension  system  was  introduced  in  Poland  which  is  based  on  a  first  pillar  pay-as-

you-go NDC pension scheme and a funded second pillar (OFE). In 2016, the parliament decided to 

reverse previous increases of the retirement age so that it is 65 for men and 60 for women again. 

For  the  old-age  pension  without  a  guaranteed  minimum  pension,  there  is  no  minimum  qualifying 

period. There is, however, also a minimum pension that requires 25 years (for men) and 20 years 

(for women) of contributory and non-contributory periods. 

Initially,  people  born  in  1969  and  later  were  obliged  to  participate  in  the  funded  scheme;  people 

born  between  1949  and  1968  could  choose  to  opt  in.  However,  several  reforms  since  2011  have 

significantly  reduced  the  relevance  of  the  funded  pension  scheme.  These  measures  include,  for 

instance, a reduction of the contribution rate from 7.3 percent to 2.92 percent. In 2014, the public 

NDC scheme was defined as the default option and workers have to opt in to the funded system. 

Current  plans  foresee  a  complete  termination  of  OFE.  The  assets  of  those  who  stayed  in  the 

funded system are gradually transferred to the public system. 

In the earnings-related NDC part, 19.52 percent of earnings (or 16.6 percent for those who are still 

in the funded tier) are credited to individuals' notional accounts. The ceiling to contributions is set to 

2.5-times  the  average  base  amount,  which  corresponded  to  PLN  142,950  in  2019.  The  notional 

interest  rate  of  the  earnings-related  part  is  defined  as  100  percent  of  the  growth  of  the  covered 

wage  bill  (and  no  less  than  price  inflation). The  benefit  is  calculated  by  dividing  the  accumulated 

notional capital by the average life expectancy at retirement age (‘g-value'). 

The public employment service pays the contributions to the pension system during unemployment 

(based on the unemployment benefit). Further non-contributory periods are, for instance, sickness 

allowance,  parental  leave,  university  education,  and  caring  for  dependent  persons. According  to 

MISSOC,  the  indexation  of  pensions  in  payment  corresponds  to  an  average  annual  index  of 

consumer goods and services in the preceding calendar year, increased by at least 20 percent of 

the real growth of earnings. 

There  are  no  general  provisions  for  early  retirement  in  the  pension  system.  A  bridging  pension 

system allows people to retire up to five years before the legal retirement age under strict limits, but 

this is being phased out. 

Eligibility to  invalidity pensions is related to  an individuals’ total or partial  loss  of capacity to work 

because  of  illness  or  disability.  Invalidity  benefits  depend,  inter  alia,  on  the  reference  wage,  the 

number of years of insurance and the extent of incapacity. 

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Portugal 

The  public  pension  system  in  Portugal  consists  of  an  earnings-related  pension  scheme 

complemented by a means-tested safety net. The normal pension age varies with the increase of 

life  expectancy  at  the  age  65,  starting  from  the  year  2015,  and  was  set  to  66  years  and  seven 

months in 2022, both for men and women. The minimum contribution period for an old-age pension 

is 15 years. 

The earnings-related old-age benefit is primarily determined by reference earnings and the accrual 

rate. For the calculation of reference earnings, past monthly salary is adjusted according to the CPI 

(without housing prices) and the best 40 years are taken into account.24 The pension accrues at 2 

percent  for  each  year  of  contributions  for  20  or  fewer  years.  With  more  than  20  years  of 

contributions, the accrual rate varies between 2.3 percent for low and 2 percent for high earnings. 

Periods  of  unemployment  (and  ‘social  unemployment’)  benefit  claims  are  taken  into  account  to 

calculate  pension  benefits,  and  credits  for  these  periods  are  based  on  earnings  before 

unemployment.  Pension  benefits  are  paid  14  times  a  year,  which  is  consistent  with  14  salaries 

paid. The  indexation  of  pension  benefits  is  based  on  the  CPI,  but  varies  to  some  extent  with  the 

amount of the pension benefit and real GDP growth, i.e., a lower pension benefit and a higher GDP 

growth rate imply a higher indexation of pension benefits. 

An early old-age pension may be claimed under certain conditions, e.g., for very long careers (such 

as  a  career  length  of  48  years),  long-term  unemployment,  and  an  ‘old-flexibility’  and  a  ‘new-

flexibility’ scheme for individuals with at least 40 years of contributions. For individuals falling under 

the  new-flexibility  scheme,  a  pension  penalty  applies,  while  a  so-called  sustainability  factor  is  no 

longer  valid. The  pension  penalty  is  equal  to  0.5 percent  for  each  month  of  retirement  before  the 

‘personal  retirement  age’.  Disability  benefits  are  paid  to  individuals  with  absolute  invalidity 

(complete  and  permanent  incapacity  to  carry  out  any  working  activity)  and  relative  invalidity  (in 

case  of  inability  to  earn  more  than  one-third  of  a  normal  wage).  Similar  to  old-age  pensions, 

disability pension benefits are based on reference earnings and accrual rates. 

Romania 

Romania’s  national  pension  system  consists  of  three  pillars:  (i)  a  mandatory  public  scheme 

including old-age disability, (partial) early retirement and survivors pension  and a social allowance 

for pensioners below a certain income level; (ii) a mandatory private defined contribution scheme; 

and (iii) voluntary private pensions. The standard retirement age is 65 years for men. For women, it 

will  increase  to  63  years  by  2030  and  was  61  years  and  nine  months  in  2022.  The  minimum 

contribution period is 15 years. 

A  major  change  to  the  Romanian  public  pension  system  was  drafted  in  2018  and  legislated  in 

2019.  Differently  to  pension  reforms  in  many  other  countries  that  go  along  with  long  transitional 

periods, the legislated reform has rather strong short- and medium-term impacts both for pensions 

already in payment and for accrual rates. According to the AWG pension group, the average impact 

of  the  recalculation  of  pension  benefits  according  to  the  new  pension  law  will  be  a  14 percent 

increase compared to the old system. On the other hand, the new law defines more restrictive rules 

regarding contribution periods. Under the new law, the pension benefit is defined as the individual’s 

number  of  pension  points  multiplied  by  the  ‘reference  point  value’  (RPV,  defined  as  the  pension 

24 The adjustment of some earnings of the 2000s is somewhat higher. 

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Update and Extension of the Labour Market Model – Final Report 

point value divided by 25). This calculation has been changed not only for new pensions, but also 

for  pensions  in  payment.  From  September  2021,  the  RPV  stands  at  RON  75  (=1,875/25).  Under 

the  new  law,  the pension point value  is indexed with inflation plus  50 percent of  the real average 

gross wage growth of the previous year. According to MISSOC, the State pays social contributions 

on behalf of recipients of unemployment benefits so that we implement accrual of pension rights for 

periods of receiving unemployment benefits in the LMM.  

The second pillar scheme  was introduced in  2007. The contribution rate currently is 3.75 percent 

(which  is  subtracted  from  the  contribution  to  the  public  system).  The  scheme  is  compulsory  for 

individuals  aged  up  to  35  years  and  optional  for  people  aged  35  to  45  years.  Under  certain 

conditions, individuals have an  option  to transfer assets to the first pillar, but very few have  done 

that so far. 

Disability pensions are paid to individuals who  have lost their capacity to work,  totally or partially. 

Analogously  to  old-age  pensions,  the  benefit  is  determined  by  a  pension  points  scheme,  but  the 

calculation  takes  into  account  the  extent  of  invalidity.  There  is  an  early  retirement  pension  for 

individuals whose contribution period is at least eight years longer than the full contributory period. 

For  individuals  whose  contributory  periods  are  one-to-eight  years  longer,  there  is  a  partial  early 

retirement  benefit  with  deductions  to  the  pension  benefit  (which  depend  on  the  number  of 

contribution  years  exceeding  the  full  contributory  period).  Unlike  many  other  countries,  these 

deductions are only valid until the individual reaches the statutory retirement age. 

Slovenia 

Slovenia  runs  a  compulsory  PAYG  pension  scheme  providing  earnings-related  pension  benefits 

combined  with  a  minimum  pension.  With  less  than  40  years  of  contributions,  the  legal  retirement 

age  is  65  years  both  for  men  and  women.  However,  there  is  a  preferential  entitlement  to  early 

pensions with 40 contributory years. From 2019 on, 15 years of insurance are necessary to qualify 

for a pension benefit. 

Pension benefits are determined by previous earnings, the number of insurance years and the age 

of retirement. The pension rating base (PRB) is calculated using the best 24 consecutive years of 

wages.  The  PRB  is  based  on  net  earnings.  Past  net  earnings  are  uprated  with  the  growth  of 

nominal  net  wages.  This  earnings-related  pension  scheme  gives  29.5 percent  of  the  PRB  once 

qualifying  conditions  have  been  met.  For  each  additional  year,  the  accrual  rate  is  1.36 percent. 

Therefore, total accrual after 40 years of contribution is 63.5 percent. There is a minimum pension 

rating base which is equal to 76.5 percent of the average monthly salary. On the other hand, there 

is  also  an  upper  ceiling  for  pensionable  earnings  set  at  four-times  the  minimum  pension  rating 

base. 

Periods of receipt of unemployment insurance benefits qualify for a pension and the Employment 

Agency  pays  the  contributions. The  value  of  unemployment  benefits  is  taken  into  account  for  the 

calculation of pension benefits. 

Like  old-age  pensions,  early  pensions  are  based  on  PRB.  The  pension  benefit  decreases  by 

0.3 percent for each month of early retirement. In principle, the law envisages that pension benefits 

in payment are indexed with 60 percent of gross average wage growth and 40 percent of consumer 

price inflation. 

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Invalidity is defined  as a reduction in the capacity for  work because  of an  injury or illness related 

and  unrelated  to  work  which  cannot  be  reversed  by  medical  treatment  or  rehabilitation.  The 

invalidity benefit is based on how and when invalidity occurred as well as on previous earnings. 

Slovakia 

The public pension system in Slovakia basically consists of an earnings-related points system and 

includes  a  minimum  pension,  as  well  as  social  assistance  benefits.  At  the  beginning  of  2005, 

defined-contribution plans were introduced. The statutory pension age is gradually increasing to 64 

years for men and women (without children) born in 1966 or later; it is 62 years and 10 months for 

individuals  born  in  1959.  Based  on  the  number  of  children,  the  retirement  age  for  women  with 

children  is  lower.  Eligibility  to  pension  benefits  of  the  first  pillar  requires  15  years  of  pension 

insurance. 

Contributors to the earnings-related pension scheme earn annual pension points based on the ratio 

of individual earnings to economy-wide average earnings. The pension system features a so-called 

‘solidarity  formula’.  This  means  that  pension  points  below  1  are  increased  and  pension  points 

above 1.25 are decreased. Benefits at retirement are calculated by multiplying the number of points 

by  the  pension-point  value,  which  is  indexed  to  average  earnings.  Following  the  OECD,  this  is 

equivalent to an accrual rate in a defined-benefit scheme of 1.25 percent. There are several non-

contributory periods, such as caring for children or sickness absence, which are credited. However, 

spells of unemployment are not credited in the pension system. From 2018, indexation of pensions 

in payment followed the development of consumer prices for pensioner’s households. 

The government introduced a defined-contribution system in 2005. Its contribution rate is gradually 

increasing to a value of 6 percent in 2024. For workers who joined these plans, benefits under the 

public  earnings-related  scheme  are  adjusted  proportionally  (as  their  contribution  rate  to  the 

earnings-related scheme is reduced). 

Under some conditions, early retirement is possible, and benefits are reduced by approximately 6.5 

percent  per  year  of  early  retirement.  An  individual  is  entitled  to  an  invalidity  pension  as  a 

consequence  of  a  long-term,  severe  health  condition.  Among  other  details,  disability  benefits 

depend on the level of incapacity and lifetime earnings. 

Finland 

The  public  pension  system  in  Finland  provides  an  income-tested  basic  state  pension  (national 

pension) and a range of earnings-related schemes (with very similar rules for different groups). The 

pensionable age for the national pension is 65, the retirement age for the earnings-related pension 

is currently increasing from 63 years to 65 years by 2027. 

The  full  amount  of  the  basic  pension  is  between  EUR  558  and  EUR  629  per  month  in  2019, 

depending  on  marital  status.  A  full  pension  requires  at  least  80  percent  of  residency  in  Finland 

between  the  age  of  16  and  65  and  the  benefit  is  reduced  proportionally  if  this  requirement  is  not 

fulfilled.  The  basic  pension  is  withdrawn  against  income  from  the  earnings-related  scheme.25 

Following the OECD, we cover the earnings-related scheme for private sector employees (TyEL). 

From  2017,  the  accrual  rate  amounts  to  1.5  percent  of  annual  earnings  but,  during  a  transitional 

period,  the  accrual  rate  is  1.7  percent  for  individuals  aged  53  to  62.  Earlier  years’  earnings  are 

25 Details for the withdrawal can be found in OECD (2021) and the MISSOC database. 

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valorised in line with a mix of inflation (20 percent) and wage growth (80 percent). Since 2010, new 

earnings-related pensions are adjusted to account for increases in life expectancy after 2009. For 

instance, for people born in 1958, this reduces pensions by 4.6 percent. 

Several  non-contributory  periods  are  credited.  Earnings-related  unemployment  benefits  accrue 

rights based on 75 percent of the income  on which  the unemployment  benefit  is based. After the 

period  of  earnings-related  unemployment  benefits,  a  flat-rate  unemployment  assistance  can  be 

claimed,  but  unemployment  assistance  does  not  entitle  a  person  to  pension  rights.  Earnings-

related pensions in payment are indexed by a mix of inflation (80 percent) and earnings growth (20 

percent). 

According  to  MISSOC,  earnings-related  pensions  can  be  claimed  before  the  statutory  retirement 

age and pensions  are  permanently reduced  by 4.8 percent per year of early retirement. Invalidity 

pensions are also comprised of a basic pension and an earnings-related part. 

Sweden 

The  Swedish  public  pension  system  consists  of  an  earnings-related  part  based  on  notional 

accounts  and  a  smaller  mandatory  defined-contribution  funded  pension  system.  There  is  also  an 

income-tested  top-up,  the  ‘guarantee  pension’.  Furthermore,  quasi-mandatory  occupational 

pension plans cover more than 90 percent of employees. 

Contributions  of  18.5 percent  of  pensionable  earnings  are  credited  on  the  accounts.  As 

pensionable  pay  is  defined  as  earnings  minus  the  employee  contribution  to  the  pension  system, 

this  corresponds  to  an  effective  contribution  rate  of  17.21 percent  of  gross  earnings.  Whereas 

14.88 percent  of  earnings  are  devoted  to  the  notional-accounts  system,  2.33 percent  are  paid  to 

the  funded  pension  scheme.  According  to  MISSOC,  contributions  are  levied  up  to  a  ceiling  of 

annual  earnings  of  SEK 519,708  in  2019.  In  the  earnings-related  part,  earlier  years’  contributions 

are uprated with the development of average earnings. The earnings-related pension benefits are 

calculated by converting the accumulated notional capital into an annuity. Earnings-related pension 

benefits  in  payment  are  indexed  with  average  earnings  growth  minus  an  imputed  interest  rate  of 

1.6 percent.  For  the  defined  contribution  system,  individuals  can  choose  between  an  annuity  to 

avoid  investment  risk  and  a  variable  annuity  where  funds  continue  to  be  invested.  In  LMM,  we 

assume that funds are paid as annuities indexed to price inflation. 

In addition, there are four major occupational schemes in Sweden that are estimated to cover more 

than  90 percent  of  employees.  We  follow  the  OECD  by  modelling  ITP1,  a  funded  defined-

contribution plan. The contribution rate is 4.5 percent of salary for an income up to 7.5 income base 

amounts and 30 percent of salary in excess of that value. 

Several  non-contributory  periods  are  credited  for  pension  entitlements.  Unemployment  benefits 

(and  activity  grants  paid  to  unemployed  individuals)  count  as  pensionable  income,  and  the 

government takes over the contribution of the employer.  

The Swedish pension system allows for a flexible retirement age. The earliest age for withdrawing 

the  earnings-related  pension  is  62  years  in  2021;  this  figure  will  gradually  increase.  The  pension 

system includes an  automatic actuarial reduction  of  earnings-related  benefits for early retirement. 

The income-tested guarantee pension, however, cannot be claimed before the age of 65. Disability 

pensions are dependent on the three highest annual incomes earned during a certain period before 

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the time of disability as well as on the degree of incapacity. For persons with low pension income, 

there is also a guaranteed compensation. 

Aggregate Pension Expenditures as in the LMM  

Aggregate  pension  expenditures  as  in  the  LMM  are  shown  in  Table  43.  Generally  speaking,  this 

number includes public as well as mandatory or ‘quasi-mandatory’ occupational pensions. It must 

be  noted  that  these  numbers  can  deviate  from  public  expenditures  published  by  the  OECD  and 

Eurostat, as we include some schemes (such as occupational pension systems) in LMM which are 

not  included  in  the  OECD’s  and  Eurostat’s  public  pension  expenditures  (see  also  the  description 

above).  Pension  expenditures  in  LMM  vary  among  the  modelled  countries.  They  range  from  5 

percent of GVA in Ireland to less than or around 10 percent in many Eastern Member States to 18 

percent of GVA in Italy and around 20 percent in Greece. 

Table 43: Pension expenditures as in the LMM as a percentage of GVA, average 2015–2017 

2.10. Other Social Benefits 

In  addition  to  public  unemployment  and  pension  insurance,  other  social  benefits  for  private 

households  are  available  in  all  modelled  countries.  The  main  source  used  to  assign  the  different 

benefits  across  age  and  skill  groups  is  the  EU-SILC.  Given  the  availability  of  data  the  following 

cash transfers are considered: 

•  Education allowances; 

•  Sickness benefits; 

•  Family allowances; 

•  Social exclusion; 

•  Housing allowances. 

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Some  of  these  benefits  are  defined  on  an  individual  level  (education  allowances,  sickness 

benefits),  whereas  others  are  available  on  the  household  level.  Benefits  for  which  data  are  only 

available on the household level are assigned across the household members in the following way 

for the calibration of the model. Each person in the household aged 25 or older, and each person of 

a lower age whose mother and father are not members of the same household, receive the same 

amount  of  the  total  household  benefit.  This  means  that  these  benefits  are  divided  equally  upon 

non-dependent members of a household. The level of aggregate expenditures is largely based on 

information of the OECD Social Expenditure Statistics. The last year for which data are available is 

2017. In general, we use the average of expenditures as a percentage of GVA of the years 2015 to 

2017. If a country is not a member of the OECD, ESSOSS is used as source for total expenditures 

for the different social expenditure categories.  

Data  of  the  EU-SILC  about  education  allowances  are  regrouped  for  the  model  as  education  is 

ongoing for younger age groups. Without adjustment the share of allowances granted would be too 

high for low- and medium-skilled persons whereas high-skilled persons would receive grants only 

after having finished  tertiary education. For this reason, we divide education allowances for 15 to 

19-year-old  persons  according  to  the  population  share  in  the  model  between  medium-  and  high-

skilled persons. For 20 to 24-year-old persons, we assign all benefits to high-skilled persons. For 

older age groups we use the data directly without any corrections.  

Sickness  benefits  are  assigned  only  to  employed  persons  or  persons  receiving  unemployment 

benefits. In addition, we assume that the amount paid to employed and unemployed persons is the 

same,  if  unemployed  individuals  are  eligible.  Sickness  benefits  are  reflected  in  the  model  in  the 

variables  ‘zw’  and  ‘zu’  as  well  as  ‘b00’,  which  reflect  fixed  transfers  if  a  person  is  employed  or 

unemployed.  ‘zu’ includes sickness benefits for unemployed persons receiving income-dependent 

unemployment  benefits;  ‘b00’  includes  sickness  benefits  of  unemployed  persons  receiving  wage-

independent benefits.  

Benefits for social exclusion are divided  between three groups  of  persons:  persons in retirement, 

persons not participating on the labour market, and persons in unemployment. The assignment is 

based  on  EU-SILC  data  by  using  information  about  how  many  months  a  person  spent  in  these 

states.  Only  persons  spending  the  entire  year  in  one  of  these  states  and  with  positive  social 

exclusion benefits are considered for the model. This may distort the result to some extent but will, 

in  our  opinion,  lead  to  a  more  trustworthy  result  than  dividing  income  arbitrarily  by  counting  all 

persons receiving social  assistance. Social exclusion benefits for retired persons enter the model 

as  lump-sum  payments  to  private  households.  Benefits  for  inactive  persons  are  included  in 

‘ynonpar0’ and benefits for social exclusion for unemployed persons are included in ‘b00’. 

Information about the age- and skill structure of social expenditures is based on the EU-SILC. Total 

expenditures  for  the  different  social  expenditure  categories  are  taken  from  the  OECD  Social 

Expenditure  Dataset  or  ESSOSS  database  and  are  used  to  scale  benefits  derived  by  EU-SILC. 

Although EU-SILC also provides information about total expenditures by aggregating individual or 

household  data,  small  sample  sizes  may 

lead 

to  an 

imprecise  approximation  of 

total 

expenditures.26  However,  total  expenditures  for  education  allowances  are  taken  directly  from  EU-

26 It is also the case that the OECD Social Expenditure Database contains additional expenditures not included in EU-SILC. 
Implicitly, the same EU-SILC age and skill structure is assumed for these expenditures. For Italy, EU-SILC does not 
contain sickness benefits. They are assigned across age and skill groups in the same way as in Spain, as total 
expenditures in both countries in the EU-SILC are similar. In Denmark, income maintenance benefits are missing in the 

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SILC as the OECD Social Expenditure Dataset does not provide any information about this type of 

allowance. Total expenditures for education allowances as a  percentage of GVA  for the modelled 

countries are shown in Table 44. There are significant differences in total expenditures with values 

ranging  from  0.01  to  nearly  1.4  percent.  In  the  Northern  countries,  the  transfers  are  significantly 

higher than in the other countries.  

Table 44: Total expenditures for education allowances as a percentage of GVA 

Table 45: Total public expenditures for different social events as a percentage of GVA 

For  the  other  categories  of  social  expenditures,  aggregate  public  expenditures  are  based  on 

information  provided  by  the  OECD  Social  Expenditure  Statistics  or  ESSOSS  database.  An 

overview  of  total  public  expenditures  as  a  percentage  of  GVA  is  presented  in  Table  45.  These 

numbers  include  cash  transfers  as  well  as  benefits  in-kind.  In  Germany  housing  transfers  linked 

EU-SILC. The age and skill structure and division between unemployed and inactive persons is based on the share of 
these persons in the population. 

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with ALG  II  (unemployment  benefits  II)  are  assigned  to  social  expenditures,  being  divided  across 

unemployed  and  inactive  persons  in  the  same  way  as  transfers  for  income  maintenance.  In  the 

following, we describe the different systems for family allowances, housing allowances, and social 

exclusion in the modelled countries. 

Belgium 

Sickness  benefits  in  Belgium  are  provided  by  a  compulsory  social  insurance  scheme.  In  case  of 

sickness, the employer must provide continued payment for one month.27 The compensation rate 

of  the  benefit  equals  60  percent  of  previous  earnings  with  a  maximum  daily  amount  of  about 

EUR 143. The maximum period of payment is one year. Benefits are subject to taxation but not to 

social security contributions.  

Family benefits consist of child benefits, parental leave benefits, allowances and grants. The child 

benefit is granted to the active population (also including persons receiving integration income) with 

an age limit of the child of 18 years (25 years in case of vocational training or further education). 

The monthly amount depends on the region. In Flanders and Wallonia and Brussels for example, 

the benefit amounts to about EUR 95 for the first child, EUR 175 for the second and EUR 260 for 

the third and subsequent children.28 For single parents whose professional or replacement income 

is  below  EUR  2,452.41,  a  supplement  of  about  EUR  48  per  month  for  the  first  child  is  paid, 

decreasing to EUR 24 for the third and subsequent children. In addition, a monthly age supplement 

(ranging from EUR 16.5 to EUR 29) is paid, depending on the age of the child.  

Parental  leave  benefits  are  paid  to  persons  leaving  the  labour  market  for  child-raising  reasons 

(maximum  four  months  when  interrupting  a  full-time  job,  eight  months  when  working  half-time 

during leave). To be eligible a person must be on leave from the time of childbirth and before the 

child reaches the age of 12. The benefit is flat rate and amounts to EUR 818.56 or EUR 1,129.61 

for a single person (in case of half-time interruption, the amount depends on age). In addition, birth 

and adoption grants of EUR 1,122 can be claimed. Special allowances are granted for children with 

disabilities, for school, and for people with disabilities. Family allowance, birth and adoption grants 

are  not  subject  to  taxation,  but  parental  leave  benefits  are  taxable  (but  no  social  security 

contributions).  

Social assistance in Belgium, called integration income, is an individual right and paid to persons 

who  prove  willingness  to  work.  Eligibility  requires  an  age  of  18  (different  rules  for  special  cases). 

The  amount  of  the  integration  income  depends  on  the  family  situation  and  is  means-tested.  A 

person  living  alone  receives  EUR 910.52  per  month  (year  2019),  a  single  parent  or  couple  EUR 

1,254.82  and  a  cohabitant  EUR 607.01.  Family  benefits  are  granted  in  addition  to  the  minimum. 

Benefits  are  not  taxable  and  not  subject  to  social  security  contributions.  For  persons  aged  65  or 

above,  there  is  a  ‘Guarantee  of  Income’,  which  is  means-tested.  It  amounts  to  EUR 1,118.36  per 

month for a single person and EUR 1,491.14 (values for 2019) for a two-person household. For this 

type  of  benefit  a  tax  reduction  is  allowed;  no  social  security  contributions  accrue.  Income 

maintenance  is  granted  for  an  indefinite  period;  a  mandatory  annual  revision  is  foreseen.  Direct 

housing benefits are not available, but there exist schemes to assist the access to property.  

27 Two weeks in case of disability of a worker.  

28 From 2019 on, an amount of EUR 163.20 is paid for each child.  

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Bulgaria 

Sickness  benefits  are  provided  within  a  social  insurance  scheme.  The  scheme  is  compulsory  for 

employees; self-employed persons can join voluntarily. There is no earnings ceiling for coverage in 

Bulgaria. To qualify for benefits, six months of insurance are necessary. In the case of sickness, the 

first  three  days  of  payments  are  covered  by  employers  with  a  replacement  rate  of  70  percent. 

Benefits are granted from the fourth day onwards until recovery or the establishing of invalidity and 

amount to 80 percent of average gross salary within the 18 months before the sickness. If earnings 

are  lower  than  the  minimum  contributory  income,  then  the  replacement  rate  is  100  percent. 

Unemployed persons are also eligible for sickness benefits. Benefits are neither taxable nor subject 

to social security contributions.  

Family benefits are available for Bulgarian citizens if their children live in the country. Upon the birth 

of  a  child,  mothers  are  entitled  to  a  one-off  payment  of  BGN 250  (in  2019,  EUR 128)  for  the  first 

child, BGN 600 for the second, BGN 300 for the  third and BGN 200 for  each subsequent child. A 

means-tested monthly allowance is granted for raising a child until graduation from high school up 

to  the  age  of  20.  To  be  eligible,  the  average  monthly  gross  income  per  family  member  must  not 

exceed BGN 500. Between BGN 400 and BGN 500, the benefits are 80 percent of the full amount. 

The monthly allowance for raising a child amounts to BGN 40 for families with one child, BGN 90 

for  two  children,  and  up  to  BGN 145  for  four  children.  For  each  subsequent  child  the  amount 

increases  by  BGN 20.  If  the  mother  is  uninsured,  a  monthly  allowance  of  BGN 100  for  raising  a 

child  under  one  year  of  age  is  available.  Additionally,  several  one-off  benefits  are  available,  for 

instance for pupils enrolled in the first grade of school. Benefits are not subject to taxation or social 

security contributions.  

Maternity  and  paternity  benefits  are  granted  via  a  compulsory  social  security  scheme  for 

employees;  self-employed  persons  can  join  voluntarily.  To  qualify  for  benefits,  12  months  of 

insurance are required. Insured parents are entitled to pregnancy and childbirth leave of 410 days, 

of  which  45  must  be  taken  before  confinement.  Fathers  are  entitled  to  15  days  after  birth.  In 

addition, from the sixth month of age of the child, six months of maternity leave can be transferred 

to fathers. The pregnancy and childbirth benefit amounts to 90 percent of  the contributory income 

of  the  24  months  before  leave.  It  amounts  to  at  least  the  statutory  minimum  income.  If  mothers 

return to work after six  months of birth, they receive  50 percent  of the benefit. If mothers are  not 

insured,  a  one-off  benefit  for  low-income  persons  is  eligible.  After  expiry  of  the  pregnancy  and 

childbirth benefit, a mother (or father) is entitled to an additional period of childcare leave before the 

child reaches the age of two, if childcare facilities are not claimed and the mother has been insured 

for at least 12 months. The benefit amounts to BGN 380 per month. Benefits are not taxable and 

not subject to contributions.  

In Bulgaria there are two schemes for social assistance. Both schemes require a minimum period 

of residence in Bulgaria of five years. To be eligible for the general scheme an unemployed person 

must be registered with the employment office for at least six months, with several exemptions like 

for  parents  with  young  dependents.  The  benefit  is  defined  as  a  percentage  of  the  guaranteed 

minimum  income  of  BGN 75  per  month.  For  a  person  below  the  age  of  65  living  alone,  this 

amounts to 73 percent of the minimum  income. For a person cohabiting,  it equals 66 percentage 

points  for  each  partner,  for  a  child  younger  than  16  (20  in  the  case  of  students)  the  guaranteed 

minimum  rises  by  91  percentage  points. A  special  scheme,  the  social  pension,  exists  for  old-age 

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retirees with an age of 70 years or older. The monthly amount of the social pension is BGN 125.58. 

Housing  benefits  in  Bulgaria  are  available  for  persons  with  a  monthly  income  of  less  than  250 

percent of the minimum income, who live in a publicly owned accommodation, and who are either 

orphans aged under 25, lone elderly people of 70 or older, or single parents. In this case, part of 

the  rent  is  paid  by  social  funds.  Minimum  resources  are  not  taxable  and  not  subject  to  social 

security contributions.  

Czechia 

Sickness benefits in Czechia are granted via a compulsory social insurance scheme with earnings-

related  benefits.  Self-employed  persons  can  join  voluntarily. There  is  a  minimum  monthly  income 

for eligibility of CZK 3,000 (year 2019). Benefits for the first two weeks of sickness are paid by the 

employer,  public  benefits  step  in  afterwards.  The  replacement  rate  is  60  percent  for  the  first  15 

days,  66  percent  for  the  next  30  days,  and  72  percent  of  the  daily  assessment  base  afterwards. 

The  assessment  base  is  90  percent  for  the  first  CZK 1,090  of  daily  income  and  decreases  to  30 

percent for  income between CZK 1,635 and  CZK 3,270.  Earnings above are not considered. The 

benefit is paid for 380 days. The benefit is also available for caring for a sick child or adult family 

member  for  nine  to  16  days.  Sickness  benefits  are  neither  subject  to  taxation  nor  social  security 

contributions.  

Family benefits consist of the child allowance, the parental allowance and a birth grant. The child 

allowance is provided to children until completion of compulsory school and longer if a child invests 

in full-time education up to an age of 26. Entitlement requires that family income is below 2.7-times 

the family’s living minimum. The child allowance amounts to CZK 500 per month for a child below 

the age of six, CZK 610 between six and 15 years, and CZK 700 for an older child. An increased 

rate  (by  CZK  300)  is  granted  if  one  of  the  family  members  has  income  from  work  of  at  least  the 

individual living minimum or receives specific social benefits. The parental allowance is granted to 

a parent who provides full-time and regular care for the youngest child up to an age of four years. 

The allowance is provided until the total amount of CZK 220,000 is drawn or the child reaches the 

age  of  four.  In  case  of  multiple  births,  the  total  amount  increases  to  CZK  330,000. A  parent  may 

choose  the  monthly  amount  within  limits  and  therefore  the  length  of  the  allowance  if  at  least  one 

parent in the family is insured against sickness. Otherwise it amounts to CZK 7,600.  

The birth grant is related to the first and second born children and only to families whose income 

does not exceed 2.7-times the family living minimum. The amount of the birth grant is CZK 13,000 

for the first child and CZK 10,000 for the second child. A higher amount is paid to families in case of 

multiple births. All three benefits are not taxable and not subject to social security contributions. 

Maternity and paternity benefits are based on a compulsory social insurance system for employees 

and  a  voluntary  system  for  self-employed  persons.  For  eligibility,  270  days  of  insurance  are 

necessary.  The  maternity  benefit  starts  six-to-eight  weeks  before  birth  and  lasts  28  weeks  (37 

weeks in case of multiple births). A paternity leave of one week within the first six weeks after birth 

is possible. The benefit amounts to 70 percent of the daily assessment base, which is the same as 

for the sickness benefit. The benefit is neither taxable nor subject to social security contributions.  

The  social  assistance  or  living  allowance  provides  support  for  citizens  who  are  in  need  of 

assistance  (means-tested)  and  the  overall  social  and  economic  situation  prevents  a  person  or 

family from increasing income from work. In case of unemployment, the person must be registered 

at the public employment service. A supplement for housing is granted for persons or families not 
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capable of covering housing costs. The amount of the housing supplement is determined by how 

much the difference of income and living minimum covers reasonable housing costs, which include 

rent,  services  related  to  housing  and  energy  costs.  The  living  minimum  amounts  to  CZK 3,410 

(values 2019) for a single person, CZK 3,140 for the first person in a household and CZK 2,830 for 

the second and further adults in the household. The minimum for a dependent child lies between 

CZK  1,740  (under  six  years)  and  CZK 2,450  (15  to  26  years  old).  The  subsistence  minimum  is 

available for persons who are out of work for more than six months and amounts to CZK 2,200.  

The housing allowance supports low-income households to cover housing expenditures. Eligibility 

requires that 30 percent of the household income is not enough to cover housing costs and that 30 

percent of the household income is lower than the prescriptive housing costs. The allowance does 

not cover total housing costs. It is derived as the difference between the prescriptive housing costs 

and  30  percent  of  the  relevant  household  income.  If  actual  housing  costs  are  lower  than  the 

prescriptive housing costs, the actual costs are used for the calculation. Social assistance benefits 

and the housing allowance are not taxable and not subject to social security contributions. 

Denmark 

Sickness  benefits  in  Denmark  are  tax  financed  and  available  for  employees  and  self-employed 

persons. The first 30 days of sickness benefits are paid by the employer (two days in case of small 

firms  are  possible).  Sickness  benefits  to  unemployed  persons  are  paid  for  the  first  14  days  of 

sickness. To qualify for benefits, employment of 240 hours within the last six months or eligibility for 

unemployment  benefits  are  necessary.  The  benefit  is  based  on  income  during  the  three  months 

before sickness with a maximum weekly amount of DKK 4,355. The maximum period of benefits is 

30 weeks (including 30 days of continuation of payments by the employer). Sickness benefits are 

subject to taxation and the supplementary pension scheme (ATP).  

Family benefits, and Child and Youth benefits, are available in Denmark for all children below the 

age of 18. In contrast to many other countries, the benefit decreases with the age of the child. The 

annual payment is DKK 18,228 for children between 0 and two, DKK 14,436 between three and six 

and  DKK 11,352  for  older  children.  This  benefit  is  means-tested  and  decreases  with  an  annual 

income  above  DKK 782,600.  There  is  a  study  supplement  of  DKK 7,568  for  each  parent  who  is 

studying  (income-tested).  In  addition,  a  child  allowance  of  DKK 5,764  per  child  is  available.  For 

single  parents  the  amount  is  raised  by  DKK 5,876  per  year  and  household.  For  low-income 

households,  day-care  of  children  is  subsidised.  Benefits  are  neither  taxable  nor  subject  to  social 

security contributions.  

The duration of social assistance is unlimited. However, the benefit decreases if a person can work 

but does not meet a minimum work requirement. Entitlement is a subjective right. Benefits can be 

claimed  for  two  reasons.  Activation  measures  and  benefits  (social  assistance)  and  educational 

assistance  are  provided  for  persons  without  temporarily  sufficient  means  to  meet  basic  needs. 

Integration benefits are available for persons in a situation of need. Social assistance is available 

for persons aged from 30 years (18 years old in the case of completion of vocational education) to 

retirement age, educational assistance from 18 to 29 years of age. The integration benefit can be 

claimed  by  18-year-olds  up  to  retirement  age.  Social  assistance  requires  the  participation  in 

activation measures. Benefits are means tested.  

The  benefit  amounts  to  60  percent  of  the  maximum  unemployment  benefit  (DKK 11,423  in  2019) 

for a person without  dependent children and 80 percent for  a person with children (DKK 15,180). 
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For  married  couples  the  amount  depends  on  the  income  and  savings  of  both  spouses.  The 

education allowance depends on age, family status and other aspects. A person aged 20 or more 

without  children  enrolled  in  higher  education  is  entitled  to  DKK  6,259  per  month.  The  integration 

benefit  is  DKK 5,997  per  month  for  a  single  person  and  DKK  8,393  for  a  couple.  In  addition  to 

social  assistance,  a  household  may  receive  a  special  housing  benefit  if  the  net  rent  (rent  minus 

general  housing  benefits)  is  in  excess  of  DKK  3,050.  For  families  with  children,  the  net  rent 

exceeding DKK 4,400 per adult (reduced by DKK 850 for the second and further children) is paid. 

The  sum  of  social  assistance  (after  tax)  and  special  housing  benefits  has  to  be  lower  than  90 

percent  of  previous  net  labour  income  for  the  first  three  months. Afterwards  the  sum  has  to  be 

lower than the maximum unemployment benefit after tax. Benefits are subject to taxation and the 

supplementary pension scheme ATP, of which one-third is paid by the beneficiary and two-thirds by 

the municipality.  

In Denmark, there exist two types of housing benefits, ‘boligsikring’ and ‘boligydelse’. ‘Boligsikring’ 

is  available  for  households  with  children  or  households  with  high  rent  and  low-income  (usually 

singles).  ‘Boligydelse’  is  granted  to  persons  receiving  old-age  pensions.  The  housing  benefit 

depends  on  household  income,  rent,  the  number  of  children,  and  other  individual  characteristics. 

The  rent  is  adjusted  according  to  an  indicative  size  of  the  accommodation.  In  ‘boligsikring’  the 

maximum  annual  rent  subsidised  is  DKK 81,500  and  increases  by  5  percent  for  each  child.  The 

subsidy  is  calculated  as  60  percent  of  the  rent  diminished  by  18  percent  of  annual  household 

income above DKK 145,200 (plus DKK 38,300 for each child). For a household without children or 

retirees the subsidy cannot exceed 15 percent of the rent. Housing benefits are not taxable.  

Germany 

Sickness  benefits  in  Germany  are  available  for  all  employees  with  annual  gross  income  of  up  to 

EUR 60,750;  opting  out  is  possible  for  higher  income.  For  low-income  employees  (EUR  450  per 

month) insurance is not compulsory either. If employment lasts for at least four weeks, continuation 

of payment by employers lasts six weeks with full compensation. After six weeks, sick persons can 

claim benefits amounting to 70 percent of gross income, not exceeding 90 percent of net income of 

the  last  three  months  preceding  sickness.  Sickness  benefits  for  a  child’s  sickness  for  10  working 

days (20 days for single parents) are also available. Sickness benefits are not subject to taxation 

but subject to social security contributions (with the exception of sickness insurance).  

Family  benefits  consist  of  the  family  tax  credit  (‘Kindergeld’),  the  parental  allowance  (plus) 

(‘Elterngeld  (plus)’),  and  the  supplementary  child  allowance.  The  family  tax  credit  is  granted  to 

children up to the age of 18 (21 in case of unemployment) or 25 in case of education. The tax credit 

is  independent  of  income  and  amounts  to  EUR 194  per  month  for  the  first  and  the  second  child, 

EUR 200  for  the  third,  and  EUR 225  for  the  fourth  and  subsequent  children.  The  parental 

allowance  is  granted  to  persons  who  take  care  of  their  children  and  work  at  most  part-time.  It 

amounts to 67 percent of net labour income between EUR 1,000 and EUR 1,200 before the birth of 

the  child.  The  rate  increases  further  for  lower  income  but  decreases  to  65  percent  for  higher 

income.  The  allowance  is  granted  at  most  for  the  first  14  months  after  the  birth  of  the  child. 

Parental allowance plus allows the recipient to double the period but cuts the benefit in half. If only 

one parent applies for the grant, it is paid for 12 months. If both work for four months at the same 

time,  both  receive  an  additional  four  months  of  a  possible  benefit  claim  (partnership  bonus). The 

supplement child allowance is available for persons able to finance their own living costs, but who 

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do not have sufficient resources available for their children. The allowance depends on the income 

of the family, the rent, and additional needs and is at most EUR 170 per month and child. Benefits 

are  tax  exempted  and  no  social  security  contributions  are  obliged.  The  parental  allowance  is 

subject  to  progression.  Maternity  leave  exists  in  Germany  for  a  period  of  six  weeks  before  and 

eight weeks after the birth of a child (12 weeks in case of multiple births or disability). The benefit 

amounts to the net-wage of the insured person. The benefit is not subject to taxation. 

Social assistance in Germany is divided into subsistence benefits, assistance for the elderly and for 

persons with reduced earning capacity, and unemployment assistance for jobseekers. Whereas the 

first  ones  are  generally  an  individual  right  and  are  administered  at  the  federal  level,  the 

unemployment  assistance  for  jobseekers  is  household  related  and  administered  mostly  by  the 

Federal  Employment Agency  together  with  local  authorities.  The  benefit  (year  2019)  amounts  to 

EUR 424 per month for persons living alone or for single parents, EUR 382 for cohabiting spouses, 

and  between  EUR  245  (children  younger  than  six  years)  and  EUR  322  (children  older  than  15 

years)  for  children.  In  addition,  actual  costs  for  housing  and  heating  of  an  appropriate  dwelling, 

education benefits and benefits for increased requirements are paid. Social assistance is provided 

for an unlimited period. Benefits are not subject to taxation, health and long-term care insurance is 

covered by the competent authority.  

Housing  benefits  are  disposable  for  persons  with  low  income  and  high  rent.  Persons  receiving 

social assistance are not eligible for housing benefits as the benefits already include a benefit for 

housing costs. The housing allowance is determined by the size of the household, eligible income, 

and housing costs by using a formula. Benefits are not taxable.  

Estonia 

In  case  of  sickness  for  employees  and  self-employed  persons,  a  compulsory  social  insurance 

scheme is available. If  insured, there is no qualifying period. From the fourth to the eighth day of 

sickness,  employers  continue  payments.  Public  sickness  benefits  are  paid  from  the  ninth  day 

onwards.  The  replacement  rate  typically  amounts  to  70  percent  of  average  wages  during  the 

previous  12  months.  When  taking  care  of  a  sick  child  aged  under  12,  80  percent  of  the  wage  is 

replaced. The full amount is paid in cases of work accidents and occupational disease, in the case 

of  pregnancy  and  some  other  cases.  The  benefit  duration  is  182  days  in  the  case  of  illness. 

Benefits are subject to taxation but not to social security contributions.  

Several family benefits are available, covering all residents. The family allowance is paid to families 

with  children  aged  less  than  16  (19  in  the  case  of  students).  The  family  allowance  amounts  to 

EUR 60 per month for the first and second child and increases to EUR 100 for additional children. 

For large families (six or more children) an additional allowance of EUR 300–400 exists. The family 

allowance is not means tested. In addition, a parental leave benefit can be claimed before the child 

reaches age 3. Only one parent can receive the benefit at one time. However, it is also paid if both 

parents work, so it is independent of the work status of the parents. The benefit is paid for 435 days 

and amounts to 100 percent of the reference wage with a minimum of EUR 540 and a maximum of 

EUR 3.319,8  per month.  If  the parents did not work before  the child’s  birth, they can claim a flat-

rate benefit of EUR 500 per month. Subsequently, a child care allowance for children up to the age 

of 3 is available, amounting to EUR 38.36 per month. A childbirth allowance of EUR 320 can also 

be claimed. For single parents, the family allowance increases by EUR 19.18 per month. Benefits 

are neither taxable nor subject to social security contributions.  

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Social allowance benefits are granted for persons or families whose net income, after deduction of 

fixed  expenses  for  housing,  is  below  the  subsistence  level.  Several  additional  deductions  are 

possible, like grants and benefits supporting studying or working or expenditures covering primary 

needs.  The  subsistence  level  is  based  on  minimum  expenses  for  goods  and  services  satisfying 

primary  needs.  It  equals  EUR 150  (in  2018)  for  single  persons  and  the  head  of  the  household. 

Each additional adult increases the subsistence level by EUR 120, each child (below the age of 18) 

by  EUR 180.  Housing  expenses  take  into  account  rent  and  operating  costs  (including  costs  for 

electricity and gas) up to limits of specific standards (18 m² for each household member and 15 m² 

for the household). For retirees living alone, an annual allowance of EUR 115 is paid if the monthly 

net pension is less than 1.2-times the average old-age pension.  

Maternity  benefits  are  available  for  employees  and  self-employed  persons;  paternity  benefits  are 

available  for  employees  with  permanent  employment.  Maternity  leave  is  paid  for  140  calendar 

days, of which 30 days are reserved for the period before confinement. Paternity leave is paid for 

ten working days within two months before or after confinement. Adoption leave (for children below 

the age of ten) is granted for 70 days. The maternity and adoption benefit amounts to the reference 

wage without ceilings; the paternity benefit also equals the reference wage but is limited  to three-

times  average  gross  monthly  earnings.  Benefits  are  taxable  but  not  subject  to  social  security 

contributions.  

Ireland 

Sickness  benefits  in  Ireland  are  based  on  a  compulsory  insurance  system  for  all  employees, 

without  the  possibility  of  voluntary  insurance  for  other  groups.  There  is  no  earnings  ceiling  for 

eligibility. To qualify for benefits a minimum insurance period is required (104 weeks since starting 

to  work,  39  weeks  in  the  last  year  or  26  weeks  in  each  of  two  previous  years).  There  is  no 

continued  payment by the  employer in Ireland. The waiting period for the benefit is six days. The 

flat  rate  benefit  amounts  to  EUR 198  for  persons  with  average  earnings  of  at  least  EUR 300  per 

week  and  decreases  to  EUR 88.90  for  persons  with  earnings  of  less  than  EUR 150.  For  a 

dependent child a supplement of EUR 31.80 is paid; for a dependent adult EUR 131.40 per week. 

The sickness benefit is limited only for persons with short insurance periods (less than 260 weeks). 

A  maternity  and  paternity  benefit  is  available  for  insured  employees  and  self-employed.  The 

maternity benefit  is paid for 26 weeks, the  paternity benefit for two weeks within six months after 

birth. The benefit amounts to EUR 240 per week. Parental leave is unpaid. Benefits are subject to 

taxation but not to social security contributions.  

Child  benefits  are  available  in  Ireland  for  all  children  under  the  age  of  16  (18  in  case  of  full-time 

education).  The  benefit  equals  EUR 140  per  child  per  month.  The  allowance  is  higher  in  case  of 

multiple  births.  Childcare  allowances  are  not  available.  For  single  parents,  a  means  tested 

(EUR 198 per week) supplement of EUR 31.80 can be claimed. For low-income workers, working 

at  least  19  hours  per  week,  a  family  income  supplement  exists. The  amount  is  60  percent  of  the 

difference  between  family  income  and  the  income  limit  of  the  corresponding  family  size.  Benefits 

are neither subject to taxation nor to social security contributions.  

Guaranteed minimum resources are available for persons with insufficient means to finance needs. 

There is no age limit for the supplementary welfare allowance, but persons must actively look for a 

job.  The  determined  monthly  minimum  income  level  is  EUR 849.33  for  a  single  person, 

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EUR 569.40 for an additional qualified adult, and EUR 137.80 for each child. For claimants aged 25 

or younger, lower rates are applied. There is no duration limit for the benefit.  

To  support  housing  costs,  a  rent  supplement  and  a  housing  assistance  payment  is  available. 

According to OECD Benefits and Wages, the rent supplement was largely replaced by the housing 

assistance  payment  and  is  only  available  in  specific  cases.  However,  to  be  eligible  for  housing 

assistance,  an  eligibility  to  the  rent  supplement  is  required,  for  example,  receipt  of  social  welfare 

benefit  and  an  appropriate  tenant.  The  tenant  pays  a  weekly  contribution  to  the  local  authority, 

which  is based on household  income. The way the rent contribution is calculated differs between 

local  authorities.  Social  assistance  and  housing  benefits  are  neither  taxable  nor  subject  to  social 

security contributions.  

Greece 

Sickness benefits are available for all employees; voluntary insurance is not possible. The waiting 

period before benefits can be claimed is three days; continuation of payments by employers does 

not  exist.  The  duration  of  sickness  benefits  in  Greece  depends  on  the  duration  of  contribution 

payments.  The  maximum  duration  ranges  from  182  days  of  illness  for  120  days  of  contribution 

payments,  to  720  days  for  4,500  days  of  insurance.  The  benefit  amounts  to  50  percent  of  the 

average daily wage of the insurance class the insured belongs to (based on earnings in the last 30 

days of the previous year). For each dependent, the  benefit rises by 10 percentage points with a 

maximum of 70 percent or the daily wage of the 8th insurance class. For the first 15 days it is only 

half of this value. The benefit is taxable, but no social security contributions arise.  

Child benefit in Greece is granted to permanent residents of at least  five years, depending on the 

number of children and equivalent family income (annual family income before income tax, divided 

by the weighted number of family members). The benefit is paid if the child is unmarried and aged 

under 18 (24 in case of higher education). For low-income families (up to EUR 6,000) the benefit is 

EUR 70 for each of the first two children and EUR 140 for every additional child. For families with 

higher income (between EUR 10,000 and EUR 15,000) the benefit decreases to EUR 28 (EUR 56 

respectively). Parental leave is possible for all employees up to four months until the child reaches 

six  years  of  age.  However,  no  benefit  is  paid.  The  child  benefit  is  subject  to  taxation  but  not  to 

social security contributions.  

Maternity and paternity leave benefits are only eligible for employees. To qualify for the benefit, 200 

days of insurance contributions during the last two years before birth are required. Maternity leave 

amounts to 119 days, of which  56 are assigned to the prenatal and  63 to the postnatal  period. A 

special maternity leave scheme allows extension of the leave up to six months. For paternity leave, 

two  days paid by the employer are possible. There is no flexibility to shift days  of  leave between 

parents. The maternity benefit amounts to 50 percent of the wage of the corresponding insurance 

class plus 10 percent of this amount for each child, with a maximum of 40 percent. The minimum 

amount  is  two-thirds  of  the  wage  of  the  insured  woman;  the  maximum  amount  is  EUR 47.47  per 

day (EUR 66.46 for four dependent children). The special maternity leave amounts to EUR 586.08 

per  month  (EUR 510.95  if  the  mother  is  younger  than  25  years).  If  mothers  work  part-time  (four 

hours or less per day) before maternity leave, the benefit is cut by half. Uninsured mothers receive 

EUR 440.20 (half before and half after birth). Benefits are subject to taxation (except for the special 

maternity leave) and social security contributions (old-age, sickness and supplementary pension).  

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The Social Solidarity Income provides social assistance for low-income households in Greece. The 

guaranteed minimum resources are determined at the household level, where household members 

are  weighted  by  the  internationally  used  equivalence  scale.  Working-age  beneficiaries  must 

register  at  the  unemployment  office.  The  benefit  is  means-tested  where  20  percent  of  actual  net 

income  from  employment  is  excluded.  Minimum  resources  depend  on  the  number  and  age  of 

household  members.  For  a  single-person  household,  this  amounts  to  EUR 200  per  month, 

EUR 100 for each additional adult and EUR 50 for each child. The maximum amount is EUR 900 

per  month.  For  uninsured  elderly  persons  aged  67  or  older,  a  special  scheme  exists. A  housing 

benefit to help  low-income households can be granted and  is set to  EUR 70  monthly  for a single 

person  household  and  increased  by  EUR 35  for  each  additional  household  member  (maximum 

EUR 210  and  limited  by  actual  rent).  For  uninsured  and  low-income  elderly  persons  over  65,  a 

housing allowance amounting to EUR 362 exists. Social assistance benefits are neither taxable nor 

subject to social security contributions.  

Spain 

Sickness  benefits  in  Spain  are  based  on  a  compulsory  insurance  scheme  for  employees  and  a 

special scheme for self-employed persons. To be eligible, a contribution period of 180 days within 

five  years  prior  to  sickness  is  necessary,  except  in  case  of  an  accident. After  a  waiting  period  of 

three  days,  employers  must  provide  a  continued  payment  up  to  the  15th  day  of  sickness  before 

insurance benefits are available. The replacement rate is 60 percent up to the 20th day of sickness 

and  75  percent  thereafter.  The  maximum  contribution  base  is  EUR 4,070.10  (year  2019),  the 

maximum duration is 365 days with a possible extension by a further 180 days. Sickness benefits 

are  taxable  and  subject  to  social  security  contributions.  A  child  care  leave  allows  to  reduced 

working hours of one of the parents by 1 hour per day for 30 months, or 2 for the first 12 months 

and 1 hour for the following 6 months.  

Child benefits are available for dependent children (under the age of 18, or older if disabled) and 

for multiple births or adoption (one-off lump-sum payments). The child benefit is granted if annual 

income  is  below  EUR 12,313  (higher  amounts  for  large  families).  The  economic  allowance 

amounts to EUR 24.25 per month and child. Benefits for disabled children depend on the degree of 

handicap (EUR 83.33 for a degree of 33 percent or more for children below 18, EUR 392 for a child 

above 18 and a degree of handicap of 65 percent or more, and EUR 588 for a degree of 75 percent 

and more). The multiple birth grant for birth or adoption amounts to EUR 3,600 for two children and 

rises to EUR 10,800 for four and more children. In addition, large families, lone parent families or 

disabled mothers receive an additional amount of EUR 1,000. Family benefits are not taxable and 

not subject to social security contributions. 

The social assistance scheme ‘Ingreso Minimo/Renta Minima de Insercion’ (MII) is implemented on 

the  regional  level,  following  the  principle  to  alleviate  poverty  by  cash  benefits.  Persons  aged 

between 25  and 65 or older without public pension entitlement are  eligible. In  Madrid,29 the basic 

amount  of  MII  is  EUR 400  per  month,  the  amount  for  the  second  and  further  persons  is 

considerably lower (e.g., in Madrid the supplement for the second earner is set to EUR 112.67 and 

EUR 75.11 for the third person). The benefit is means tested and the claimant must actively search 

for a job. The benefit is taxable. Housing allowances amount to EUR 525 per year to reduce rent 

29 Following the OECD Tax Benefit Model for Spain.  

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costs,  if  a  person  is  entitled  to  a  non-contributory  old-age  or  invalidity  pension,  lacks  home 

ownership and is not related to the owner.  

France 

Sickness  benefits  in  France  are  based  on  a  compulsory  social  insurance  scheme.  There  are  no 

ceilings for earnings. To be eligible a minimum payment of contributions is necessary (2,030-times 

the hourly minimum wage within the preceding 12 months). The benefit amounts to 50 percent of 

the basic daily earnings of the last three months, capped at 1.8-times the minimum wage, or two-

thirds  from  the  31st  day  onwards  for  beneficiaries  with  three  children.  The  difference  to  the 

preceding wage income is paid by the employer.30 Sickness benefits are taxable and subject to the 

generalised social contribution of 6.2 percent and the contribution for the repayment of social debt 

of 0.5 percent.  

Several family benefits exist in France. The Child Benefit is granted for children up to the age of 20 

and  is  paid  only  if  there  are  two  or  more  children.  The  benefit  amounts  to  EUR  131.16  for  two 

children  per  month  and  increases  to  EUR  467.24  for  four  children.  Each  further  child  is  granted 

EUR  168.04.  Contribution  to  the  reimbursement  of  social  debt  is  already  deducted  in  these 

amounts. There is no income-test for this benefit. For children over 14 years old,31 a supplement of 

EUR 65.91 can be claimed and a flat rate allowance of EUR 83.35 for one year for large families is 

granted.  

The Infant Welcome Benefit consists of two parts. One part of the benefit is granted for a birth or 

adoption  and  a  second  for  the  child  education  choice  or  childcare  choice.  The  Birth  or Adoption 

Grant  amounts  to  EUR  941.66  before  the  end  of  the  second  month  of  birth  or  EUR  1,883.31  in 

case of an adoption. The benefit is means-tested. In addition, the Basic Allowance of EUR 170.71 

(2019) is paid for the first three years after birth or adoption. Since 2015, allowances are only 50 or 

25 percent of these values for high-income families. The second type of benefit is granted for child-

raising  or  childcare.  The  child-raising  allowance  is  not  means-tested  but  previous  labour  market 

activity is necessary. Beneficiaries must have at least one child under the age of three. The amount 

of  the  benefit  is  EUR 396.01  per  month  (partial  amounts  for  part-time  activity).  The  childcare 

allowance is a partial contribution to care costs for children younger than six years and requires a 

professional activity generating a minimum income. The benefit decreases to 50 percent for a child 

between  the  ages  of  three  and  six.  Social  contributions  of  a  hired  maternal  assistant  are  paid 

entirely  and  to  50  percent  if  a  person  who  takes  care  of  the  child  at  home  is  hired.  For  single 

parents  a Single Parent allowance is granted (income-tested on a differential basis) to guarantee 

minimum  income.  The  monthly  amount  is  EUR  943.29  for  a  single  parent  with  one  child, 

EUR 1,179.11 for two children and EUR 235.82 for each subsequent child. The New School Year 

allowance  is  paid  for  children  aged  between  six  and  18.  It  is  an  annual  payment  and  is  means-

tested. The amount depends on the age of the child (EUR 367.73 for a child between six and ten 

years up to EUR 401.47 for a child between 15 and 18 years). Family benefits are not subject to 

taxation but are subject to the 0.5 percent contribution for the repayment of the social debt (single 

parents receiving single parent allowance are exempted).  

30 Alternatively, payments according to the collective agreement conditions are also possible if more favourable.  

31 Except for the first child.  

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Maternity  and  paternity  leave  is  provided  by  the  health  insurance  scheme  for  employees  for  16 

weeks (six weeks before birth and 10 afterwards). After the third birth the time span is extended to 

26  weeks.  Longer  periods  are  granted  for  multiple  births.  Paternity  leave  is  possible  for  11 

consecutive days within four months after childbirth. The benefit amounts to previous gross income 

(up to a ceiling) minus a 21 percent fee rate (social security contributions and other contributions). 

The  minimum amounts to  EUR 9.53  per  day,  the maximum to  EUR 87.71. The  benefit is taxable 

and subject to the generalised social contribution and repayment of social debt.  

Social assistance in France is an individual right, taking into account the family situation, implying 

that a differential amount is paid. Persons are eligible if they are at least 18 years old. There is also 

a connection to the labour market, as the person must be willing to undertake training, integration 

or employment activities. The Guaranteed Minimum Resources (RMI) is determined at the national 

level. The active solidarity income provides supplemental income from work and amounts to EUR 

550.93  for  a  single  person  and  EUR  1,156.96  for  a  couple  with  two  children.  The  allowance  of 

specific  solidarity  guarantees  a  minimum  income  for  persons  capable  of  working.  The  full  rate  is 

EUR 16.48 per day. Special schemes exist for elderly and disabled persons. With the exception of 

the  allowance  of  specific  solidarity,  benefits  are  not  taxable.  No  social  security  contributions  are 

applied.  

The  housing  allowance  is  means  tested  and  granted  to  tenants  and  home-buyers.  For  the 

calculation of the allowance the rent (upper limit) and the family situation as well as the resources 

of the family and the place of residence are taken into account.  

Croatia 

In Croatia, employees and self-employed persons are eligible for sickness benefits. To be eligible, 

nine  months  of  consecutive  insurance  or  12  months  (with  interruptions)  within  the  last  two  years 

are  necessary.  For  employees  there  is  no  waiting  period;  for  self-employed  persons,  the  waiting 

period  is  42  days.  The  waiting  period  for  self-employed  persons  is  the  same  as  the  period  of 

continuation of payments by the employer. The sickness benefit cannot be lower than 70 percent of 

average net earnings in the  six months preceding sickness. In certain cases (e.g., nursing a sick 

child aged less than three years, or quarantine) the replacement rate is 100 percent. The minimum 

benefit amounts to HRK 831.50 (EUR 112) per month. The maximum benefit equals HRK 4,257.28. 

After 12 months of benefit claims, the beneficiary must submit a claim for invalidity pension; after 

18 months the benefit is reduced by 50 percent. Sickness benefits are not taxable and not subject 

to social security contributions.  

The child benefit in Croatia is a tax-financed and means-tested benefit that varies with income. The 

child must reside in Croatia. The benefit is paid for children aged 15 or younger (19 in  the case of 

secondary  school  attendance).  It  amounts  to  HRK 299.34  per  child  if  monthly  income  per 

household  member  is  less  than  HRK 543.14.  It  decreases  to  HRK 199.56  if  income  is  above 

HRK 1,119.53  and  below  HRK 2,328.20.  Higher  income  households  are  not  entitled  to  child 

benefits.  For  sole  parents,  the  amount  is  15  percent  higher;  for  a  disabled  child  25  percent. 

Parental  leave  is  available  for  employed,  self-employed,  unemployed  and  inactive  persons.  For 

employed and self-employed persons, parental leave is granted for four months per parent for the 

first and second child (until the age of 8). For the third and each subsequent child it is 15 months 

per  parent.  Two  months  can  be  transferred  between  parents.  For  unemployed  and  inactive 

persons,  parental  leave  can  be  claimed  from  the  child’s  sixth  month,  up  to  one  year. The  benefit 

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amounts to previous earnings in the case of employed persons, with a maximum of 120 percent of 

the State Budget Base (HRK 3,991.20). In all other cases, the benefit amounts to 70 percent of the 

State Budget Base. Additional benefits are new-born child assistance and a birth grant for the third 

child,  both  a  one-off  payment,  and  a  special  allowance  for  children  with  disabilities.  Benefits  are 

neither taxable nor subject to social security contributions.  

Maternity  benefits  are  granted  to  the  employed  and  self-employed,  but  also  to  unemployed  and 

inactive  women.  Paternity  leave  benefits  are  not  available.  For  employed  and  self-employed 

women an insurance period of 12 months or 18 months with interruptions is necessary. For others, 

permanent  residency  is  required.  In  the  case  of  employment,  28  days  of  prenatal  leave  is 

compulsory. Postnatal leave of six months after birth is possible (70 days compulsory in the case of 

employment).  The  benefit  amounts  to  100  percent  of  monthly  earnings.  For  self-employed, 

unemployed and inactive women, the benefit equals HRK 2,328.20 per month. Benefits are neither 

taxable nor subject to social security contributions.  

Social  assistance  is  determined  on  a  household  level.  Eligible  persons  capable  of  work  (but 

younger  than  65  years  or  less  than  five  years  from  retirement  age)  must  be  registered  at  the 

employment  service.  Several  allowances  are  not  considered  for  the  means  test.  The  living 

minimum is a multiple of the base value of HRK 800. For a single person not capable of work, it is 

115  percent  of  the  basis,  and  100  percent  for  a  single  person  capable  of  work.  For  an  additional 

adult  household  member,  60  percent  of  the  base  value  is  granted,  40  percent  for  a  child  and  55 

percent  for  a  child  of  a  single  parent. The  average  income  of  the  last  three  months  is  taken  into 

account  and  offset  from  the  living  minimum.  In  addition,  a  benefit  for  energy  buyers  with  low 

income  of  HRK 200  and  a  one-time-allowance  can  be  granted.  Benefits  are  not  taxable  and  not 

subject to social security contributions.  

Italy 

Sickness benefits in Italy are based on a compulsory social insurance scheme, voluntary insurance 

is not possible. There is no earning ceiling for eligibility. The benefit period is at most 180 days per 

year.  Benefits  are  paid  by  the  employer  but  can  be  deducted  from  other  insurance  contributions. 

The  benefit  amounts  to  50  percent  of  net  earnings  for  the  first  20  days  and  two-thirds  for  the 

following days. Benefits are neither taxable nor subject to social security contributions.  

There  are  three  types  of  family  benefits,  a  family  allowance,  an  allowance  to  households  with  at 

least three children and a birth allowance. The family allowance is not only granted to households 

with children but also to low-income couples with no children, as long as they are not self-employed 

or former self-employed retirees. The transfer covers different household types and varies also with 

respect  to  the  level  of  income  of  the  household.  Eligibility  requires  that  at  least  70  percent  of 

household income is income from employment (inclusive of unemployment benefits). For an annual 

income  up to EUR  14,198.48,  the monthly  benefit  amounts to EUR  258.33; for  an  income above 

EUR  78,640.85,  no  benefit  is  granted.  The  allowance  for  households  with  at  least  three  children 

below the age of 18 amounts to EUR 144.42 (2019) per month. The allowance is means tested and 

is paid for 13 months (renewable). The birth allowance is paid for one year after birth, amounting to 

EUR 960 if ISEE (equivalent economic situation indicator) reference income is below EUR 25,000. 

The  benefit  is  higher  for  significantly  lower  reference  income  and  for  subsequent  births. All  three 

allowances are tax exempt and not subject to social security contributions.  

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The system in Italy also grants vouchers to families. One voucher is granted for childcare activities 

with a monthly amount of EUR 600 for six months following maternity leave. Another voucher is the 

Kindergarten  voucher.  It  is  granted  for  mothers  who  are  not  exempted  from  payments  for  public 

nursery services. The annual amount is EUR 1,000 granted over a period of 11 months.  

The  social-insurance-based  maternity  (paternity)  benefit  amounts  to  80  percent  of  earnings  and 

100 percent for a compulsory four-day leave. The maternity leave is granted for one-to-two months 

prior  to  birth  and  three-to-four  months  afterwards.  In  total  five  months  of  leave  are  possible.  The 

paternity leave is granted for six days. For non-working mothers and mothers with low income two 

additional  allowances  are  possible,  which  can  be  cumulated.  The  allowance  for  non-working 

mothers is paid for five months. The benefit for non-working mothers amounts to EUR 421.84, the 

allowance for low-income mothers to EUR 342.62. The allowances are granted if reference income 

is below a threshold.  

In Italy, no universal support scheme exists except for ‘Assegno sociale’ covering persons aged 66 

years and seven months and older. The ‘Assegno sociale’ is paid on a differential basis to a defined 

minimum income, where additional household members are scaled by an equivalent factor. For a 

single  person,  annual  minimum  income  is  EUR  6,000  plus  a  determined  amount  for  rent.  The 

inclusion income support is available for claimants if unemployment benefits have been exhausted. 

One  of  the  following  requirements  is  necessary:  being  unemployed  with  an  age  over  55,  being  a 

pregnant woman, being a disabled member of a family, or at least one member of the family being 

aged  under  18.  The  benefit  depends  on  the  household  composition  and  the  age  of  household 

members. Social assistance benefits are neither taxable nor subject to social security contributions.  

Housing  benefits  are  available  for  those  who  buy  a  residence  as  well  as  persons  who  rent  it. 

Buyers  are  subsidised  by  a  tax  allowance  for  mortgage  loan  interests,  rebates  on  the  property 

transfer  tax  and  low  interest  rates  for  loans.  The  rent  allowance  is  available  for  low-income 

households.  

Cyprus 

Sickness benefits may be granted for employees and self-employed persons. To qualify, a person 

must  be  insured  for  at  least  26  weeks  (0.5  insurance  points,  of  which  0.39  in  the  relevant  year) 

before  sickness.  Beneficiaries  have  to  be  aged  between  16  and  63  years.  If  conditions  for  the 

statutory pension are not fulfilled, payments until the age of 65 are possible. The waiting period for 

employees is three days, and nine days for self-employed persons. A continuation of payments by 

employers  is  not  available  in  Cyprus.  The  benefit  amounts  to  60  percent  of  earnings  below  the 

Basic Insurable Earnings (equals one insurance point), increased by 20 percentage points for the 

first dependant and 10 percentage points for other dependants in the household. For income above 

the  Basic  Insurable  Earnings  the  replacement  rate  equals  50  percent,  with  a  maximum  benefit 

equal  to  the  Basic  Insurable  Earnings.  The  duration  of  eligibility  is  156  days,  with  a  possible 

extension to 312 days. Benefits are not subject to taxation and social security contributions.  

The  child  benefit  in  Cyprus  depends  on  the  number  of  eligible  children  and  the  level  of  family 

income  in  the  previous  year.  Eligibility  requires  that  children  reside  in  Cyprus.  The  benefit  is 

independent of a child’s age and is granted up to age 18 (20 if attending secondary education). The 

maximum yearly  income level is set to  EUR 49,000 for one dependent child, EUR 59,000 for two 

children,  and  an  additional  EUR 5,000  for  every  further  child.  The  benefit  per  child  increases 

significantly with the number of children,  from  EUR 482.17 for  one child to  EUR 1,700.29 for  four 
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children  for  households  with  family  income  below  EUR 19,500.  The  benefit  decreases  for  higher 

income  levels  (e.g.,  EUR 1,152.14  per  child  for  families  with  four  children).  For  single  parents  an 

additional  allowance  of  EUR 162.42-182.72  is  granted.  Parental  leave  of  up  to  18  weeks  is 

possible; however no benefits are available. In addition, a one-off birth benefit is granted. Benefits 

are neither taxable nor subject to social security contributions.  

Maternity and paternity benefits are based on a compulsory social insurance scheme and available 

for  employees  and  self-employed  persons.  To  be  eligible,  26  weeks  of  insurance  (0.5  insurance 

points, of which 0.39 in the relevant year) are necessary. The possible duration of maternity leave 

is 18 weeks, of which two-to-nine weeks must be before the confinement. The possible duration of 

paternity  leave  is  two  consecutive  weeks  within  the  first  16  weeks  after  birth.  The  transfer  of 

periods between  parents is not possible. The benefit  equals to 72  percent of the weekly value of 

insurance points. Replaced income up to one insurance point is increased to 80, 90 or 100 percent 

according to the number of dependants in the household. The benefit is tax exempted and social 

security contributions do not arise.  

Eligibility for social assistance benefits is based on household income and requires an age of 28 or 

more  (exceptions  exist,  e.g.,  for  married  couples,  single  parents,  disabled  persons). An  applicant 

has to participate in training or accept job offers. Income considered for comparison with minimum 

resources  is  defined  in  gross  terms;  only  some  benefits,  like  social  benefits  due  to  disability,  are 

excluded.  The  basic  amount  of  guaranteed  minimum  income  is  EUR 480  for  the  head  of  a 

household,  EUR 240  for  every  dependent  person  aged  14  and  older,  and  EUR 144  for  younger 

dependent persons. The benefit equals the difference between household income and guaranteed 

income.  A  housing  allowance  is  granted  for  renters  and  owners  paying  mortgage  interest.  The 

allowance  depends  on  the  composition  of  the  family  (55  m²  for  a  single  person  or  couples  and 

additional 20 m² for every two additional minors of the same sex) and the district of residence. The 

housing  benefit  amounts  to  EUR 1.75/m²  in  Paphos  to  EUR 2.80/m²  in  Nicosia.  Benefits  are  not 

taxable and not subject to social security contributions.  

Latvia 

Sickness benefits  are  organised within  a compulsory  social insurance for  all  employees and self-

employed  persons.  Voluntary  membership  is  possible.  To  qualify  for  benefits,  three  months  of 

insurance  within  the  six  months  (or  six  months  within  24  months)  before  sickness  are  required. 

Employers  are  obliged  to  provide  continued  payments  to  employees  for  ten  days.  The  benefit 

amounts  to  80  percent  of  average  gross  wages  in  the  year  preceding  sickness.  The  duration  of 

benefits  is  26  weeks  or  52  weeks  within  a  three-year  period.  Sickness  benefits  are  subject  to 

taxation but not to social security contributions.  

The child benefit in Latvia is granted to children at least one year old until the age of 15 (20 in the 

case of education in secondary or vocational school). The benefit is not means-tested, independent 

of the income  level and amounts to  EUR 11.38 per  month for the first child. It  is twice  and  three-

times  this  amount  for  the  second  and  third  child,  and  4.4-times  this  amount  for  the  fourth  and 

further children. For families with two or more children, a supplement of  EUR 10 for two children, 

EUR 66  for  three  children  and  EUR 50  for  each  further  child  is  granted.  For  parental  leave,  two 

benefits are available. The child-raising allowance paid to persons raising children up to an age of 

two  years  is  tax-financed  and  the  parental  benefit  is  financed  by  the  social  insurance.  The  child-

raising allowance amounts to EUR 171 per month for children below 18 months old and EUR 42.69 

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up  to  the  age  of  two  years.  The  social  insurance  benefit  equals  to  60  percent  of  average  gross 

wages during the previous 12 months, up to the child’s first year, or 43.75 percent if the benefit is 

claimed  up  to  an  age  of  one  year  and  six  months.  If  a  person  works,  the  rate  amounts  to  30 

percent. The child-raising allowance and the parental benefit can both be claimed. Additional family 

benefits  are  available  for  childbirth  (EUR 421.17),  for  disabled  children  and  in  case  of  adoptions. 

Benefits are not taxable and not subject to social security contributions.  

Maternity  leave  benefits  are  granted  for  112  days  (one-half  before  and  one-half  after  birth).  An 

additional  12  days  are  available  in  the  case  of  continuous  medical  care  before  the  12th  week  of 

pregnancy.  Paternity  leave  amounts  to  ten  days.  The  benefit  amounts  to  80  percent  of  average 

gross earnings within the  previous year. Minimum  and maximum payments  do  not  exist.  Benefits 

are neither taxable nor subject to social security contributions.  

Guaranteed  minimum  resources  are  available  for  persons  with  permanent  residency  in  Latvia. 

People  capable  of  work  must  register  with  the  State  Employment  Agency.  Social  assistance  is 

based  on  household  income  and  the  benefit  equals  the  difference  of  the  guaranteed  minimum 

income  of  EUR 53  times  the  number  of  household  members  and  household  income.  Certain 

benefits and types of income are deducted from household income. Eligibility rules and the amount 

for housing benefits are determined at the local level. Benefits are not taxable and social security 

contributions are not payable.  

Lithuania 

Sickness  benefits  in  Lithuania  are  based  on  a  social  insurance  scheme  and  are  compulsory  for 

employees and self-employed persons. To qualify for the benefit, a minimum period of insurance of 

three  months  during  the  previous  12  months,  or  six  months  during  the  previous  two  years,  is 

necessary. Employers are required to provide a continuation of payments for the first two days of 

sickness. The social benefit is paid from the third day onwards. The amount of the benefit equals 

62.02 percent of the average wage three months preceding sickness. It cannot be lower than 11.64 

percent and not higher than twice the national average monthly wage. The duration of the benefit 

equals four months but can be extended to 244 days in the case of periodic inability to work. With 

respect  to  nursing  of  family  members,  seven  days  of  absence  is  possible  (14  days  for  children 

under  14  years).  In  general,  sickness  benefits  are  not  granted  to  unemployed  persons.  Sickness 

benefits are subject to a lower income tax (15 percent) and health social security contributions (6 

percent).  

To  be  eligible  for  the  child  benefit,  children  have  to  reside  permanently  in  Lithuania  or  have  a 

temporary residence permit. The benefit is available as long the child is younger than 18 (or 21 if 

studying).  The  benefit  amounts  to  EUR 50.16  (1.32  of  Basic  Social  Benefit)  and  EUR 69.92  for 

disabled  children.  For  low-income  families  (EUR 183)  and  families  with  three  or  more  children,  a 

supplement  of  EUR 20.14  is  granted.  In  addition,  an  income-related  childcare  benefit  for  insured 

employees  for  at  most  two  years  after  birth  is  available. The  amount  depends  on  the  duration  of 

leave.  If  childcare  takes  place  up  to  the  child’s  first  birthday,  then  77.58  percent  of  the  previous 

wage is granted. In the case of a longer duration of childcare, the allowance is 54.31 percent until 

the first birthday and 31.03 percent afterwards. The minimum benefit is  six-times the Basic Social 

Benefit, the maximum twice the average monthly wage. An unpaid third year of leave is possible. In 

this case, contributions for the unemployment and  pension systems are granted. Further benefits 

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are  birth  and  adoption  grants  (lump-sums  of  EUR 418)  and  a  monthly  benefit  for  multiple  births 

(EUR 152) up to age two. Benefits are neither taxable nor subject to social security contributions.  

Maternity and paternity insurance is compulsory and available for employees and certain groups of 

self-employed  persons.  To  qualify,  12  months  of  insurance  during  the  previous  24  months  are 

necessary. The duration of maternity leave equals 70 days before and 56 days after birth. Paternity 

leave  is  granted  for  one  month  at  most,  within  the  first  three  months  after  the  child’s  birth.  The 

benefit  amounts  to  77.58  percent  of  the  average  wage  for  the  three  months  before  the  month  of 

birth. The  considered  wage  is  limited  by  two-times  the  national  average  monthly  wage.  Rules  for 

taxation and social security contributions are the same as for sickness benefits.  

Social assistance is provided at a household level and requires residency in Lithuania, registration 

at an employment service, or being a student, disabled or taking care of a sick child younger than 

three  years  old.  To  be  eligible,  the  working  time  has  to  be  less  than  two-thirds  of  a  full-time 

equivalent.  Depending  on  family  status,  15-to-35  percent  of  net  income  is  not  considered  for 

calculation of the social  assistance benefit. For a single  household, the defined minimum level  of 

income  is  the  State  Supported  Income  of  EUR 122  per  person  and  month;  80  percent  of  the 

minimum  level  is  granted  for  the  second  household  member  and  70  percent  for  the  third  and 

additional members. Housing benefit is not available. However, means-tested support for heating, 

drinking water and warm water costs is granted. For retirees, a special social assistance scheme 

exists. Benefits are not taxable and no social security contributions arise.  

Luxembourg 

Sickness benefits in Luxembourg are financed via a compulsory social insurance scheme, covering 

all active persons. There is no earnings ceiling for coverage. To qualify for the benefit, no minimum 

insurance period is required. Employers are obliged to provide continuation payments until the end 

of the month of the 77th day of sickness (on average, 13 weeks). Employers are compensated with 

a refund of 80 percent by the social insurance. In the case of a longer absence, the insurance pays 

sickness  benefits  up  to  a  maximum  of  78  weeks.  The  replacement  rate  equals  the  wage  of  the 

insured  person,  with  a  minimum  of  the  social  minimum  wage  and  a  maximum  of  five-times  this 

amount. Unemployed persons are not entitled. If an insured person takes care  of a sick child, the 

maximum duration equals 12 days if the child is younger than four years old and up to 18 days for 

older children (for children older than 13 years, five days are available). Continuation payments are 

subject to taxation and health care, long-term care and pension insurance.  

The child benefit requires residency of the child in Luxembourg and is paid until age 18 (25 years in 

case of education or serious disability) of the child. The monthly amount per child is EUR 265 with 

an  additional  allowance  of  EUR 20  for  children  older  than  six  years  or  EUR 50  for  children  older 

than  12  years  respectively.  The  benefit  is  independent  of  income.  Parental  leave  is  available  for 

employees  and  self-employed  persons.  The  duration  is  four-to-six  months  if  employment  is  fully 

suspended (8-to-12 weeks in the case of a 50 percent reduction). The child must be younger than 

six years. Parental leave is available for each parent but cannot be shared. The benefit amounts to 

income  12  months  before  leave,  with  a  minimum  of  EUR 2,071.10  and  a  maximum  of 

EUR 3,451.83  per  month.  In  addition  to  these  benefits,  a  one-off  birth  grant  of  EUR 1,740.09,  a 

new  school  year  allowance  and  benefits  for  children  with  disabilities  are  available.  Benefits  are 

neither taxable nor subject to social security contributions.  

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Maternity  leave  is  possible  for  employees  and  self-employed  women  eight  weeks  before  and  12 

weeks after birth. Paternity leave is granted for ten days. The benefit amounts to the wage received 

before  leave  with  a  minimum  of  EUR 2,071.10  per  month  and  a  maximum  of  EUR 10,335.50. 

Benefits are taxable and subject to social security contributions.  

Guaranteed  minimum  resources  in  Luxembourg  are  a  personal  right;  however,  the  household 

situation is considered. To be eligible, a person must be 25 or older (younger if pregnant, disabled 

or raising a child), have resided in Luxembourg for at least five years during the previous 20 years, 

and must be looking for a job. Gross employment income of 25 percent is not taken into account for 

the  calculation  of  the  benefit.  Minimum  resources  vary  between  communities.  The  benefit 

comprises  a  flat  rate  per  adult  (EUR 726.61),  per  child  (EUR 225.59),  an  amount  for  common 

household expenses (EUR 726.61), an increase per child in the case of single-parent households 

(EUR 66.70) and an increased amount for common expenses in the case of a child (EUR 109.05). 

For  low-income  households,  a  rent  subsidy  is  available,  independent  of  the  social  assistance 

scheme,  and  amounts  to  a  maximum  of  EUR 300.  Social  assistance  benefits  are  taxable  and 

subject to health and long-term care insurance contributions; housing benefits are not taxable.  

Hungary 

Sickness  benefits  in  Hungary  are  based  on  a  compulsory  insurance  scheme  for  employees  and 

self-employed persons. Voluntary insurance is possible. There is no ceiling for insurance coverage 

and no qualifying period. The continuation of payments by employers happens for 15 days per year 

with  a  replacement  rate  of  70  percent  of  gross  earnings.  The  sickness  benefit  amounts  to  60 

percent of the earnings of the previous 180 days (50 percent in case of inpatient treatment or an 

employment history of less than two years). The maximum daily benefit amounts to 200 percent of 

the daily minimum wage. The maximum duration is set to  one year; unemployed persons are not 

entitled  to  the  benefit.  The  support  is  also  granted  to  take  care  of  a  sick  child  (14  to  83  days, 

depending  on  the  age  of  the  child).  The  benefit  is  subject  to  taxation  but  not  to  social  security 

contributions.  

Maternity and paternity benefits are granted to employees and self-employed persons with at least 

one year of insurance within the last two years. Maternity leave is granted for 24 weeks (four weeks 

before  and  20  weeks  after  birth),  paternity  leave  is  possible  for  five  working  days.  The  benefit 

equals 70 percent of the average gross earnings of the previous 180 days. Benefits are taxable but 

not subject to social security contributions.  

Child benefits are available for all residents but depend on residency of the child in Hungary. The 

benefit  is  granted  from  birth  until  the  end  of  participation  in  the  compulsory  educational  system 

(usually  18  years).  In  case  of  participating  in  secondary  education  or  vocational  training,  an 

extension to 20 years is possible. The monthly benefit per child rises with the number of children in 

the family and is higher for single parents. It ranges from HUF 12,200 for one child to HUF 17,000 

for  three  or  more  children  for  a  single  parent.  The  amount  for  disabled  children  is  higher.  In 

addition, there are two parental leave schemes. The childcare allowance is tax financed and covers 

all residents; the childcare fee is available for previous employees and self-employed persons. The 

childcare  allowance  is  provided  for  parents  taking  care  of  their  children  up  to  three  years  of  age. 

Employment activities are not possible until the child reaches an age of half a year. Subsequently, 

there  is  no  restriction.  The  monthly  benefit  equals  the  minimum  old-age  pension  (HUF 28,500), 

independent of the number of children. The childcare fee requires an insurance period of 365 days 

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within the last two years before birth. Restrictions on employment are the same as for the childcare 

allowance.  The  benefit  amounts  to  70  percent  of  the  average  gross  earnings  during  180  days 

before. The maximum is set to double the minimum wage (HUF 298,000). The fee is granted after 

expiry of the maternity (paternity) benefit and until the child reaches two years of age. Both benefits 

can  be  received  on  a  part-time  basis  and  transferred  between  parents.  The  one-off  birth  grant 

(HUF 64,125) is an additional family benefit. Except for the childcare fee, benefits are not subject to 

taxation.  No  social  security  contributions  arise  for  child  benefits  and  the  birth  grant;  childcare 

benefits are subject to pension contributions.  

Social assistance  in Hungary is divided  into two schemes. The scheme for persons in  active age 

(18  to  the  retirement  age)  is  further  split  into  an  employment-substituting  benefit  (with  the 

requirement  to  be  registered  as  jobseeker  and  to  take  up  public  jobs)  and  a  benefit  for  people 

suffering from health problems or taking care of a child. The benefit equals the difference between 

minimum  resources  and  income  at  the  household  level,  where  certain  benefits  and  forms  of 

employment  income  are  not  taken  into  consideration.  Minimum  resources  in  the  case  of  the 

employment-substituting  benefit  equal  80  percent  of  the  minimum  old-age  pension  (HUF 22,800) 

times  a  consumption  unit  factor.  In  the  case  of  health  problems  or  taking  care  of  a  child,  the 

guaranteed minimum is set to 95 percent of the minimum old-age pension (HUF 27,075) times the 

consumption unit factor. The factor reflects the composition of the household and is 1 for the first 

adult  (1.2  for  single  parents).  It  increases  by  0.9  for  a  spouse  or  partner,  by  0.8  for  the  first  and 

second  child,  and  0.7  for  the  third  child  and  further  children.  The  second  scheme  provides  a 

guaranteed minimum to old-age households. This minimum is set to HUF 25,630 per month if the 

person  lives  with  a  spouse.  For  a  single  person  it  amounts  to  HUF 30,150  if  the  individual  is 

younger  than  75  years  old  (HUF 40,700  if  older  than  75  years).  There  are  no  general  housing 

allowances  in  Hungary.  However,  local  governments  can  provide  financial  assistance.  Social 

assistance benefits are neither taxable nor subject to social security contributions.  

Malta 

Sickness benefits in Malta are based on a compulsory insurance scheme for employees and self-

employed  persons.  Voluntary  insurance  is  not  possible.  To  qualify  for  benefits,  50  weeks  of 

contributions  (at  least  20  within  the  previous  two  years)  are  required.  The  number  of  days  of 

sickness paid by the employer is determined by law or collective agreement. For the following days 

(up  to  a  maximum  number  of  156  working  days),  the  social  insurance  pays  a  fixed  amount  of 

EUR 13.46  per  working  day  (five  or  six  days  per  week)  for  a  single  person  and  EUR 20.79  for  a 

single parent or a married person whose spouse is only employed part-time. Benefits are subject to 

taxation but not to social security contributions.  

Maternity benefits are granted for 14 weeks with universal entitlement. In  the case of employees, 

the employer pays 100 percent of earnings. In addition, employees and self-employed persons can 

receive  benefits  for  an  additional  four  weeks,  conditional  on  the  return  to  work  of  the  woman. 

Paternity  benefits  are  not  available.  Six  weeks  of  maternity  leave  must  be  taken  after  birth.  The 

universal  benefit  amounts  to  EUR 94.35  per  week,  the  additional  four  weeks  are  granted 

EUR 175.84. Benefits are neither taxable nor subject to social security contributions.  

Child  benefits  in  Malta  are  related  to  household  income.  The  benefit  is  granted  to  families  with 

children  younger  than  16  years  old  (21  in  the  case  of  students).  Certain  types  of  income  are  not 

considered, like social assistance benefits. The yearly child benefit amounts to 6 percent for each 

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child (2 percent for students) of the difference between EUR 25,045 and household income (with a 

minimum  household  income  of  EUR 5,780  considered).  The  minimum  child  benefit  amounts  to 

EUR 450 per year. For single parents the child allowance is paid at maximum rate. Parental leave 

benefits are not available in Malta. An in-work benefit for families with children is also granted but 

considered in the determination of income tax rates. Benefits are not subject to taxation and social 

security contributions.  

Social assistance is a subjective right and provided by the central government.  Eligibility requires 

an  age  between  18  and  60  years  and  to  be  registered  at  the  public  employment  service.  The 

minimum  level  of  income  is  60  percent  of  the  national  minimum  wage  (EUR 105.93)  for  the  first 

adult per week. For each additional household member, EUR 8.15 per week is granted. In addition, 

a bonus of EUR 135.10 twice a year and EUR 3.12 per week is paid. For low-income households, 

a  supplementary  allowance  depending  on  family  status  can  be  claimed.  The  maximum  benefit  is 

EUR 12.54  per  week  for  couples  and  EUR 4.57  for  single  households. To  cover  housing  costs,  a 

rent allowance of up to EUR 38 per week is available. Social assistance and housing benefits are 

not taxable and not subject to social security contributions.  

Netherlands 

In the Netherlands, a continuation of payment by the employer for two years in case of sickness is 

determined.  The  continued  payment  amounts  to  70  percent  with  a  maximum  daily  wage  of 

EUR 214.28. However, there is a safety net if an employer no longer exists, with the same rules for 

replacement income. In addition, a step-up can be claimed if the replacement income is below the 

social minimum.  

A  person  qualifies  for  child  benefits  if  they  are  insured  and  have  one  or  more  children  below  the 

age  of  18.  The  amount  of  the  benefit  depends  on  the  age  of  the  child.  A  child  counts  for  two 

children  if  they  live  away  from  home  or  there  is  need  for  extensive  care. The  benefit  amounts  to 

EUR 219.97  per  quarter  for  a  child  with  an  age  below  five,  EUR 267.10  for  a  child  with  an  age 

between six and eleven, and EUR 314.24 for an older child up to the age of 17.  

The  child-related  allowance  is  an  additional  benefit,  which  can  only  be  claimed  if  the  family  also 

receives the child  benefit. The amount depends on family  income  and size. The maximum of the 

annual benefit ranges from EUR 1,166 for one child up to EUR 2,447 for three children. For each 

additional  child  an  amount  of  EUR 292  is  granted.  The  amount  is  increased  by  EUR 239  for 

children aged 12 to 15 and EUR 427 for children aged between 16 and 17. Single parents receive 

an additional benefit up to EUR 3,139 per year. The benefit is withdrawn at a rate of 6.75 percent if 

income  exceeds  EUR 20,451.  The  benefits  are  not  taxable.  Childcare  is  financed  by  employers, 

employees  and  the  government.  Childcare  benefits  are  calculated  as  a  share  of  total  costs  of 

expenditures and decrease with the income level of the parents. The share is set to 95.5 percent 

for low-income parents (up to EUR 17,553) and decreases to one-third for an income level above 

EUR 113,016 for the first child. For other children it decreases only to 85 percent for an income of 

more  than  EUR  162,936.  Childcare  benefits  are  not  taxable  and  no  social  security  contributions 

arise. In the Netherlands, a maternity leave of 4-to-6 weeks before birth is compulsory, and 10-to-

12  weeks  after  birth. A  paternity  leave  of  five  days  within  four  weeks  after  birth  is  optional.  For 

maternity leave a benefit exists with 100 percent of daily wages with a ceiling of EUR 214.28 per 

day. The  benefit is also  granted for self-employed  persons with a ceiling  of the  minimum monthly 

wage (EUR 1,615.80). Paternity leave is financed by the employer.  

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Social assistance guarantees a minimum income for persons who are no longer entitled to benefits 

under  the  social  insurance  schemes.  Beneficiaries  must  apply  and  accept  jobs  and  must  be 

registered  with  the  local  employment  agency.  Social  assistance  can  also  be  provided  to  top  up 

other  benefits  or  income.  The  benefit  is  intended  to  cover  the  normal  costs  of  living.  Married 

couples/cohabitants  receive  100  percent  of  the  subsistence  minimum,  single  households/parents 

70 percent. The monthly benefit amounts to EUR 1,025.55 for a single household or lone parents 

and to EUR 1,465.07 for married couples/cohabitants. In addition, a holiday allowance of 5 percent 

is granted. Benefits are not taxable and not subject to social security contributions.  

The  housing  benefit  is  restricted  by  minima  and  maxima  and  depends  on  taxable  family  income. 

Part of the rent is always paid by the household and amounts to about EUR 225 (‘standard rent’). 

Monthly rents up to EUR 720.42 qualify for benefits; for a full benefit only rents up to EUR 424.44 

are  accounted  for.  Households  are  eligible  for  benefits  if  their  income  is  lower  than  EUR 22,700 

(EUR 30,825)  for  a  single  person  younger  than  65  (a  household  in  which  the  highest  earner  is 

younger than 65). For households with older persons the values are comparable. The benefit is not 

taxable. 

Austria 

Sickness  benefits  in  Austria  are  granted  for  all  employees,  unemployed  and  voluntarily  insured 

persons. There is no upper limit for coverage. There is a waiting period of three days. For the first 6 

to  12  weeks,  employers  are  responsible  for  continued  payment  of  wages.  For  the  following  four 

weeks, 50 percent are paid by the employer and 50 percent by the public health insurance. From 

the  43rd  day  of  sickness,  60  percent  income  replacement  with  an  upper  ceiling  of  EUR 5,220  is 

granted.  The  duration  of  sickness  benefit  is  at  most  26  weeks  with  a  possible  extension  to  78 

weeks  in  certain  cases.  Sickness  benefits  are  taxable  and  subject  to  old-age  insurance 

contributions.  In  addition,  there  is  a  rehabilitation  benefit  and  a  reintegration  benefit  after  a  long-

term  illness.  Rehabilitation  benefits  are  granted  for  persons  whose  pension  application  has  been 

rejected because invalidity is not permanent but lasts at least six months. The rehabilitation benefit 

is the same as the sickness benefit but cannot be lower than a minimum threshold. Conditions for 

the reintegration benefit are, amongst others, an employment relationship of at least three months, 

a  sick  leave  of  at  least  six  weeks,  and  a  reduced  working  time  of  a  quarter  to  a  half.  The 

reintegration benefit amounts to 60 percent of the assessment base (gross earnings of the reduced 

working time).  

The  main  family  benefits  are  the  child  benefit  (‘Familienbeihilfe’)  and  the  child-raising  allowance 

(‘Kinderbetreuungsgeld’).  The  child  benefit  is  paid  for  families  with  dependent  children  and  is 

differentiated with respect to age and the number of children. The benefit amounts to EUR 114 per 

month for a child below the age of three, EUR 121.90 for a child up to the age of ten, EUR 141.50 

up  to  the  age  of  19  and  EUR  165.10  up  to  the  age  of  24  (in  general).  If  there  is  more  than  one 

child, a supplement is paid, amounting to EUR 14.20 for two children to EUR 364 for seven or more 

children.  In  addition,  for  three  or  more  children  an  additional  increase  of  EUR  20  per  month  and 

child is  granted  if income is below  EUR 55,000. In  September,  EUR  100 are granted for children 

between six and 15 to cover schooling costs. Family benefits are not taxable and are not means-

tested.  

To subsidise childcare, parents can claim a childcare allowance (‘Kinderbetreuungsgeld’), which is 

available for child-raising reasons. Two general options are available, a flat benefit and an income-

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dependent benefit. The duration of the flat benefit can be chosen by the beneficiary between one 

year and 28 months. The benefit is scaled such that the total amount of the benefit is independent 

of the duration. In case of a one-year entitlement, the benefit is EUR 33.38 per day. The income-

dependent  variant  requires  employment  prior  to  benefit  eligibility  and  replaces  80  percent  of 

previous income with a maximum of EUR 66 per day. If both parents claim childcare allowance, the 

duration and therefore the total amount of the benefit is extended by one-sixth. There is a ceiling 

for  additional  annual  earnings  amounting  to  EUR  16,200.  The  childcare  allowance  is  not  taxable 

and not subject to social security contributions. Lone parents and married couples on low income 

can  apply  for  a  supplementary  allowance  amounting  to  EUR  6.06  per  day.  Maternity  leave  is 

compulsory eight weeks before and after birth. The benefit replaces total labour income. In case of 

unemployment, 180 percent of unemployment benefits are paid. A parental leave bonus for fathers 

can be claimed for at most 31 days during the first 91 days following birth. The amount equals to 

EUR 22.60 per day.  

In Austria, two types of social assistance exist, the needs-oriented guaranteed minimum resource 

and  the  supplementary  pension  (Ausgleichszulage).  The  latter  is  paid  to  retirees  or  persons 

incapable  of  working  to  guarantee  a  minimum  income.  The  needs-oriented  guaranteed  minimum 

resource  is  granted  at  the  regional  level  and  differs  between  regions.  The  transfer  in  Styria,  for 

example,  amounts  to  EUR  863.04  (2019)  per  month  for  a  single  person,  EUR 1,203.94  for  a 

couple,  and  EUR 155.35  for  a  child.  In  addition,  there  is  a  subsidy  for  housing  rent,  which  is  a 

quarter  of  the  total  benefit.  Persons  receiving  the  benefit  must  be  available  to  take  up  a  job. 

General assistance entitlement depends on household resources, that is, it is means- and income-

tested. The benefit is not taxable and not subject to social security contributions.  

The system of housing benefits is rather complex in Austria. The amount of benefit depends on the 

region. The ‘Wohnbeihilfe’, for example, subsidises housing costs for rented flats. Eligibility requires 

income  above  a  threshold.  Benefits  are  not  taxable.  There  are  also  subsidies  and  subsidised 

credits for the creation of living space.  

Poland 

Sickness  benefits  in  Poland  are  available  for  employees  (compulsory)  and  self-employed 

(voluntary). There is no ceiling for insurance coverage. Qualification requires 30 days of insurance 

for  employees  and  90  days  in  case  of  voluntary  insurance.  For  the  first  33  days  of  sickness  of  a 

year the employer pays 80 percent of the reference wage (14 days in case of persons aged 50 or 

above). The benefit paid afterwards amounts to 80 percent in general. In case of hospitalisation, 70 

percent  are  paid;  100  percent  in  special  cases.  The  duration  of  eligibility  is  182  days.  The  child-

minding  allowance  is  paid  to  employees  who  must  look  after  a  sick  child  under  the  age  of  14 

(maximum  60  days)  or  another  member  of  the  family  (maximum  14  days  per  year).  The  benefit 

amounts  to  80  percent  of  the  reference  wage  for  sickness  benefits.  A  rehabilitation  benefit  is 

available  if  sickness  lasts  longer  than  the  maximum  period  of  182  days  or  rehabilitation  is 

necessary to rehabilitate a person. The benefit amounts to 90 percent for the first three months and 

75 percent afterwards. Benefits are subject to taxation.  

A family allowance is granted for children below the age of 18 (21 if the child is in education or 24 if 

disabled  and  in  education). The  family  benefit  is  means-tested  (in  2019  family  income  per  capita 

must be lower than PLN 674 per month). The family allowance depends on the age of the child and 

amounts to PLN 95 monthly for a child below the age of five, PLN 124 for a child between five and 

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18  years  and  PLN  135  for  a  child  between  18  and  24  years. The  benefit  for  bringing  up  children 

pays  a  monthly  amount  of  PLN 500  for  each  child  (except  the  first  one)  up  to  an  age  of  18. The 

benefit  for  the  first  child  can  only  be  claimed  if  family  income  per  capita  is  below  PLN 800.  Lone 

parents  receive  an  additional  supplement  of  PLN  193  per  child  with  a  maximum  of  PLN 386  per 

family.  In  addition,  a  birth  supplement  of  PLN 1,000  per  child  is  granted  if  net  income  per  family 

member  is  below  a  threshold.  Benefits  are  not  taxable  and  not  subject  to  social  security 

contributions. 

Maternity leave is compulsory for all insured women and voluntary for self-employed women. The 

duration  is  generally  20  weeks  in  the  case  of  a  single  birth,  of  which  14  weeks  are  after  birth. A 

paternity leave of two weeks is possible within 24 months after birth. The allowance is 100 percent 

of the reference wage (gross earnings 12 months before leave), but at least PLN 1,000 per month. 

The benefit is taxable and subject to social security contributions.  

A voluntary parental leave benefit is available for all insured women. The duration of the parental 

leave  is  32  weeks. Afterwards  a  child-raising  leave  is  available  with  a  duration  of  24  months  (36 

months in case of multiple births or a single parent). In the latter case monthly income per family 

member  must  not  exceed  25  percent  of  the  average  wage  of  the  previous  year.  There  is  some 

flexibility  with  respect  to  the  division  between  two  parents.  The  parental  leave  benefit  is  100 

percent of the reference wage (the same as for maternity allowance) for the first six weeks and 60 

percent  afterwards.  The  child-raising  supplement  amounts  to  PLN  400  per  month.  For  uninsured 

persons, a parental benefit amounting to PLN 1,000 per month for one year after birth is available. 

The child-raising supplement is subject to social security contributions but not taxable.  

The  social  assistance  system  in  Poland  consists  of  benefits  from  the  social  welfare  system. 

Benefits are granted to persons with insufficient means for living. The minimum level of income is 

defined as PLN 701 monthly for a single and PLN 528 for a family member. The benefit can either 

be  permanent  (age,  disability  or  permanent  illness)  or  temporary  (e.g.,  poverty,  unemployment). 

Benefits  from  the  social  insurance  institutions  are  payments  to  persons  unable  to  work  due  to 

invalidity,  which  occurred  already  before  age  18.  The  minimum  temporary  (permanent)  benefit 

amounts  to  PLN  20  (PLN  30),  the  maximum  to  PLN 418  (PLN 701).  Benefits  are  neither  taxable 

nor subject to social security contributions. 

Housing benefits are paid at the local level to  low-income households.  Benefits  are based on the 

difference  between  what  is  considered  reasonable  expenditure  for  housing  and  actual  housing 

costs. Housing costs cannot exceed a maximum amount depending on the household size and the 

size of the flat. Households have to cover housing costs by themselves to a certain amount, 15-to-

20 percent of household income for a single household, 12-to-15 percent for a two-to-four-person 

household  and  10-to-12  percent  if  five  or  more  persons  live  in  the  household,  depending  on 

household  income. To be  eligible, household income must  be  below  175 percent of the minimum 

retirement pension for a single person and 125 percent for each person for families. If the income is 

higher  only  the  difference  between  the  income  criteria  and  the  benefit  is  paid.  The  benefit  is  not 

taxable.  

Portugal 

Sickness  insurance  in  Portugal  covers  employees  and  self-employed  persons  with  no  income 

ceiling for insurance coverage. To qualify, six months of paid insurance  is necessary, of which 12 

days must occur within the four months before sickness. There is no continuation of payments by 
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employers  and  there  is  a  waiting  period  of  three  days.  The  replacement  rate  with  respect  to  the 

average wage within six months before sickness depends on the length of the sickness period. It 

amounts to 55 percent for the first 30 days and increases stepwise to 75 percent for periods after 

one year of sickness. If the reference earning is lower than EUR 500, an additional 5 percentage 

points for the first 90 days is granted. The maximum period is 1,095 days. Taking care of children is 

possible for 30 days for a child under 12 years old and for 15 days for older children. Benefits are 

not subject to taxation and social security contributions.  

Maternity and paternity benefits are available for all insured employees and self-employed persons 

with six months of contributions to social security. Initial parental leave can be taken for 120 or 150 

consecutive days, and simultaneously by both parents. Part of the leave is reserved for the mother, 

30 days (voluntarily) before and six weeks after birth. Paternity leave of 15 days is compulsory, of 

which  five  days  must  be  taken  immediately  after  birth.  The  maternity  benefit  amounts  to  full 

employment  income  (Christmas  and  holiday  bonuses  not  considered),  with  a  minimum  of  50 

percent of the reference social support income (EUR 435.76 monthly). The paternity benefit equals 

80 percent of earnings. Benefits are neither taxable nor subject to social security contributions.  

Child benefits are granted to resident children until age 16. In case of education, the limit can be 

extended  to  24  years. The  benefit  depends  on  household  income  relative  to  the  reference  social 

support  index  and  the  age  of  the  child.  There  are  five  earnings  levels,  with  no  entitlement  for 

families belonging to the fifth level (household income of more than 2.5-times the reference index). 

For low-income households, the benefit is equal to EUR 148.32 for children younger than one year, 

EUR 110.77  for  children  between  one  and  three  years,  and  EUR 37.08  for  older  children.  In  the 

fourth level (1.5-to-2.5–times the reference index) children receive a monthly benefit of EUR 38.31 

up  to  age  three. The  birth  of  further  children  leads  to  a  supplement  for  each  child  aged  between 

one and three years (EUR 147.85 in the first level). For single parents the benefit is increased by 

35  percent.  With  respect  to  parental  leave  two  schemes  are  available.  The  extended  parental 

benefit extends the initial parental benefit for a duration of three months and amounts to 25 percent 

of  average  income  with  a  minimum  of  40  percent  of  the  reference  social  support  index.  The 

childcare  leave  is  available  subsequently  for  two  years  but  no  benefit  is  paid.  Benefits  are  not 

taxable and not subject to social security contributions.  

Social assistance is a subjective right and organised at the national level. The means test is based 

on the household level. The social minimum income is available for persons aged 18 or older. To 

claim the benefit the claimant must accept  the obligations of the integration contract and must be 

registered  with  a  job  centre.  Regarding  the  means  test,  total  household  income  is  taken  into 

account,  with  the  exception  of  family-,  disability-  and  long-term  care  benefits  and  20  percent  of 

work-related income after deduction of social security contributions. If the household benefits from 

social  housing,  income  is  increased  by  EUR 15.45-46.36,  depending  on  the  subsidy  duration. 

Guaranteed minimum income is based on the composition of the household, with a weight of 1 for 

the claimant, 0.7 for an additional adult and 0.5 for each child. The base value equals EUR 186.68 

and is indexed using the reference social support index. The benefit equals the difference between 

guaranteed minimum income and actual income. There are no housing and heating allowances in 

Portugal. Additional minimum  income schemes exist  for pension claimants  and  disabled persons. 

Benefits are not taxed by the income tax and not subject to social security contributions.  

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Romania 

Sickness benefits in Romania are based on a compulsory social insurance scheme for employees 

and self-employed persons. There are no earnings ceilings for coverage, but at least one month of 

contributions is  necessary for qualification.  Employers must  pay for  the first five  days of sickness 

before  social  benefits  can  be  claimed.  The  monthly  benefit  equals  75  percent  of  gross  earnings 

within the last six months before sickness; the maximum duration of benefit payment is 183 days in 

a one-year period. The benefit is also available when taking care of a sick child aged under seven 

years  (18  in  case  of  disability).  The  replacement  rate  in  this  case  is  higher  and  amounts  to  85 

percent.  The  benefit  is  not  taxable  but  subject  to  invalidity-,  old-age-,  and  survivor  pension 

contributions.  

Maternity and paternity benefits in Romania are based on a compulsory social insurance scheme 

for  employees  and  self-employed  persons.  To  be  eligible  for  maternity  benefits,  one  month  of 

insurance  within  the  last  12  months  is  necessary. The  duration  of  maternity  leave  amounts  to  63 

days before and 63 days after birth. Paternity leave is possible for five working days. Days of leave 

cannot  be  transferred  between  parents.  The  benefit  for  maternity  leave  equals  85  percent  of  the 

average wage within the previous six months. The maximum assessment base is 85 percent of 12-

times  the  minimum  wage.  The  replacement  rate  for  paternity  leave  is  100  percent.  Similar  to 

sickness benefits, the benefit is not taxable but subject to invalidity-, old-age-, and survivor pension 

contributions. 

In Romania, two child benefit schemes exist, the state allowance for children and the family support 

allowance. The first is granted to children living with parents, the second for children of school age. 

Both  benefits  are  granted  up  to  the  age  of  18.  The  state  allowance  equals  40  percent  of  the 

reference social indicator (RON 500) up to age two and 16.8 percent for older children. The family 

support allowance is paid to low-income households. If net income per family member is less than 

40  percent of the reference social indicator, the  benefit  amounts to 16.4 percent of the reference 

indicator per child, 15 percent per child for income levels up to 1.06-times the reference indicator. 

For single parents, the family support allowance is 30 percent higher. For parental leave, the child-

raising benefit is available. Leave duration is two years after childbirth (three years in the case of a 

disabled  child).  The  benefit  amounts  to  85  percent  of  the  average  net  income  during  the  year 

before  confinement.  The  maximum  benefit  is  RON 8,500.  The  return-to-work  bonus  is  an 

alternative  to  the  child-raising  benefit  up  to  the  age  of  two  years  (three  years  in  the  case  of 

disability)  and  amounts  to  RON 650  per  month.  Benefits  are  neither  taxable  nor  subject  to  social 

security contributions.  

To guarantee minimum resources, several benefits are granted in Romania, including social aid, a 

heating  energy  allowance,  a  natural  gas  allowance  and  an  oil  allowance.  Individual  persons  and 

households  are  eligible.  The  minimum  age  to  claim  social  aid  is  18  years;  it  is  16  years  for  the 

heating allowance. There is no maximum age. One of the household members is obliged to work 

for  the  local  authority  if  the  person  is  capable  of  work.  Household  income  takes  into  account  all 

income except some benefits like scholarships and family benefits. An individual or household is in 

need if monthly income is less than guaranteed income. The minimum income equals 28.3 percent 

of the reference social indicator for an individual, 51 percent for a household with two members and 

rises to 105.4 percent for a household with five members. If one of the family members works, then 

the  amount  rises  by  15  percent.  The  different  energy  allowances  depend  on  the  income  of  the 

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household.  The  heating  energy  allowance  for  instance  varies  between  5  and  90  percent  of  the 

heating costs. Housing benefit is not available in Romania. Benefits are not taxable and not subject 

to social security contributions.  

Slovenia 

In  Slovenia,  insurance  against  sickness  is  a  compulsory  social  insurance  scheme,  financed  by 

employees  and  self-employed  contributions.  It  guarantees  continuation  of  work-related  income  in 

case of incapacity to work or the nursing of an immediate family member. The first 30 days are paid 

by the employer. The benefit amounts to the average monthly gross wage in the previous year of 

employment for occupational diseases or accidents at work, 90 percent for reasons of illness, and 

80 percent for an injury unrelated to work or nursing. For the next 90 days, the replacement rate is 

10  percentage  points  lower.  There  is  no  limitation  for  the  duration  of  the  benefit.  Benefits  are 

subject to taxation and social security contributions. 

The  Slovenian  system  of  support  for  families  consists  of  maternity,  paternity  and  family  benefits. 

Maternity  leave  lasts  a  total  of  105  days:  four  weeks  (28  days)  before  the  birth  and  11  weeks 

following  the  birth.  It  is  obligatory  to  take  15  days  of  leave.  The  level  of  maternity  allowance  is 

determined  using  the  average  pay  received  by  the  mother  over  the  preceding  12  months  of 

employment.  Regarding  paternity  leave,  in  2019,  a  father  has  the  right  to  paternity  leave  of  30 

calendar days. At least 15 days of paid leave may be taken as full-time or part-time after the end of 

maternity  leave; the rest of the paid leave (maximum  15  days) may  be taken as full-time or  part-

time leave until the time at which the child completes the first grade of primary school. The level of 

paternity allowance amounts to the father’s average  pay during  the 12  months  prior to the leave. 

Benefits are also subject to taxation and social security contributions. 

Family  benefits  consist  of  several  grants  to  families.  Child  benefit  in  Slovenia  depend  on  income 

and the number of children. It is paid for children residing in Slovenia. The monthly average income 

per family member must be lower than EUR 1,034.14 to qualify for child benefits. The benefit per 

child  decreases  with  the  level  of  income  and  rises  with  the  number  and  age  of  children.  The 

minimum benefit amounts to EUR 19.88, the maximum to EUR 137.18. The age limit for the benefit 

is 18. Single parent families (30 percent) and missing childcare services (20 percent) lead to higher 

benefits.  

The  parental  benefit  is  paid  during  260  days  of  childcare  leave  and  equals  gross  income  with  a 

maximum  of  two  and  a  half  monthly  average  wages. Additional  grants  are  reductions  for  nursery 

school fees, birth- and adoption grants, special allowances for children with disabilities and a large 

family allowance. Family benefits are not subject to taxation and social security contributions (with 

the exception of parental benefit).  

Financial  social  assistance  (FSA)  is  granted  to  persons  and  families  to  meet  minimum  needs. 

Entitlement  requires  a  permanent  residence  in  Slovenia.  The  assistance  is  available  for  persons 

with insufficient income, that is, lower than minimum income, if no other social claims (e.g., social 

insurance) are available and the person is active in seeking solutions to the current problem (i.e., 

claimants  must  search  for  a  job).  The  FSA  is  means  tested,  with  income  as  well  as  real  and 

moveable property considered. The FSA amounts to EUR 392.75 for the first adult. If this person is 

economically active between 60 and 128 hours per month, the assistance rises to EUR 494.87 and 

EUR 593.05 for more than 128 hours. For every next adult person in the household (working less 

than  60  hours)  the  assistance  amounts  to  EUR 223.87.  The  FSA  is  granted  for  three  months  at 
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longest for the first time and can be prolonged for an additional six months. For older persons (65 

for  men,  63  for  women)  a  supplementary  allowance  is  available.  The  benefit  amounts  to  the 

difference  of  income  to  the  defined  minimum  level  of  EUR  566.02.  Benefits  are  exempted  from 

taxation and social security contributions.  

According to Benefits and Wages, the housing benefit supports low-income households to finance 

rents. The benefit ranges from 1 percent to 80 percent of the rent. Eligibility requires the income of 

the household to be below a threshold. The upper limit of the benefit ranges between EUR 85 for 

one household member to EUR 235 for six household members. Housing benefits are not taxed. 

Slovakia 

Sickness  benefits  in  Slovakia  are  a  compulsory  insurance  scheme  for  employees  and  self-

employed  persons  with  no  earnings  ceiling  and  no  qualifying  period.  Employers  are  obliged  to 

continue payment for the first 10 days of sickness. The insurance benefit steps in afterwards with a 

maximum  duration  of  the  benefit  of  52  weeks.  The  benefit  amounts  to  55  percent  of  the 

assessment  base  (daily  earnings  of  the  previous  year  with  a  ceiling  of  two-times  the  national 

average monthly wage). For unemployed persons, no benefit is granted. In addition, a maximum of 

10 days of care of relatives are granted.  

To be eligible for the maternity leave benefit 270 days of insurance are necessary. Maternity leave 

is provided for 34 weeks, of which six-to-eight weeks are before birth. There is no paternity leave 

but  there  is  the  possibility  of  transferring  maternity  leave  rights  to  the  father.  The  benefit  is  75 

percent  of the assessment base (defined  in  the same way as  the sickness benefits) with  at  least 

the  same  amount  as  the  parental  allowance  (see  below).  Neither  sickness  benefits  nor  maternity 

leave are subject to taxation or social security contributions. 

The child allowance is paid up to the age of 16 of the child (25 for full-time vocational training and 

university students). The benefit is set to EUR 24.34 per child per month. For childcare, a parental 

allowance  is granted up to the age of three years (six years for handicapped children) for proper 

care  of  the  child.  Employment  is  a  necessary  requirement  and  the  benefit  is  paid  irrespective  of 

whether  parental  leave  is  taken  or  not.  The  monthly  allowance  is  set  to  EUR 220.70.  Also,  a 

childcare allowance up to an age of five is available with an amount of up to EUR 280 per month 

and  a  birth  grant  of  EUR 829.86.  Benefits  are  neither  taxable  nor  subject  to  social  security 

contributions.  

Social  assistance  guarantees  the  provision  of  basic  living  conditions  for  citizens  in  material  need 

and  is  income-tested.  The  following  persons  are  jointly  assessed,  namely  husband  and  wife, 

parents and their dependent children within one household, and parents and their children up to the 

age of 25 if they live within one household and have no income. The benefits differ with respect to 

the number and type of jointly assessed persons. For example, a single person receives EUR 61, a 

childless  couple  EUR 107.10  and  a  couple  with  a  maximum  of  four  children  EUR 160.40.  For  a 

pregnant woman (from the fourth month of pregnancy) and for persons with a child up to one year 

of  age,  the  benefit  increases  by  EUR 13.50.  In  addition,  housing-,  protective-  and  activation-

allowances  are  granted.  The  housing  allowance  is  set  to  EUR 55.80  for  a  single  person  and 

EUR 89.20  for  a  household  with  an  additional  jointly  assessed  person.  The  activation  allowance 

(EUR 63.07  monthly)  is  provided  for  a  person  in  material  need  and  jointly  assessed  persons  for 

measures which increase employability. The protective allowance (EUR 63.07 monthly) is granted 

for different living arrangements, like old-age, disability, lone parents with a child younger than 31 
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weeks, unfavourable health, and so on. Income reduces the benefit one by one, where income is 

modified to some extent. For example, 25 percent of different forms of income are deducted for the 

income  test. The  benefit  is  exempted  from  taxation.  In  addition,  subsidies  for  food,  materials  and 

scholarships for pre-primary and primary schools are granted. Housing allowances are provided for 

assistance of households in material need. A general scheme does not exist.  

Finland 

Sickness benefits in Finland cover employees, unemployed, self-employed persons, students and 

others.  There  is  no  earnings  ceiling  for  eligibility.  Employers  are  obliged  to  pay  full  salary  for  the 

first nine days before the insurance steps in. The daily amount is EUR 27.86 for annual earnings 

below EUR 1,453. Earnings above are replaced by 70 percent (for earnings below EUR 30,962) or 

EUR 72.20 plus 20 percent (for income above). The duration is limited to 300 days within two years 

for  the  same  illness.  If  a  person  receives  unemployment  benefits  for  at  least  four  months  the 

benefit equals 86 percent of the unemployment benefit. A partial sickness allowance is available for 

employees  and  self-employed  persons  who  work  part-time  (40  to  60  percent  of  previous  working 

time). In this case the benefit amounts to 50 percent of the sickness benefit and is available for 120 

days within a two-year period. Sickness benefits are subject to taxation and pension (1.45 percent) 

and other social security contributions.  

Maternity or paternity leave requires an insurance period of 180 days. Maternity leave is available 

for  105  consecutive  days  (without  Sundays)  of  which  30  to  50  days  must  be  consumed  before 

childbirth. Paternity leave of 54 days is also available. Parental leave can last 158 days, increased 

by 60 days in case of multiple births. Benefits amount to 70 percent for annual earnings up to EUR 

37,861.  Parts  of  the  income  above  this  threshold  are  replaced  by  40  percent,  20  percent  for 

earnings above EUR 58,252.32 Rules for taxation and social security contributions are the same as 

for sickness benefits.  

Child benefits are paid for children below the age of 17 who live in Finland. The amount depends 

on  the  number  of  children  in  the  household;  supplements  are  available  for  lone  parents.  The 

amount per child increases from EUR 94.88 for one child to EUR 172.69 for five and more children. 

Lone parents receive an additional benefit of EUR 53.30 per child per month.  

Families with children under three years of age who do not use public day care can claim a home 

care  allowance.  This  amounts  to  EUR  338.34  per  month  for  the  first  child,  EUR  101.29  for  any 

other  child  below  the  age  of  three  and  EUR  65.09  per  month  for  children  between  three  and  six 

years old. In addition, there is a home care supplement amounting to at most EUR 181.07, which is 

means-tested.  There  is  also  a  private  day  care  allowance  consisting  of  a  care-allowance 

(EUR 172.25  per  child  per  month)  and  an  income-tested  supplement  (EUR 144.85  per  child  per 

month). For parents working part-time a flexible care allowance can be claimed. Benefits, with the 

exception of childcare allowances, are not taxable but subject to social security contributions.  

Social assistance is a residual final safety net. The benefit is means-tested and eligibility is tested 

year by year. For the income-test 20 percent, up to a maximum of EUR 150 per month is deducted 

from family income. Social assistance consists of a basic amount and an additional amount. If the 

amount is higher than households’ net income, the difference is paid as benefit. Housing costs are 

covered  by  an  additional  allowance.  The  basic  monthly  amount  of  the  social  assistance  is 

32 The replacement rate for the first 56 days of maternity leave is higher. The minimum benefit is EUR 27.86 per day.  

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EUR 497.29 for a single, and EUR 547.02 for a lone parent. Each person of a couple receives 85 

percent  of  this  amount  (EUR 422.70).  For  a  child  older  than  18,  73  percent  of  this  amount  is 

granted,  70  percent  for  a  child  older  than  ten  and  63  percent  for  a  younger  child.  For  each 

additional  child  in  the  family  the  basic  amount  decreases  by  5  percentage  points.  An  additional 

allowance  is  granted  to  cover  reasonable  housing  costs,  home  insurance,  expenditures  for 

electricity,  child  day-care  fees  and  larger  health-care  costs.  The  benefit  is  not  taxable  and  not 

subject to social security contributions. 

The general housing allowance corresponds to 80 percent of the difference between the rent and 

the  deductible  amount,  which  is  determined  by  the  family  type,  the  geographical  location  and 

increases with income. The rent is determined by the maximum area of the dwelling depending on 

the  household  size  and  the  area  of  living,  but  also  age  and  size  of  the  flat.  The  benefits  are  not 

taxable. 

Sweden 

Sickness benefits in Sweden are available for employees, self-employed and unemployed persons 

with  no  ceiling  on  earnings  for  eligibility.  To  be  eligible  a  person  must  be  insured  and  earn  an 

income above a minimum threshold (SEK 11,100 per year). Continued payment by the employer is 

available  for  the  first  14  days  of  illness  with  a  replacement  rate  of  80  percent.  Sickness  benefits 

amount  to  80  percent  of  97  percent  of  the  income,  with  a  ceiling  of  SEK 372,000.  There  is  no 

maximum  duration  of  the  benefit  but  a  reduction  of  the  replacement  rate  to  75  percent  after  364 

days  can  take  place.  Sickness  benefits  are  subject  to  taxation  but  not  to  social  security 

contributions.  

The  pregnancy  cash  benefit  is  paid  for  leave  between  the  60th  and  the  11th  day  before  birth.  A 

parental  benefit  of  480  days  (240  days  for  each  parent)  can  be  claimed  for  the  time  after  birth. 

Ninety  days  are  reserved  for  each  of  the  parents;  the  remaining  days  can  be  shifted  between 

parents. The pregnancy cash benefit amounts to 80 percent of previous earnings with a maximum 

of SEK 348,750. The parental  benefit  equals SEK 250 per day for 390 days und SEK 180 for the 

other 90 days. Taxation is the same as for sickness benefits.  

For each child below the age of 16, or until compulsory education is finished, a child benefit is paid. 

The benefit is neither means- nor income-tested and amounts to SEK 1,250 per month and child. 

Supplements are paid if the parents have more than one child. The supplement is SEK 150 for the 

second child, SEK 730 for the third child, SEK 1,740 for the fourth and SEK 1,250 for the fifth and 

all subsequent children. The benefit is not taxable. In addition, a significant childcare allowance is 

granted  at  the  municipal  level.  Family  benefits  are  neither  taxable  nor  do  social  security 

contributions arise.  

Social assistance in Sweden is locally administered, means-tested and the beneficiary is required 

to  actively  search  for  a  job.  The  norm  for  social  assistance  is  calculated  annually  and  has  an 

individual part (marital status, age of the child) and a household part (size of the household). The 

individual rate is SEK 3,090 per month for a single person and EUR 5,570 for a married couple. For 

each child the rate increases with age, from SEK 2,130 for a child younger than one year to SEK 

3,910 for a child between an age of 19 and 20. The household rate increases with the number of 

persons in the household,  from SEK 990 to SEK 2,220 for  a household with seven persons. The 

benefit is not taxable and not subject to social security contributions.  

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Housing  benefits  for  rented  accommodation  consist  of  the  income-tested  housing  allowance,  a 

supplement  for  social  assistance  claimants  and  an  income-tested  housing  supplement  for 

pensioners. The  condition  for  receipt  of  the  housing  allowance  is  low-income  and  varies  with  the 

number  of  children.  The  housing  benefit  depends  on  age  and  family  status  as  well  as  housing 

costs. The housing benefit is not taxable.  

2.11. Update of Empirical Estimates  

Scientific  literature  provides  empirical  estimates  about  the  behaviour  of  households  and 
firms.  During  the  current  project,  we  update  the  main  parameters  to  take  into  account 
recent  empirical  research.  In  this  section,  we  discuss  the  update  of  (extensive  and 
intensive) labour supply and retirement elasticities, the elasticity of job search intensities, 
elasticities  of  substitution  in  the  production  function,  and  the  responsiveness  of 
educational decisions of households. 

Labour Supply Elasticities 

The  analysis  of  labour  supply  elasticities  remains  a  topic  of  interest  for  economists, 
producing insights into how labour reacts to, for example, wage changes. Section 9.2.5. of 
Part II  of  the  Berger et al.  (2009) report  includes  an  overview  of  empirical  literature.  For 
the  update  of  the  model,  we  exploit  elasticities  by  Bargain  et  al.  (2014),  who  develop 
comparable estimates across several countries. Broadly speaking, their estimates confirm 
the values used in the LMM so far. 

The authors compute own-wage labour supply elasticities for 17 European countries and 
the United States. They use a harmonised approach that nets out possible measurement 
differences  arising  from  data,  periods,  and  methods  while  applying  it  to  a  dataset  that 
uses similar definitions of variables. This leads to comparable estimates across countries. 
The authors implement a discrete choice labour supply model, similar to the one used in 
Chetty  et  al.  (2011).  They  choose  the  Maximum  Likelihood  method  for  own-wage 
elasticities  and  income  elasticities  of  individuals  in  couples  and  single  individuals, 
decomposed  for  the  extensive and  intensive  margin.  The  authors find that  labour  supply 
elasticities are small. Especially for the intensive margin, they are close to zero. There are 
small  differences  in  magnitude  across  countries,  which  they  attribute  to  differences  in 
work  preference  rather  than  to  demographic  or  tax  characteristics  of  a  country  after 
performing related tests. On the extensive margin they find estimates of own-wage labour 
supply elasticities for married men and married women between close to zero and 0.2 and 
between 0.1 and 0.6 respectively. For single men and women, they are between close to 
zero  and  0.6  and  0.1  and  0.6  respectively.  Income  elasticities  are  extremely  small  and 
close to zero in each of their estimates. Furthermore, the estimates suggest larger labour 
supply elasticities in countries with a low female labour market participation rate.  

Although  there  is  no  clear  consensus  about  the  magnitude  of  labour  supply  elasticities, 
especially  between  micro-  and  macroeconomic-based  estimates,  our  literature  review 
broadly confirms the magnitude of the range of elasticities found in Bargain et al. (2014). 
Chetty  et  al.  (2011)  summarise  and  compare  micro-  and  macroeconomic  labour  supply 

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elasticities.  They  recommend  Hicksian  and  Frisch  elasticities  of  0.25  on  the  extensive 
margin  and  elasticities  on  the  intensive  margin  of  0.3  and  0.5  for  the  Hicksian  and  the 
Frisch  elasticity  respectively.  Bargain  and  Peichl  (2016)  perform  a  meta-analysis  of 
intensive and extensive labour supply elasticities, where they compare 282 estimates from 
92  studies  and  then  perform  meta  regressions.  They  focus  on  differences  in  elasticities 
arising  from  methodically  differing  approaches.  They  suggest  elasticity  parameters 
between  0.12  for  men  and  0.59  for  married  women  and  single  mothers.  Keane  (2011) 
focuses  on  how  differences  in  models  and  methods  generate  different  elasticity 
parameters and confirms a consensus in the literature on smaller estimates for men than 
for women; for example, he finds an average Hicksian elasticity of 0.31 for men. 

For the  calibration  of  LMM,  we  use  the  Bargain et  al. (2014)  estimates  for  intensive and 
extensive  labour  supply  elasticities  according  to  family  status  (married  women,  married 
men,  single  women,  single  men)  and  by  income  quintile.  Using  EU-SILC,  we  calculate 
weighted averages of these estimates for age and skill groups.33 

The results  are  illustrated in  Table  46.  Intensive labour  supply  elasticities  are  very  small 
and slightly lower than in the previous LMM calibration (where they ranged from 0.08 for 
high-skilled  to  0.1  for  low-skilled  individuals).  Extensive  labour  supply  elasticities  are 
higher  than  intensive  elasticities  and  the  estimates  show  more  dispersion  between  the 
countries.  The  lowest  estimates  are  found  for  Portugal  (close  to  0.05),  while  they  are 
much higher in many other countries and close to 0.5 for Ireland. Still, the elasticities are 
in  a  similar  range  than  in  the  previous  LMM  (where  we  calibrated  an  average  extensive 
semi-elasticity of around 0.15). 

33 Basically, we make three adjustments to this approach. First, we arbitrarily set a lower boundary of 0.03 of intensive 

labour supply elasticities even though the Bargain et al. (2014) estimates find even lower estimates in some cases. This 
is done to improve convergence of the model routine, but intensive labour supply reaction remains very low in this case. 
Second, Bargain et al. do not provide estimates for the EU-average, BG, CZ, HR, CY, LV, LT, LU, MT, RO, SI, and SK. 
Thus, we take estimates of economically/socially related countries. Third, the authors produce very high extensive 
elasticities for a few groups of low-income individuals. We suggest that these high elasticities are partly determined by 
the educational decisions of young individuals (i.e., if current wages for low-skilled individuals are low, they will invest 
more time in education and reduce hours worked). Given that this margin is implemented in the educational decision in 
the LMM, we set an upper boundary of 0.7 for these extensive elasticities. 

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Table 46: Intensive and extensive labour supply elasticities in LMM 

Retirement Elasticities 

In previous LMM model versions, the responsiveness of the retirement age with respect to 
incentives  was  based  on  two  different  empirical  estimates.  Börsch-Supan  et  al.  (2004) 
provide econometric evidence for the impact of retirement incentives using German SOEP 
micro-data.  They  find  that  introducing  ‘actuarial’  adjustments  of  3.6 percent  per  year  of 
early  retirement  increases  the  average  retirement  age  by  eight  months.  Duval  (2003) 
performs  a macroeconometric  panel  analysis  on  the  impact  of  old-age  pension  systems. 
In  his  preferred  specification,  a  10  percentage  point  decline  of  the  implicit  tax  rate  on 
continued work reduces the fall in participation rates between two consecutive age groups 
by 1.5 percentage points. Based on these two estimates, the calibration of previous LMM 
versions replicated an impact of approximately five months for the ‘Börsch-Supan’ reform 
(i.e.,  a  smaller  impact  than  in  the  empirical  estimate)  and  an  impact  of  around  2 
percentage  points for the  ‘Duval’  reform  (i.e.,  a more  pronounced impact)  on  average  of 
the countries modelled. 

In a similar analysis, Bassanini and Duval (2006) find a slightly smaller impact than Duval 
(2003).  They  estimate  that  a  10  percentage  point  cut  of  the  implicit  tax  rate  raises  the 

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employment  rate  of  older  workers  by  1  percentage  point.  In  a  more  recent  analysis, 
Manoli et al. (2015) analyse retirement decisions by using Austrian micro-data and policy 
variations from five pension reforms between 1984 and 2003. They find that the ‘income 
effect’ (i.e., changed retirement decisions because of higher lifetime income) is moderate, 
but the ‘price effect’ (i.e., different retirement decisions because of marginal incentives for 
continued  work)  is  larger.  In  particular,  according  to  the  empirical  model  which  includes 
the  full  control  variable  set,  a  1 percent  increase  in  pension  accrual  (i.e.,  the  change  of 
pension  wealth  when  retiring  one  year  later)  decreases  the  hazard  rate  by  2.9 percent, 
which can be interpreted as an increase of the retirement age by 1.4 months. 

We set parameters of the disutility function in such a way that the ‘Börsch-Supan reform’ 
increases the retirement age by 5.7 months, while the impact of the ‘Duval reform’ is 1.7 
percentage points for the unweighted average of the 27 country results. Accordingly, this 
calibration fits rather well to the Manoli et al. (2015) result for Austria. 

Elasticities of Search Intensities 

As  described  in  Berger  et  al.  (2009),  the  curvatures  of  firms’  costs  of  posting  vacancies 
and of households’ disutility of job search are main parameters for LMM’s responsiveness 
concerning  labour  market  reforms.  We  maintain  the  assumption  of  a  cubic  function  of 
hiring costs as found for instance in Merz and Yashiv (2007). Estimates of the effects of 
an  increase  of  the  unemployment  benefit  replacement  rate  on  the  unemployment  rate 
seem to be  rather robust.  Nickell  et  al.  (2005)  cite several  empirical  estimates  and state 
an average of a 1.11 percentage point increase of the equilibrium unemployment rate in 
response  to  a  10  percentage  point  rise  of  the  replacement  rate.  Bassanini  and  Duval 
(2006) perform a panel data estimation based on a sample of 21 OECD countries for the 
period  1982-2003.  In  their  baseline  estimate,  a  10  percentage  point  reduction  of 
unemployment  benefits  results  in  a  drop  of  the  unemployment  rate  by  1.2  percentage 
points.  Orlandi  (2012)  uses  a  panel  of  13  EU  countries  over  the  period  1985-2009  to 
estimate  the  impact  of  several  labour  market  structural  indicators  on  the  NAWRU.  They 
generate  an  indicator  for  the  unemployment  benefit  replacement  rate  by  using  the 
OECD’s  rates  across  two  income  and  three  family  situations  and  by  applying  exit 
probabilities out of unemployment. In their preferred specification, an increase of the gross 
replacement  rate  by  10  percentage  points  raises  the  unemployment  rate  by  0.7 
percentage  points,  while  the  estimate  is  1.7  percentage  points  for  the  net  replacement 
rate.34,35 

In the updated version of the LMM, the unemployment rate increases by 0.9 percentage 
points if the benefit replacement rate increases by 10 percentage points on (unweighted) 

34 The latter two papers are also used for the calibration of the QUEST model; see for instance Varga and in ‘t Veld (2014). 

35 An alternative approach to the calibration of the LMM could be the application of estimates of the elasticity of job search 
with respect to unemployment benefits. For instance, the well-known Meyer (1990) paper estimates an elasticity of job 
search of -0.9 for the United States. Hunt (1995) finds similar estimates for Germany. Addison et al. (2008) use a 
structural search model for European countries and find a more elastic (-1 and more) response of job search. For the 
United States, Krueger and Mueller (2010) find an elasticity of between -1.6 and -2.2. Given the LMM calibration as 
described in this section, the (unweighted) average search elasticity is -0.33 in the LMM. The lower value may be 
reasonable, however, as empirical estimates analyse the job search of unemployed individuals (who react responsively 
to unemployment benefits), whereas the ‘LMM job search elasticity’ additionally includes employed individuals changing 
their job (who are less responsive to a change in unemployment benefits). 

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average  of  the  27  Member  States.  It  should  be  noted  that  the  impact  differs  quite 
pronouncedly between the Member States. This is, in particular, caused by very different 
eligibility for unemployment benefits, see Section 2.8. 

Production Function 

LMM’s  production  function  includes  physical  capital  and  three  differently  skilled  labour 
inputs.  As  described  in  Berger  et  al.  (2009),  it  allows  for  the  feature  of  capital-skill 
complementarity,  which 
labour  and  capital  are  more 
that  high-skilled 
complementary than low-skilled labour and capital. 

implies 

The  calibration  of  previous  LMM  versions  was,  inter  alia,  based  on  the  seminal  work  by 
Krusell  et  al.  (2000)  who  use  US  time  series  data  for  capital  and  labour  from  1963  to 
1992.  Their  results  support  capital-skill  complementarity  as  they  find  an  elasticity  of 
substitution  (EOS)  between  skilled  labour  and  equipment  capital  of  0.67  and  between 
unskilled labour and the skilled-labour-capital-nest of 1.67.36 These values are, inter alia, 
used in the CGE-model of Jaag (2005), who assumes EOS of 0.6 (capital stock to high-
skilled labour), 1.2 (medium-skilled to capital-high-skilled-nest) and 1.8 (low-skilled labour 
to  medium-and-high-skilled-capital-nest).  Recently,  Ohanian  et  al.  (2021)  re-estimate 
Krusell et al. (2000) by using US data up to 2019. They find strong evidence for continued 
capital-skill  complementarity  for  several  specifications.  In  their  specification  when  the 
labour  share  is  measured  using  income  net  of  capital  depreciation,  they  find  an  EOS 
between skilled labour and capital of 0.72 and an EOS of 1.73 between unskilled labour 
and  the  high-skilled-capital-nest.  This  means  that  the  estimates  are  very  similar  to  their 
previous paper. 

In  addition  to these  elasticities  of  substitution,  the  parameters  of  the  production  function 
are  calibrated  to  ensure  a  reasonable  reaction  of  physical  investment  to  investment 
incentives. Empirical research mostly estimates the elasticity of investment or the capital 
stock with respect to the user costs of capital (UC), which determine the necessary return 
of  an  investment  before  taxes.  For  a  Cobb-Douglas  production  function,  this  elasticity 
is -1. For previous LMM calibrations, Hassett and Hubbard (2002) was a valuable source. 
They  argued  that  empirical  analysis  had  reached  a  consensus  that  the  elasticity  is 
between -0.5 and -1. Harhoff and Ramb (2001) for Germany and Chirinko et al. (1999) for 
the United States, however, find lower elasticities of -0.42 and -0.24, respectively. Gilchrist 
and  Zakrajsek  (2007),  who  employ  a  panel  of  about  900  firms  in  the  United  States 
covering  the  period  1973-2005,  find  that  the  long-run  elasticity  of  the  capital  stock  w.r.t. 
the  UC  is  close  to  -1.  This  result  is  robust  to  a  number  of  different  specifications.  More 
recently, Dwenger (2014) argues that many empirical estimates ignore that capital, sales 
and UC contain a unit root and are cointegrated, resulting in an underestimated response 
to investment incentives. She uses German panel data of manufacturing firms from 1998 
to  2007,  applies  an  Error  Correction  Model,  and  finds  that  the  long-run  elasticity  of  the 
capital stock w.r.t. the UC is -0.9 (while the estimate is -0.5 if she doesn’t control for these 
features). 

36 In the main specification, they define skilled labour as college completion or higher. 

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As  we  set the  EOS  to  1.4 (low-skilled  to medium-high-skilled-capital-nest),  0.7  (medium-
skilled  to  high-skilled-capital-nest)  and  0.3  (high-skilled  to  capital),  we  aim  for  a 
reasonable  compromise  between  the  Krusell  et  al.  (2000)  respectively  Ohanian  et  al. 
(2021) estimates and the UC elasticity literature. That way, the LMM EOS are lower than 
in Ohanian et al. (2021) to some extent and the unweighted average long-run elasticity of 
investment w.r.t. UC is -0.85 across the countries modelled. 

Educational Decision 

In  previous  LMM  versions,  the  responsiveness  of  the  educational  decision  to  incentives 
was based on two papers. In a discussion paper, Steiner and Wrohlich (2008) analyse the 
impact  of  financial  student  aid  on  enrolment  in  higher  education  by  using  the  German 
SOEP and a detailed tax-benefit microsimulation approach. They find that an increase in 
scholarships  by  EUR 1,000  per  year  would  increase  the  enrolment  rate  to  university  by 
2.2  percentage  points.  Nielsen  et  al.  (2010)  estimate  the  response  of  enrolment  to 
changes in student aid in a Danish reform. Using register-based micro-data, they find that 
a USD 1,000 stipend would change enrolment by 1.35 percentage points. 

In  their  journal  paper,  Steiner  and  Wrohlich  (2012)  find  that  the  EUR 1,000  per  year 
scholarship  increases  the  enrolment  rate  by  1.5  percentage  points,  which  is,  to  some 
extent, lower than their estimate in the discussion paper. Bruckmeier and Wigger (2014) 
study  the  impact  of  an  introduction  of  tuition  fees  of  (up  to)  EUR 500  per  semester  in 
Germany. They find a significant negative effect of these fees in simple regressions. The 
treatment  effect  of  these  fees  becomes  insignificant,  however,  when  they  include 
additional  control  variables.  The  point  estimate  (even  though  insignificant)  is  of  a  very 
similar magnitude as the Steiner and Wrohlich (2012) and Nielsen et al. (2010) estimates 
respectively. Sneyers and De Witte (2018) perform a meta-analysis of the effects of higher 
education  policies.  They  find that  a  EUR 1,000  increase  of  need-based grants  increases 
enrolment in higher education (as well as graduation) by 2.5 percent, which is a somewhat 
larger  effect  than  in  Steiner  and  Wrohlich  (2012)  and  Nielsen  et  al.  (2010).  It  should  be 
noted, though, that the  studies considered  by  the  authors  investigate  need-based  grants 
and include research for the United States (which typically has higher tuition fees). It can 
be  argued that  both features  imply  a  higher responsiveness to financial  support than for 
the general increases for European countries considered in Steiner and Wrohlich (2012), 
Nielsen et al. (2010), and the LMM calibration. 

For  the  calibration  of  LMM,  we  set  the  exponent  of  the  educational  cost  function,  εD,  in 
order to replicate a responsiveness of the educational decision close to, but slightly lower 
than  the  Steiner  and  Wrohlich  (2012)  and  Nielsen  et  al.  (2010)  estimates.  We  interpret 
these  estimates  as  a  ‘short-run’  effect. In the  long-run, the  higher  number  of  high-skilled 
workers  reduces  their  future  productivity  and  wages  and  has  a  negative  impact  on 
employment opportunities compared to the initial situation. As individuals consider this for 
their  educational  decision,  the  medium-  and  long-run  effect  is  less  pronounced  than  the 
short-run impact.  

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3.  List of Variables 

LMM’s  detailed  representation  of  institutional  settings  and  economic  behaviour  implies 
that it features numerous parameters and variables, reducing transparency. The attached 
‘List of Variables’ is intended to improve the clarity of the programme code and of the data 
processing  procedure  and  to  facilitate  the  work  with  the  model  for  the  staff  of  the 
Commission and helps to perform future updates. 

In  previous  projects,  a  documentation  of  the  different  variables  was  provided  in  ‘List  of  Variables’ 

(see, for instance, Table 26 in Berger et al., 2016), ‘List of Variables that have to be Updated’ (Table 

36),  and  in  the  Excel  files  ‘DataInputCountry’  (and  linked-in  Excel  files).  Following  the  tender 

specifications, we merge the comprehensive ‘List of Variables’ and the ‘List of Variables that have 

to be Updated’ for the current report. As this merging adds several columns to the list, we no longer 

include it in the report, but provide a separate Excel file. 

Basically,  the  list  of  variables  consists  of  two  parts.  The  first  columns  deal  with  the 
interpretation of the different variables in the model. The second part provides information 
on  how  to  perform  an  update  of  the  calibration  for  those  parameters  and  variables  that 
need to be re-calculated for an update of LMM. 

For all the variables listed, the first part contains (i) a short description of the variable, (ii) 
its  type,  (iii)  its  dimension,  (iv)  the  dimension/unit  and  (v)  the  source  for  the  code.  The 
column  ‘Type’  indicates  whether  a  variable  is  determined  endogenously  or  exogenously 
outside  the  code  or  whether  it  is  an  input  for  deriving  a  variable  in  calib.  Exogenous 
parameters can be differentiated further: they can either be assigned to institutional/policy 
parameters, and thus can be changed in a policy reform scenario. Alternatively, they can 
represent  completely  exogenous  parameters  such  as  preference  or  technological 
parameters.  Furthermore,  the  model  includes  some  ‘technical  terms’  which  simplify  the 
notation in the programme code. The column ‘Dimension’ specifies whether the variable is 
defined as (in one particular period) scalar or matrix. The latter indicates that the value of 
the  variable  varies  (potentially)  for  different  age  and  skill  groups.37  The  column 
‘Dimension/Unit’  provides  information  on  how  to  interpret  the  values  in  the  model. 
Basically,  we  distinguish  ‘nominal  values’,  ‘factors/rates’  and  ‘exponents’  of  functional 
forms. When interpreting nominal values, one must keep in mind the normalisation of the 
model. For each of the individual countries, we normalise two variables. First, population 
is set to 100 in calib. Second, gross value added (GVA) is set to 100 in calib. Accordingly, 
this  implies  that GVA  per  capita  is  normalised to  1 in  calib.  Thus,  all  the  nominal values 
must  be  interpreted  relative  to  this  normalisation.  This  holds  true  for  aggregate  values 
(such as public revenues, trade balance,…), which should be interpreted relative to GVA 
(which  is  100  in  calib)  or  GDP,  as  well  as  for  individual  values  (such  as  labour  income, 
social benefits,…) which can be interpreted relative to GVA per capita (which is 1 in calib). 

37 For some variables, we include additional information in brackets. For instance, the entry for human wealth (hwv) is 8x3 
(5x3). This means that the variable is a 8x3-matrix in the programme code but that only 5x3 entries are different from 
zero (as human wealth is zero for retirees). 

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from  model  equations  (given 

The  last  column  of  the  first  part  of  the  list  of  variables,  ‘Source  for  Code’  describes  the 
way  in  which  the  variable  is  initially  set/calibrated.  Basically,  this  can  happen  in  four 
different ways in the model. First, the file ‘param’ contains parameters being the same for 
all  countries,  for  example  the  elasticity  of  intertemporal  substitution  or  the  elasticities  of 
substitution  in  the  production  function.  Second,  the  Excel-files  ‘DataInputXX.xls’  contain 
country  specific  data,  for  example  the  participation  rate,  the  average  number  of  hours 
worked or institutional parameters.38 The country code for which a simulation is performed 
is  set  in  ‘lmm’  or  ‘lmmloop’.  Depending  on  the  country  code,  the  programme  imports 
country specific input data from the relevant ‘DataInputXX.xls’ file. In addition to these two 
files, other variables are initially determined in the programme ‘Code’ calib as they can be 
derived 
in  param  and 
‘DataInputXX.xls’). Finally, the categorisation ‘Root’ indicates a special way of the ‘Code’ 
categorisation. It implies that the variable is derived as a root of the calibration procedure. 
For  instance,  the  subjective  discount  factor  beta  is  derived  in  a  way so that,  for  a given 
interest rate, asset markets clear,  i.e., aggregate supply of assets by private households 
equals aggregate demand of assets (consisting of public debt, foreign assets and assets 
invested 
term 
‘DataInput+Root’ or  ‘DataInput+Code’.  This  indicates that  the  variable is initialised  in the 
‘DataInputXX.xls’ file, but is subsequently adjusted during the calibration procedure (in the 
‘calib’ file). For instance, the age- and skill-specific structure of the income tax rate ‘tw’ is 
set in the ‘DataInputXX.xls’ file. Adjacently, these tax rates are adjusted in the ‘calib’ file in 
order  to  replicate  aggregate  public  revenues  from  this  tax.  Thus,  this  variable  is 
categorised as ‘DataInput+Root’. 

firms).39  Sometimes, 

the  categorisation 

input  provided 

is  mixed, 

the  data 

i.e., 

the 

in 

in 

The second part of the ‘List of Variables’ provides information on the data collecting and 
the calibration of variables defined in ‘DataInputXX.xls’ or ‘param’. First, the ‘Unit/Scale for 
Calibration’  column  presents the  interpretation of  the  parameter  for the  calibration  of the 
model,  such  as  ‘in  percent’  or  ‘in  percent  of  GVA’.  Furthermore,  the  table  includes  the 
‘Data  Source’,  the  ‘Years  of  Reference’  and  the  way  the  parameter  was  ‘calibrated’. 
Finally,  the  list  contains  the  ‘Reference’  for  each  variable,  which  presents  the  source 
where the parameter was calculated or described. 

The last column of the ‘List of Variables’ contains some remarks. 

38 For these variables, the second part of the list contains information on the data gathering and their calibration. 

39 This ‘root’ categorisation is complemented by information, which condition/equation is solved via the adjustment of the 

variable. 

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4.  Illustrative Scenarios 

4.1.  Tax Structure: Tax Shift from Income to Consumption Taxes 

We  assume  a  change  of  the  tax  structure  among  all  the  EU  Member  States  in  this 
scenario.  A  cut  of  the  personal  income  tax  (PIT)  is  balanced  by  (i)  negative  lump-sum 
transfers and (ii) an increase of the value added tax (VAT). 

Labour  income  is  a  very  important  source  of  ‘taxation’.  According  to  Figure  1,  revenues 
based  on  social  security  contributions  and  the  income  tax  amount  to  27.3  percent40  of 
GVA  in  the  EU-27  countries.  Revenues  from  the  income  tax  amount  to  10.1  percent  of 
GVA  and  finance  an  important  portion  of  government  expenditures.  According  to 
economic  theory,  income  taxation  distorts  decisions  of  private  households  (e.g., 
participation decisions or decisions about the number of hours worked) and influences the 
wage level in the economy as employees bargain over net wages after deducting income 
tax. It therefore influences the investment decisions and labour demand of firms as well. 
Besides that, income taxation influences human capital investment decisions and the level 
of private consumption in the economy.  

On  the  other  hand,  taxation  of  consumption  has  an  impact  on  labour  supply,  labour 
demand  and  investment  as  well.  A  higher  consumption  tax  rate  (e.g.,  VAT)  increases 
inflation,  deflates  labour  income  and  has  an  impact  on  the  labour  supply  of  private 
households.  Higher  inflation  raises  the  wage  demands  of  employees,  decreasing  labour 
demand.  The  lower  level  of  employment  in  turn  dampens  investment  demand.  From  an 
economic point of view, the channels of income- and consumption taxes are similar with 
respect to economic activity. 

However,  the  tax  base  of  the  income  tax  depends  on  income  generated  by  production 
within a country. The tax base of consumption taxes is the consumption in an economy, 
independent  of  the  source  of  financing.  Therefore,  consumption  taxes  deflate  not  only 
labour  income  but  also other  sources  of  income,  like returns of  private  savings  or  public 
transfers.  Overall,  a  combined  cut  of  the  PIT  balanced  via  a  VAT  increase  strengthens 
incentives to participate in the labour market.  

Economic theory and the results of empirical research into the growth impact of different 
taxes  also  confirm  the  very  pronounced  effect  of  the  personal  income  tax.  Arnold  et  al. 
(2011)  and  Arachi  et  al.  (2015)  show  that  income  taxes  have  the  strongest  impact  on 
growth.  According  to  Alinaghi  and  Reed  (2017),  personal  and  corporate  income  taxes 
dampen economic growth considerably more strongly than other tax categories. Besides 
the direct effect, taxes on disposable income have the strongest impact on the behaviour 
of persons, strengthening the negative impact on the economy considerably. Bordignon et 

40 The share deviates to some extent from the results based on National Tax Lists as social security contributions also 

include contributions to other items (such as occupational pensions and mandatory private pension systems) in some 
countries. 

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al. (2019) and Hristov und Roeger (2020) find a positive impact of a reduction of the tax 
wedge on employment associated with a reduction of the natural unemployment rate.  

We  start  by  presenting  the  results  for  a  cut  in  the  personal  income  tax  in  the  Member 
States and the EU as a whole and analyse the total impact of the reform by considering 
public  budget  balancing  (i)  in  a  neutral  way  via  lump-sum  transfers  and  (ii)  by  an 
adjustment  of  consumption  taxes  (i.e.,  the  VAT).  The  cut  in  the  personal  income  tax  is 
assumed to equal 0.2 percent of GDP in each Member State. Comparable tax shifts have 
been  performed  by  DG  ECFIN  several  times  by  applying  the  QUEST-model;  see  for 
example Varga and in’t Veld (2014).  

Cut in Personal Income Tax 

In this scenario, a cut in the personal income tax of 0.2 percent of GDP is assumed. The 
personal  income  tax  determines  to  a  considerable  extent  the  tax  wedge  between  labour 
costs of firms and take-home pay of employees. The income tax is also applied to other 
sources of income, especially on pension income in most of the Member States. However, 
average  income  tax  rates  on  pension  benefits  are  typically  lower  than  tax  rates  on 
employment income.  

We  assume  a  proportional  adjustment  of  income  tariff  rates  such  that  the  tax  rate 
decrease  is  on  average  more  pronounced  for  high-skilled  persons  (as  they  on  average 
have  higher  wages)  than  for  low-skilled  persons.  To  balance  the  public  budget,  we 
assume a  lump-sum  payment  from  each person  in the  economy (i.e.,  each  person  pays 
the  same amount). As lump-sum payments do not distort the labour market decisions of 
households  and  firms,  from  an  economic  point  of  view,  the  simulation  shows  the  pure 
effect of the personal income tax rate cut. The decrease of the personal income tax rate 
decreases the tax wedge and increases, therefore, the share of value added of a worker 
(job rent) which can be distributed between workers and firms at the cost of government 
revenues.  Wage  bargaining  between  firms  and  workers  determines  the  distribution 
between them depending on their bargaining power.  

As part of the income tax cut can be claimed by firms, wage costs decrease, which boosts 
the  demand for  labour. Firms  offer  a  higher  amount  of  open  vacancies to hire  additional 
workers. On the other hand, higher net wages provide an additional incentive for workers 
to supply labour along several margins. Along the intensive margins, the incentive rises to 
increase the average number of hours worked. Given that the elasticity is rather small in 
many  countries,  the  effect  will  be  rather minor. On the  extensive  margin,  participation  of 
households on the labour market and search intensity of unemployed persons rises. The 
to 
that  higher  net-wages 
latter  comes 
unemployment  benefit  payments.  If  replacement  income  (e.g.,  pension  benefits  or 
unemployment benefits) is also taxed, the labour supply effect is smaller as replacement 
income  increases  as  well.  In  equilibrium,  the  overall  increase  of  labour  supply  meets 
expanded open vacancies such that employment rises.  

the  difference 

increases 

from 

fact 

the 

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firms.  Higher 
The  expansion  of  employment 
employment  decreases  the  capital-labour  ratio,  expanding  productivity  of  capital  and 
raising  profits.  This  boosts  investment  to  regain  labour  productivity  and  a  higher  capital 
stock.  

investment  demand  of 

incentivises 

From  a  distributional  point  of  view,  the  scenario  with  a  proportional  reduction  of  the 
income tax rates reduces the tax burden in a more pronounced way for high- than for low-
skilled,  as  well  as  for  older  than  for  younger  persons.  Nevertheless,  younger  and  low-
skilled  persons  benefit  from  the  scenario  for  several  reasons  as  well.  First,  capital-skill 
complementarity  in  the  production  function  implies  that  the  capital  stock  should  react 
strongly to changes in high-skilled employment. The higher level of investment also raises 
the productivity of and labour demand for low-skilled and younger employees. Second, the 
labour supply reaction is more elastic for low-skilled and younger persons, implying more 
pronounced  labour  supply  and  employment  of  this  group.  Third,  the  tax  decrease  raises 
the  rate  of  return  of  education  and  as  a  consequence  educational  attainment  in  the 
population.  More  medium-  and  high-skilled  and  less  low-skilled  persons  dampen  the 
pressure on the remaining low-skilled employees through reducing the unemployment rate 
and  through  higher  wages.  Although  such  demographic  changes  unfold  the  full 
consequences in the long-run, the expansion of educational attainment decreases labour 
supply in the young cohorts already in the short- to medium-term.  

In this section, the long-run effects of the reform are presented. The economic channels 
by  which  the  reform  influences  the  behaviour  of  persons  is  the  same  for  each  country 
modelled in the LMM. However, country-specific institutions, elasticities, demography and 
economic structure lead to different outcomes in the Member States. Employment across 
all  EU  Member  States  (EU-27)  is  boosted  by  0.16  percent  (see  Figure  2).  The 
employment effect is particularly strong in Ireland (more than 0.4 percent), Hungary (0.26 
percent)  and  Denmark  (0.23  percent)  compared  to  the  baseline  scenario  without  a 
personal  income  tax  cut.  On  the  other  hand,  a  significantly  lower  employment  effect 
compared  to  the  EU-27,  according  to  the  simulation  results,  can  be  found  in  Portugal 
(0.09 percent), Bulgaria, Poland (both 0.11 percent) and Latvia (0.12 percent).  

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Figure 2: Cross-country employment effect of a PIT cut 

The  employment  effects  are  to  a  large  extent  the  result  of  the  change  in  labour  supply. 
Ceteris  paribus,  the  higher  the  extensive  (intensive  labour  supply  elasticities  are  very 
small in general) labour supply elasticity, the stronger the employment effect in a country. 
Labour  supply  elasticities  are  presented  in  Table  46  in Section  2.11.  This  influences  the 
employment effect positively, especially in Ireland41, Luxembourg, Belgium, and Denmark 
and  negatively  in  Portugal,  Bulgaria,  Poland,  and  Latvia.  The  correlation  between 
employment and average participation elasticity is shown in Figure 3. Furthermore, if the 
income tax schedule is less progressive, the tax relief is more important for low-skilled and 
younger persons, who both have, in general, a higher labour supply elasticity. This effect 
is especially important in Hungary. 

But there are also other aspects determining the employment effect. A low unemployment 
rate goes hand in hand with a higher employment probability if a person participates in the 
labour  market.  For  this  reason,  a  low  unemployment  rate  supports  labour  supply  and 
therefore  also  the  employment  impact  of  the  reform.  Unemployment  is  especially 
pronounced in Greece and Spain, leading to a smaller employment effect. In addition, the 
higher  the  capital  share,  the  lower  the  share  of  compensation  of  employees.  Given  that 
the income tax cut equals 0.2 percent of GDP in all countries, the increase of net wages is 
more pronounced in countries with a higher capital share.  

The  strong  effect  of  the  reform  in  Ireland,  compared  to  the  other  26  Member  States,  is 
also a result of the distortions of GDP due to foreign direct investment. GDP based on the 

41 However, the strong effect in Ireland can be attributed to other determinants as well, see below for a discussion. 

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production function in the model is about 65 percent of official GDP. Therefore, the reform 
in Ireland amounts to 1.55-times the reform in other countries. 

Figure 3: Average participation elasticity and employment effect of a PIT cut 

The  tax  reform  also  influences  the  composition  of  labour.  As  the  income  tax  cut  has  a 
stronger  impact  on  the  take-home  pay  of  skilled  persons,  employment  of  medium-  and 
high-skilled persons rises by more than average. This shift is reinforced by the educational 
decision  of younger  workers  and to a  moderate extent  by  demand  for further training  by 
worker- and firm-sponsored training. This leads to additional supply of medium- and high-
skilled persons (see change of new-borns in the comparative results table).  

The boost in employment as a result of the income tax cut raises the productivity of capital 
installed.  Higher  rates  of  return  incentivise  the  investment  activities  of  firms,  leading  to 
additional investment activities. Across all EU-27 countries, real investment rises by 0.25 
percent.  Compared  to  the  additional  employment  effect,  investment  rises  by  more.  The 
more  pronounced  investment  effect  is  mainly  caused  by  capital-skill  complementarity  in 
the  production  function.  The  increase  of  skilled  labour  in  production  leads  to  additional 
investment  incentives.  As  the  capital  stock  rises  by  more,  this  implies  higher  wages  for 
workers, also for low-skilled workers. The net-wage of low-skilled workers rises in general 
slightly  less  than  average  wages,  but  more  than  the  direct  effect  of  the  tax  cut  would 
suggest.  

In  the  Netherlands,  the  investment  effect  is  especially  pronounced.  This  is  caused  by  a 
stronger  skill  shift  and  therefore  an  employment  effect  on  medium-  and  high-skilled 
persons  compared  to  other  countries.  In  Ireland  on  the  other  hand,  the  real  investment 
effect (0.31 percent) is smaller than the employment impact (0.43 percent). The deviation 
from other countries is the result of the high share of foreign direct investment in Ireland 
and  the  high  level  of  investment  as  a  proportion  of  GDP.  Compared  to  the  level  of 
investment  in  the  production  function  (without  distortions  of  FDI)  the  increase  would  be 

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0.62 percent. The moderate investment boosts in Bulgaria, Latvia, and Poland are related 
to comparably small effects in employment. 

Figure 4: Cross-country real investment effect of a PIT cut 

The  impact  of  the  tax  cut  on  GDP  follows  the  employment  and  investment  effect  of  the 
reform. GDP in the EU-27 would rise by about 0.2 percent, very much in line with the size 
of the tax cut (0.2 percent of GDP). Real output would grow significantly more strongly in 
Ireland, the Netherlands, Hungary, Belgium, and Germany and significantly  more weakly 
in  Bulgaria,  Poland,  and  Latvia.  This  result  mainly  follows  employment  and  investment 
effects,  taking  into  account  the  change  in  skill  composition  in  these  countries.  As  the 
reform increases the income of private households, private consumption is also boosted. 
However,  given  that  the  tax  reform  is  financed  by  lump-sum  transfers  to  balance  the 
public  budget,  additional  income  and  consumption  is  mainly  determined  by  the  higher 
production  level.  Figure  6  relates  the  long-run  impact  of  private  consumption  growth  to 
GDP growth. Deviations from the trend line can to a large extent be related to the capital 
share  in  the  economy  (the  higher  the  capital  share,  the  less  the  growth  in  private 
consumption) and the share of income tax cut falling upon retirees. Both conditions hold 
especially for Cyprus, Italy, and Portugal. 

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Figure 5: Cross-country real GDP effect of a PIT cut 

Figure 6: Private consumption and GDP impact of a PIT cut 

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Table 47: Simulation results for a PIT cut (0.2 percent of GDP) 

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Table 47 (contd.): Simulation results for a PIT cut (0.2 percent of GDP) 

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Tax Shift from PIT to VAT 

The second simulation in this scenario deals with closing the public budget through a rise 
in  the  value  added  tax  (VAT)  instead  of  lump-sum  transfers.  The  value  added  tax,  as 
mentioned above, exerts negative incentive effects on economic activity. It deflates labour 
income,42  whereas  the  real  value  of  home-production  stays  the  same.  This  leads  to  a 
negative labour supply effect and higher labour costs for firms as the consumption tax is 
considered in the wage bargaining between workers and firms. The increase of the VAT 
therefore  works  in  the  opposite  direction  to  the  income  tax  cut.  However,  the  tax  base 
differs between these taxes, being broader43 for the VAT. 

Financing the reform via a VAT increase decreases the positive employment effect of the 
PIT  cut  significantly,  e.g.,  from  0.16  percent  in  the  EU-27  to  0.04  percent  (based  on 
employment figures in 2021 in the EU, this amounts to about 82,000 additional employed 
persons). The impact seems to be rather small. However, one must also consider that the 
tax  shift  of  0.2  percent  of  GDP  is  a  minor  reform.  The  employment  effect  varies 
considerably  between  Member  States,  ranging  from  more  than  0.2  in  Ireland  to  0  in 
Cyprus.  In  Germany  and  the  Netherlands,  employment  would  rise  by  about  0.1  percent. 
The  comparably  small  impact  in  Bulgaria,  Cyprus,  Portugal,  and  Slovenia  is  to  a  large 
extent the result of a lower employment effect of the personal income tax cut. In addition, 
the share of private consumption in GDP differs between countries. Ceteris paribus, if the 
share  of  private  consumption  is  lower,  the  tax  rate  must  increase  more  heavily  (in 
percentage  points)  to finance  public  expenditures  and to  balance  the  budget.  This  is  for 
example the case in Hungary. 

Figure 7: Cross-country employment effect of a tax shift 

42 The required real rate of return of firms is kept constant. 

43 In the sense that additional sources financing private consumption are taxed. 

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Expenditures for real investment are positively affected by the tax shift reform, but also to 
a lower extent compared to the personal income tax cut. For the overall European Union, 
real  investment  rises  by  0.1  percent,  ranging  from  more  than  0.25  percent  in  the 
Netherlands44 to nearly nothing for Bulgaria. For most countries, the impact is very similar 
to the EU average. In Germany and Ireland, investment increases significantly as well. In 
Germany  this  goes  hand  in  hand  with  higher  employment;  in  Ireland  it  is  especially  the 
result of a comparably stronger reform (see discussion above). 

Figure 8: Cross-country real investment effect of a tax shift 

Figure 9: Cross-country real GDP effect of a tax shift 

The impact on real GDP is determined by changes in employment and investment. Across 
all EU Member States, real GDP would rise by nearly 0.1 percent, ranging from about 0.2 

44 The Netherland had the highest impact already when balancing via lump sum transfers, see above. 

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percent  in  Ireland  and  the  Netherlands  to  a  very  small  impact  in  Bulgaria,  Cyprus,  and 
Poland. In general, the resulting growth effect of the reform is to a large extent related to 
the consequence of the PIT cut as shown in Figure 10, which plots the growth outcome of 
both reforms. 

Figure 10: GDP effect of a PIT reform and a tax shift reform 

To  conclude,  a balanced  tax shift  away from the personal  income tax towards  the value 
added tax would lead to a boost of economic activity in the EU-27. The distribution of the 
effects is different for the Member States. It ranges from a small effect in Bulgaria, Cyprus, 
and Poland to a significant impact in Germany, the Netherlands, and Ireland. The reason 
for  the  diverting  outcomes  depends,  inter  alia,  on  the  labour  supply  elasticities  in  the 
countries.  Other  reasons,  like  the  way  GDP  is  measured  (e.g.,  in  Ireland),  the  labour 
share  in  an  economy,  or  the  share  retirees  contribute  to  income  tax  or  value  added  tax 
revenues, are important as well.  

Furthermore,  the  simulations  show  that  the  reform  favours  medium-  and  high-skilled 
persons,  implying  a  larger  investment  than  employment  effect  due  to  capital-skill 
complementarity  in  the  production  function.  But,  additional  employment  and  investment 
also favours low-skilled persons by improving the productivity of this group. This effect is 
reinforced, as the reform is associated with an increase in the skill-premium incentivising 
educational-  and  life-long training  effort.  This  decreases  the share  of  low-skilled  persons 
and  together  with  higher  labour  demand,  the  reform  is  also  beneficial  for  persons  with 
lower  skills.  As  the  volume  of  the  supposed  tax  shift  is  small  and  a  balanced  budget  is 
required,  the  total  effect  is  of  minor  importance.  However,  a  larger  reform  would  have  a 
larger  impact  and  could  strengthen  economic  activity  in  a  significant  way.  The  long-run 
effects are summarised in Table 48. 

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Table 48: Simulation results for a tax shift 

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Table 48 (contd.): Simulation results for a tax shift 

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4.2.  Enhancing Employment of Older Workers  

Enhancing  the  labour  market  participation  of  older  workers  is  a  key  issue  in  order  to 
sustain  economic  growth,  foster  social  cohesion  and  improve  the  sustainability  of  social 
security systems across the European Union. Europe’s population structure is undergoing 
significant demographic shifts. According to the baseline scenario of the EUROPOP2019 
population  projection,  the  working  age  population  (defined  here  as  the  population  aged 
from  20  to  64  years)  will  decline  from  265 million  people  in  2019  to  247 million  in  2035 
(i.e., by -6.7 percent compared to 2019) and 221 million in 2060 (-16.6 percent). As Figure 
11 illustrates, projections are quite different for the EU Member States. While there will be 
five  countries  (Ireland,  Cyprus,  Luxembourg,  Malta  and  Sweden)  with  an  increasing 
working  age  population,  many  other  Member  States,  in  particular  Eastern  European 
countries, will see a massive decline of the workforce. 

On the other hand, the population aged 65 years and older will grow steadily. According to 
EUROPOP2019, the old-age dependency ratio (defined as the population aged 65 years 
and  older  relative  to  the  population  aged  between  20  and  64  years),  will  increase  from 
34.1 percent  in  2019  to  47.2 percent  in  2035  (+13.1 p.p.)  and  59.2 percent  in  2060 
(+25.1 p.p.) in the European Union. Put differently, while 2.9 people  of working age face 
one older individual today, this number is projected to decline to 1.7 in 2060. Again, this 
development will be quite different among Member States, as Eastern European countries 
are projected to age faster than the average. 

Enhancing the employment of older workers is one important means to promote economic 
growth and improve the sustainability of social security systems. There has already been 
progress  in  this  direction  in  the  past.  In  the  European  Union,  the  employment  rate  of 
elderly workers (aged 55 to 64 years) increased from 43.2 percent in 2009 to 60.5 percent 
in  2021.45  The  rate  currently  ranges  from  43.8  percent  in  Romania  to  76.9 percent  in 
Sweden.  Still,  the  average  effective  labour  market  exit  age  according  to  the  OECD  is 
pronouncedly  lower  than  the  normal  retirement  age,  at  62.6  years  (compared  to  64.3 
years  normal  age)  for  men  and  61.9  years  (compared  to  63.5)  for  women  in  the  EU 
average. 

The following policy scenario illustrates the potential labour market and economic effects 
of incentivising employment for older workers. To do so, we assume an in-work benefit for 
all employed individuals aged 55 years or older. We simulate a yearly benefit amounting 
to 1 percent of average yearly labour costs in each of the three skill groups.46 The benefit 
only  subsidises  employment  and  does  not,  for  instance,  increase (the  assessment  base 
of) unemployment benefits. For the overall EU-model, the budgetary impact of the in-work 
benefit amounts to 0.12 percent of GDP (ex-ante, i.e., before taking into account that, for 
instance,  public  revenues  from  taxes  on  labour  income  may  rise  as  a  result  of  the 

45 At the same time, the unemployment rate of people aged 55 years and more declined by 1 percentage point. 

46 This means that the benefit for low-skilled individuals amounts to 1 percent of average labour costs of 55+ low-skilled 

individuals, the benefit for medium-skilled persons refers to labour costs of medium-skilled workers, etc. This is done in 
order to provide similar labour market incentives for all educational groups and abstract (to some extent) from 
distributional impacts of the policy reform in this illustrative scenario. 

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employment  gains  that  are  associated  with  the  policy  reform).  It  is  assumed  that  the 
benefit is financed via a reduction of lump-sum transfers so that labour market decisions 
are not distorted by this means of public budget balancing. Furthermore, we concentrate 
on  long-run  effects  and do  not  discuss the  short-  and  medium-term  impact  of  the  policy 
reform. 

Figure 11: Change of working-age population (upper part) and old-age dependency ratio (lower part), 
2035 and 2060 compared to 2019 

in 

the 

labour 

As described in more detail in Part II of the initial project ‘Modelling of Labour Markets in 
the  European  Union’  (Berger  et  al.  2009),  incentives  for  postponing  retirement  (i.e., 
staying 
tax  rate  on 
retirement/participation.  Simplifying  to  some  extent  here,  this  implicit  tax  rate  consists  of 
taxes  and  social  security  contributions  on  labour  income  minus  (in-work)  benefits  for 
employed  individuals  minus  unemployment  benefits  and  assistance,  augmented  by  the 
effective  foregone  net  retirement  income  if  an  individual  stays  in  the  labour  market  for 

force)  can  be  summarised 

implicit 

in  an 

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longer.  In  the  case  of  a  higher  effective  retirement  age,  an  individual  ‘loses’  the  net 
pension benefit, but might benefit from an increase in future pension benefits.47 

The implicit retirement tax of individuals in the mixed group (i.e., the individuals aged 55 to 
69 years who endogenously choose their retirement age) at the EU-level amounts to 21.3, 
40.6  and  52.1 percent  for  low-,  medium-  and  high-skilled  persons.  Medium-skilled 
individuals effectively lose 40.6 percent of their gross labour income when they decide to 
stay  in  the  labour  market  and  postpone  retirement.  Implicit  taxes  related  to  the  labour 
market (e.g., taxes on labour income, unemployment benefits, etc.) contribute 25.6, 39.2 
and  50.2 percentage  points  to  the  retirement  tax.  This  means  that  the  pension-system-
related  part  has  an  impact  on  the  retirement  tax  that  is  close  to  zero  and  even  slightly 
negative  for  low-skilled  persons.  According  to  the  model  calibration,  the  deductions  for 
early  retirement  (of  around  4.5 percent  per  year  of  early  retirement)  and  the  accrual  of 
pension  rights  largely  offset the  impact  of  foregone  pension  benefits  in the  calibration  of 
the overall EU-model. 

The  simulation  results  for  the  policy  scenario  for  the  EU  and the  27  Member-States  are 
shown  in  Table  49.  Given  that  the  in-work  benefit  is  set  to  1 percent  of  labour  costs  in 
each  of  the  three  skill  groups,  the  ‘general  equilibrium’  implicit  tax  rate  is  reduced  by 
somewhat  more  than  1 percentage  point.  The  reduction  strengthens  participation 
incentives  for  the  mixed  group  and  their  participation  rate  increases  by  0.18 percentage 
points.  This  corresponds  to  an  increase  of  the  effective  retirement  age  of  close  to 
0.4 months. As we follow empirical evidence and implement less elastic labour supply for 
high-skilled  individuals,  the  impact  is  slightly  less  pronounced  for  high-skilled  elderly 
workers. 

Table 49 identifies that the policy reforms have a positive impact on participation rates of 
the  mixed  group  across  all  the  27  Member  States.  However,  while  the  impact  is 
0.18 percentage  points 
from  a  minimum  of 
0.13 percentage  points  (in  France,  Spain  and  Finland)  to  maximum  values  in  Denmark, 
Estonia and Italy (around 0.25 percentage points) and Romania (0.32 percentage points). 

the  overall  EU-model, 

it  ranges 

in 

Figure 12 depicts a scatterplot of the initial implicit retirement tax and the reform impact on 
participation  rates  for  elderly  medium-skilled  individuals  and  thus  illustrates  the  main 
driving force of cross-country differences. A high value of the initial implicit retirement tax 
implies  that  the  public  system  entails  pronounced  disincentives  to  remain  in  the  labour 
market. The highest value of the retirement tax can be found in Romania at 73 percent for 
medium-skilled  individuals.  On  the  other  hand,  Spain  has  the  minimum  value  with 
16 percent. Inter alia, this is related to low effective deductions for early retirement (of less 
than 2 percent per year) in Romania and high values (of 7 percent) in Spain according to 
the  model  calibration.  Figure  12  illustrates  that  the  reform  impact  is  stronger  in  the 
countries  where  it  eases  pronounced  disincentives  to  remain  in  the  labour  market.  The 
slope of the regression line of the scatterplot indicates that a 10 percentage points higher 

47 This increase of future pension benefits consists of the impact of actuarial deductions for early retirement. Furthermore, 

additional pension rights can be accrued by the longer contribution period to the pension system. 

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initial retirement tax is associated with a 0.03 percentage points more pronounced impact 
on the participation rate in this policy reform. 

Figure 12: Implicit retirement tax vs. participation rate effect of in-work benefit for older workers (for 
medium-skilled workers aged 55 to 69 years) 

The  in-work  benefit  is  only  provided  to  employed  individuals,  whereas  unemployment 
benefits are not directly affected. Therefore, unemployed individuals increase their search 
intensity for a job, which reduces unemployment. In addition, the in-work benefit increases 
the rent of a firm-worker match. This higher rent can be allocated between firm and worker 
in  the  bargaining  process.  This  results  in  a  reduction  of  firms’  labour  costs  for  older 
workers  by  -0.33 percent  and  a  reduction  by  -0.04 percent  across  all  age  groups.48  This 
incentivises labour demand of firms so that the policy reform reduces the unemployment 
rate  of  individuals  aged  55  and  older  by  0.12 percentage  points  according  to  the  LMM 
results. 

As  both  participation  of  older  workers  increases  and  their  unemployment  rate  declines, 
employment  of  elderly  workers  rises  pronouncedly.  In  the  overall  EU-model,  the  policy 
reform implies an increase of employment for older workers by 0.5 percent in the long-run. 
Cross-country differences of the employment impact for older workers are closely related 
to  the  participation  rate  impact.  While  the  most  pronounced  impact  occurs  in  Romania 
(0.84 percent),  the  value  is  lowest  for  Spain  (0.33 percent)  as  well  as  for  Cyprus  and 
Finland. 

The policy reform induces no direct impact on people aged below 55 years. Thus, labour 
market outcomes of this group are only affected by indirect effects. Accordingly, the policy 
reform implies moderate, but non-negligible positive overall labour market outcomes. On 

48 Note that compositional effects are relevant. The policy reform increases employment of older workers while employment 

of prime-age workers essentially remains unchanged. Therefore, the share of elderly workers in the workforce 
increases. Due to above-average wages of this group, this increases average wages as well. 

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the  participation  rate 

increases  by  0.04 percentage  points  while 

the 
aggregate, 
unemployment  rate  declines  by  0.03 percentage  points  in  the  overall  EU-model.  Thus, 
employment  improves  by  0.1 percent  in  the  long-run  according  to  the  LMM  simulation. 
The  employment  impact  of  the  policy  reform  across  the  Member  States  is  illustrated  in 
Figure  13.  The  in-work  benefit  implies  positive  effects  in  all  the  countries,  but  there  is 
some variation that closely follows the impact on participation rates discussed above. The 
most  pronounced  employment  effects  of  around  or  slightly  below  0.15 percent  can  be 
found in Denmark, Italy, Romania, and Sweden. 

Figure 13: Cross-country employment effect of in-work benefit for older workers 

Employment  rates  of  more  skilled  older  workers  are  higher.  As  the  in-work  benefit  is 
provided  to  all  employed  individuals  aged  55  years  or  more  and  as  the  benefit  is 
proportional  to  average  labour  costs  per  skill  group,  it  provides  positive  incentives  to 
invest  into  education.  In  the  long-run,  the  number  of  high-skilled  people  rises  by 
0.07 percent  while  the  number  of  low-skilled  declines  by  a  similar  amount.  As  a  result, 
even though the  positive  impact  on  participation and unemployment rates  is  slightly  less 
pronounced  for  high-skilled  individuals  than  on  average,  the  number  of  people  in 
employment (+0.14 percent) increases more strongly than on average (+0.1 percent). 

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Table 49: Simulation results in-work benefit for older workers 

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Table 49 (contd.): Simulation results in-work benefits for older workers 

According to Mincer regressions, workers aged above 55 years, who are the beneficiaries 
of the simulated in-work benefit, have above-average wages that are associated to above-
average  individual  productivities  in  the  LMM  calibration.  Thus,  the  employment  gain  ‘in 
productive  units’  is  slightly  more  pronounced  than  the  employment  gain  ‘in  persons’.  As 
the employment gain increases the rate of return of investment, it is complemented by a 
long-run  increase  of  the  capital  stock  by  0.14 percent  in  the  overall  EU-model.  As  the 
input  factors  capital  stock  and  (low-,  medium-  and  high-skilled)  employment  rise,  GDP 
grows  by 0.12 percent  as  a result  of the  policy reform.  Even though  the in-work benefits 
are  financed  via  a  reduction  of  lump-sum  transfers,  the  increase  of  employment  implies 

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that  disposable  income  of  private  households  increases.  Therefore,  private  consumption 
rises by 0.06 percent in the overall EU-model. 

Cross-country GDP effects of the in-work benefit are illustrated in Figure 14. Again, there 
are positive GDP effects for all Member States, but there is some variation in magnitude. 
According  to  the  LMM  simulations,  the  most  pronounced  effects  of  around  0.15 percent 
can  be  found  in  Denmark,  Italy,  the  Netherlands,  and  Sweden.  These  cross-country 
differences  closely  follow  the  employment  effects.  However,  it  is  useful  to  analyse 
Romania in a bit more detail to illustrate that other characteristics of the LMM calibration 
can  have  an  impact  as  well.  Romania  is  among  the  countries  where  participation  and 
employment effects of the reform are highest. However, according to Mincer regressions, 
Romania has a flatter wage profile in the sense that average wages of older workers are 
only moderately higher than the countrywide average. Given that ‘individual productivities’ 
are associated with wages in the LMM, this characteristic implies a less pronounced GDP 
impact than in other countries. Thus, while employment effects are among the highest in 
Romania, the GDP impact is modest. 

Figure 14: Cross-country GDP impact of in-work benefit for older workers 

4.3.  Migration 

The third part of the illustrative LMM simulation scenarios concerns the labour market and 
macroeconomic impact of migration towards the European Union.49 

49 Note that the current analysis is done with the base migration version of EU-LMM. In this base version, it is assumed that 
migrants in a particular age-and-skill group share the same labour market characteristics as their native counterparts. 

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In  a  nutshell,  the  theoretical  and  empirical  literature  on  labour  market  effects  of  inward 
migration can be summarised in the following way. In a standard model with one type of 
labour, higher labour supply can decrease wages and/or increase the unemployment rate 
in the short-run, as long as there are rigidities like for the adjustment of the capital stock; 
see  for  instance  Levine  (1999)  and  Boeri  and  Brücker  (2005).  However,  as  e.g.,  the 
capital  stock  adjusts  to  the  supply  shock  in  the  medium-  and  long-run,  the  impact  on 
wages  and  unemployment  vanishes  and  employment  and  GDP  rise  in  line  with  the 
working-age  population  (see  e.g.,  Barrell  et  al.  2006  and  Brücker  and  Jahn  2011).  This 
fundamental  result  is,  however,  adjusted  in  the  literature  for  several  reasons.  Among 
them,  the  skill  structure  of  migrants  being  different  to  the  native  population,  (more 
pronounced)  mismatch of  migrants’  qualifications  and  job  requirements  and  the  issue  of 
(im-)perfect  substitution  or  complementarity  between  migrants  and  natives50  can  be 
mentioned. 

In  our  ‘standard  migration  scenario’,  we  analyse  short-  and  medium-term  effects  of  the 
same  relative  magnitude  of  migration  inflows  to  the  overall  EU  and  to  each  of  the  27 
Member States. It is assumed that a total number of 1 percent of EU-LMM’s age groups 
that  form  the  working-age  population  (i.e.,  the  15-to-69  year  olds)  migrates  towards  the 
EU, within a period of two years (i.e., 0.5 percent in each of the years). Furthermore, we 
assume  that  these  people  have  exactly  the  same  age  and  skill  structure  as  the  EU’s 
resident  population.  This  means  that  21 percent  of  migrants  are  low-,  46 percent  are 
medium-  and  33 percent  are  high-skilled  individuals.  As  a  consequence  of  this 
assumption, we abstract from compositional effects for the EU-model that is analysed in a 
first  step.  In  a  second  step,  we  will  illustrate  cross-country  results  and  assume  that  the 
migrants  are  allocated  towards  the  27  Member  States  according  to  the  population  size. 
The skill structure of migrants is therefore the same for all countries, but it differs from the 
respective resident population. 

Simulation Results for the EU-model 

The positive labour supply shock induced by migration is not fully absorbed in the short-
run, in particular due to a delayed adjustment of the capital stock and labour adjustment 
the  unemployment  rate  of 
costs.51  Thus,  we  observe  a  short-run 
0.09 percentage  points  in  the  EU-model,  see  Figure  15.52  However,  the  hike  disappears 
when the economy adjusts to the supply shock. The unemployment impact is fairly evenly 
distributed  across  the  three  educational  groups.  Given  that  the  adjustment  of  the  capital 
stock due the additional labour supply takes some time, the capital-labour ratio declines in 

increase  of 

50 This issue is, for instance discussed among Borjas (2003) and Ottaviano et al. (2006). 

51 Note that we do not adjust the variable ‘empl’ in this illustrative policy scenario. This variable depicts the share of 

participating individuals who have a job right at the beginning of a period without the need to find a match in the job-
search-vacancy-framework in our ‘static matching’ model. In the context of migration, this modelling approach implies 
that a considerable number of the migrants who enter the economy and participate in the labour market will find a job 
without the need for matching. In a more detailed modelling exercise that is beyond the scope of the current illustrative 
scenario, one might reflect the extent to which the variable ‘empl’ should be adjusted to take into account this feature. 

52 A remark concerning the timing of migration in EU-LMM is necessary here. In year 1 of a dynamic analysis, the 

demography is the same as the calibrated demography. This means that the model allows for migration changing the 
demography from year 2 of a dynamic simulation. Given that individuals and firms have perfect foresight in the model, 
they already ‘know’ that migration takes place and firms partially adjust their capital stock ‘in advance’. 

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the short-run. Due to capital-skill-complementarity, the lower capital-labour ratio implies a 
more  pronounced  productivity  and  wage  decline  for  skilled  individuals.  Thus,  firms 
demand  for  high-skilled  individuals  rises  less  pronouncedly  than  for  lower-skilled 
individuals and labour supply incentives of high-skilled individuals decline to some extent. 
This  results  in  a  stronger  reaction  of  the  unemployment  rate  for  high-skilled  individuals. 
However, as the labour market for high-skilled people is less responsive to incentives than 
the labour market for lower-skilled people, this dampens the non-even impact. 

Figure 15: Unemployment rate impact of ‘standard migration shock’, EU-model 

The  positive  labour  supply  shock  exerts  a  significant  influence  on  employment,  as 
illustrated  in  Figure  16.  As  the  adjustment  of  the  economy  and  the  labour  market  takes 
time (in particular due to labour and capital adjustment costs), the employment impact in 
period 3 (0.79 percent) is less than 1 percent.53 In the following years, two counteracting 
effects  prevail.  On  the  one  hand,  the  impact  of  frictions  becomes  less  pronounced  (see 
also  the  impact  on  the  unemployment  rate  in  Figure  15),  which  strengthens  the 
employment  impact.  On  the  other  hand,  as  we  assume  exactly  the  same  demographic 
structure of migrants as for the resident population, some older migrants leave the labour 
market  within  a  few  years,  which  dampens  the  employment  impact.  Thus,  the  overall 
employment  impact  is  close  to  0.9 percent  and  ‘remains’  at  this  level  in  the  following 
years.  The  employment  increase  is  fairly  evenly  distributed  across  the  three  different 
educational  levels.  As  discussed  above,  the  impact  is  slightly  less  pronounced  for  high-
skilled individuals due to capital-skill complementarity. 

53 Note that we assume the same labour market characteristics (e.g., participation and unemployment rates per age- and 

skill-group) for migrants and the resident population. Thus, the employment impact would be 1 percent if there were no 
general equilibrium or ‘displacement’ effects. 

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Figure 16: Employment impact of ‘standard migration shock’, EU-model 

The  temporary  decline  of  the  capital-labour  ratio  reduces  labour  productivity  leading  to 
lower  wages  (this  can  be  called  ‘displacement  effect’).  The  aggregate  wage  impact  is 
most  pronounced  in  year  3  with  -0.54 percent  in  the  overall  EU-model.  The  wage  effect 
declines over time as the capital stock adjusts to the labour supply shock and reaches  -
0.18 percent in year 10 (and further declines in the following years). Again, the impact is 
more  pronounced  for  high-skilled  individuals.  According  to  the  LMM  simulations,  their 
wages decline by 0.69 percent in year 3 (compared to 0.54 percent overall, 0.42 percent 
for medium-skilled and 0.31 percent for low-skilled individuals). 

Figure 17: Wage impact of ‘standard migration shock’, EU-model 

The  impact  on  macroeconomic  aggregates  is  illustrated  in  Figure  18.  As  the  gradual 
adjustment  of  the  capital  stock  (due  to  installation  costs)  reduces  average  labour 
productivity,  the  short-  and  medium-run  impact  on  GDP  is  less  pronounced  than  the 

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employment impact. In year 3, GDP rises by 0.61 percent according to LMM simulations, 
compared to employment with 0.79 percent. The ongoing adjustment of the capital stock 
implies that GDP rises by 0.81 percent in year 10. This can be compared to an increase of 
the  ‘working-age  population’  (aged  between  15  and  69  years)  by  1 percent  and  an 
increase of the total population by 0.7 percent caused by the migration shock. While GDP 
per working-age population declines to some extent in the short- and medium-term, GDP 
per capita increases somewhat in the medium-term.  

Figure 18: Macroeconomic impact of ‘standard migration shock’, EU-model 

The  gradual  adjustment  of  the  capital  stock  is  illustrated  in  Figure  18  as  well.  The 
migration  shock  implies  higher  investment  and  an  increase  of  the  capital  stock  by 
0.21 percent  in  year  3  and  0.62 percent  in  year  10.  Given  that  the  analysed  migration 
scenario improves the fiscal position in the short- and medium-term, revenues above the 
threshold  to  balance  the  budget  are  returned  to  private  households  via  lump-sum 
transfers.  Accordingly,  the  impact  on  private  consumption  is  more  pronounced  than  the 
GDP impact. 

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Table 50: Simulation results ‘standard migration shock’, EU-model 

Simulation Results for Individual Member States 

In  a  second step,  we  replicate  the  standard  migration shock  for  each  of  the  27  Member 
States. We assume an inward migration of 1 percent of EU-LMM’s age groups that form 
the  working-age  population  (i.e.,  the  15-to-69  year  olds)  and  that  these  migrants  are 
allocated  to  the  Member  States  according  to  population  size.  Furthermore,  the  age  and 
skill  structure  is  exactly  the  same  as  the  15-to-69  year  old  resident  population  in  the 
overall EU-model. 

Even  though  the  assumed  migration  scenario  does  not  alter  the  skill  structure  in  the 
overall EU-model, it may have an impact at a Member States’ level. For countries with a 
high  share  of  low-skilled  individuals  in  the  resident  population,  it  shifts  the  population 
structure towards higher skills and vice versa for countries with a low share. However, one 
should  keep  in  mind  that  this  shift  is  rather  moderate.  For  instance,  the  share  of  low-
skilled individuals declines from 44.6 to 44.4 percent in Portugal. 

Figure 19 illustrates the employment impact of the standard migration inflow for the overall 
EU-model,  the  five  most  populous  Member  States  (Germany,  France,  Italy,  Spain,  and 

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Poland)  and  the  two  countries  with  the  strongest  (Portugal)  and  weakest  impact 
(Lithuania) after five years. In general, the employment impact is rather similar across all 
27 Member States, but there is some dispersion across countries. While it is 0.86 percent 
in the overall EU-model in year 5, it ranges from 0.74 percent in Lithuania to 0.93 percent 
in Portugal. The three countries with an employment impact of more than 0.9 percent are 
Portugal,  Italy,  and  Malta,  while  the  employment  impact  is  less  than  0.8 percent  in 
Lithuania,  Slovakia,  Ireland,  Hungary,  and  Latvia.  The  main  factor  of  cross-country 
differences  is the  skill  structure  in the  resident  population.  For  instance, Portugal, Malta, 
and Italy have the highest shares of low-skilled individuals in the resident population, see 
also  Table  10  in  chapter  2.2.  Thus,  the  migrants  are  on  average  more  highly  educated 
than  the  resident  population,  which  is  associated  with  more  beneficial  labour  market 
integration  in  terms  of  participation  and  unemployment  rates.  This  implies  more-than-
average employment impacts of the migration shock. 

Figure 19: Employment impact of ‘standard migration shock’, individual MS 

Similarly,  Figure  20  illustrates  the  impact  on  wages  (average  labour  costs  per  hour 
worked) in the five most populous countries and in the countries with the most (Romania) 
and  least  pronounced  (Denmark)  wage  impact  in  year 3  (which  is  the  year  with  the 
strongest deviation from baseline values). While the wage effect is -0.54 percent in year 3 
in the EU-model, it ranges from -0.43 percent in Denmark to -0.68 percent in Romania. As 
already discussed  above, the  average  wage  impact  declines to  -0.18 percent  in  year 10, 
but  some  dispersion  remains  (the  impact  ranges  from  -0.12 percent  in  Denmark  to  -
0.23 percent in Romania). 

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Figure 20: Wage impact of ‘standard migration shock’, individual MS 

Figure 21: Difference in skill structure vs. wage impact in year 3, ‘standard migration shock’ 

The influence of the skill structure on wages is shown in  Figure 21. As a proxy, we sum 
the  ‘absolute  difference in  the  skill  structure’  of migration  versus the  resident  population. 
For instance, this absolute difference is 2.5 (21 minus 18.5 for low-skilled, see Table 10) 
plus  4.5  (46.3  minus  41.8)  plus  6.9  (absolute  of  32.8  minus  39.7),  i.e.,  13.9  percentage 
points for France. If the migration structure is very different to the population structure, this 
implies a more pronounced impact on the skill structure of workers. As a result, marginal 
productivities  and  thus  wages  decline  more  pronouncedly  in  the  short-  and  medium-run 
when the economy has not yet adjusted to the migration shock. 

Finally, the GDP impact in the Member States is shown in Figure 22. Ireland is a special 
case  again.  As  GDP  based  on  the  model’s  production  function  is  about  65  percent  of 
official  GDP  and  as  the  migration  shock  boosts  only  this  part  of  GDP,  this  reduces  the 

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official GDP impact. However, if we neglect Ireland, cross-country differences with respect 
to GDP  are  slightly  more  pronounced  than  for  employment.  The GDP  effect  in  year 5  is 
0.71 percent for the EU-model and ranges from 0.56 percent for Lithuania to 0.82 percent 
in Portugal. In Portugal, for instance, the educational level of migrants is higher than the 
resident  population.  Apart 
in  higher 
productivity, which boosts GDP. The argumentation is vice versa for Member States with 
an  already  highly  educated  population.  Similar  to  employment,  the  GDP  impact  is  most 
pronounced for Portugal and Italy. 

from  higher  employment  rates,  this  results 

Figure 22: GDP impact of ‘standard migration shock’, individual MS 

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5.  Annex: Specific Information for Modelling Experts 

5.1.  Corrections for Ireland and Countries with a High Trade Balance 

The model distinguishes between 𝑔𝑣𝑎 and 𝑔𝑣𝑎 ∗ (as well 𝑔𝑑𝑝 𝑎𝑛𝑑 𝑔𝑑𝑝 ∗, 𝑖 and 𝑖 ∗, 𝑘 and 
𝑘 ∗, and 𝑡𝑏 and 𝑡𝑏 ∗). In most countries the values of the corresponding variables are set 
to the same value and it does not matter which one to take. In five countries, the values 
differ  and  reflect  special  circumstances.  The  countries  are  Ireland,  Luxembourg,  Malta, 
the Netherlands, and Slovenia. In all countries, the high value of the trade balance implies 
implausible private assets54 if the model is calibrated without adjustments. There are also 
good justifications (see discussion in Section 2.1) for these adjustments. We assume that 
part of the high positive trade balance, named 𝑡𝑏𝑐𝑜𝑟𝑟 in the model, cannot be attributed to 
output of the production function within a country but is caused by accounting rules in the 
System of National Accounts. If a policy scenario is simulated, the variable 𝑡𝑏𝑐𝑜𝑟𝑟 is kept 
constant.  The  trade  balance  based  on  production  is  assigned  to  𝑡𝑏  and  𝑡𝑏 ∗  equals  the 
trade  balance  of  the  System  of  National  Accounts,  i.e.,  𝑡𝑏 ∗ =  𝑡𝑏 + 𝑡𝑏𝑐𝑜𝑟𝑟.  As  the  trade 
balance  also  influences  the  value  of  GVA  and  GDP,  these  variables  are  also  adjusted, 
i.e.,  𝑔𝑣𝑎 ∗ =  𝑔𝑣𝑎 + 𝑡𝑏𝑐𝑜𝑟𝑟  and  𝑔𝑑𝑝 ∗ =  𝑔𝑑𝑝 + 𝑡𝑏𝑐𝑜𝑟𝑟.  As  𝑡𝑏𝑐𝑜𝑟𝑟  =  0  in  most  countries, 
the corresponding values are the same. 

For Ireland, not only the trade balance but also the level of investment is adjusted due to 
the massive inflow of foreign direct investment. In the same way as for the trade balance, 
the  level  of  investment  related  to  the  production  within  the  country  is  labelled  by  𝑖, 
whereas 𝑖 ∗ also includes depreciation of foreign direct investment capital stock and 𝑖𝑐𝑜𝑟𝑟 
being  used  in  production  in  other  countries.  The  capital  stock  𝑘  is  based  on  𝑖  and  the 
corresponding  depreciation  rate  δ  (all  three  variables  related  to  production  in  Ireland 
itself), the variable 𝑘 ∗ is defined as 𝑘 ∗ =  𝑘 + 𝑘𝑐𝑜𝑟𝑟, with 𝑘𝑐𝑜𝑟𝑟 reflecting the capital stock 
related  to  𝑖𝑐𝑜𝑟𝑟  and  δcorr.  As  this  adjustment  influences  GVA  and  GDP  we  derive  the 
System  of  National  Account’s GVA  and GDP  in  Ireland by 𝑔𝑣𝑎 ∗ =  𝑔𝑣𝑎 + 𝑡𝑏𝑐𝑜𝑟𝑟 + 𝑖𝑐𝑜𝑟𝑟 
and 𝑔𝑑𝑝 ∗ =  𝑔𝑑𝑝 + 𝑡𝑏𝑐𝑜𝑟𝑟 + 𝑖𝑐𝑜𝑟𝑟.  

5.2.  Income Taxation and Social Security Contributions 

This  section  provides  information  on  the  implementation  of  country-specific  institutional 
details concerning income taxation and social security contributions in LMM. 

Belgium 

The non-earning  spouse  allowance (which  implies  that  a  notional  amount  of  income can 
be  transferred  between  spouses  under  certain  conditions)  is  taken  into  account  in  the 

54 This results from the balanced growth path assumption in calibration.  

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calibration  of  tax rates. It  is  explicitly  considered  in the  Stata-File,  so that this  procedure 
involves a non-standard way of deriving the parameter-file TaxBelgium.xlsx.55 

Czechia 

The  assessment  base  for  income  taxation  is  gross  earnings  augmented  with  employer 
social  security  contributions,  a  possibility  that  is  not  explicitly  implemented  in  the  labour 
market model. Our approach is to implement 

𝑥𝑡𝑎𝑥 = −

𝑡𝑓
𝑡𝑠

=>  𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 = (1 − 𝑥𝑡𝑎𝑥 ∗ 𝑡𝑠) ∗ 𝑖𝑛𝑐𝑔𝑟𝑜𝑠𝑠 = (1 + 𝑡𝑓) ∗ 𝑖𝑛𝑐𝑔𝑟𝑜𝑠𝑠, 

where ‘tf’ and ‘ts’ are employer and the employee contribution rates. 

Denmark 

Differently to the previous update for Denmark in Berger et al. (2012), we now include the 
Labour Market Contribution in the income tax rate (and not in social security contributions) 
as this was also changed in the OECD TaxBEN-model. 

The flat social security contributions of employees are deductible from taxable income, but 
a  flat,  deductible  contribution  is  not  included  in  LMM.  Thus,  we  calculate  a  ‘net  flat’ 
contribution of ‘(1-tw)*flat’, which is reflected in ‘zw’ and ‘zu’ in the model. Furthermore, as 
we  do  not  assume  deductibility  of  the  flat  contribution  in  the  calibration  of  the  tax  rates 
(TaxDenmark-file),  this  allowance  is  implicitly  taken  into  account  via  lower  income  tax 
rates.  This  approximation  replicates  the  system  in  sufficient  detail.  Differently  to  the 
previous  Denmark  LMM  update,  employee  contributions  to  unemployment  insurance are 
no longer defined as social security contributions in Danish national accounts. Thus, they 
are no longer included in the calibration of ‘revenssc’ in LMM. 

As we take into account occupational pensions in LMM, which are not considered in the 
OECD-TaxBEN-model,  we  increase  the  employer  contribution  rate  by  12  percentage 
points  (the  average  contribution  rate  according  to  Pensions  at  a  Glance)  times  the 
coverage of 90 percent in the TaxDenmark-file. 

Germany 

The TaxBEN model does not include the statutory occupational insurance for work injuries 
‘as it is not possible to identify a representative contribution rate’. It is, however, implicitly 
implemented  in  the  calibration  of  the  LMM  as  we  increase  contribution  rates  in  order  to 
replicate aggregate social security revenues. 

55 For instance, application of the TaxBEN model of the OECD for a couple with one earner would take into account the 

spouse allowance in the parameter file. As we consider the allowance on our own in the Stata-File, we do not want this 
reduction of income taxes to be included in the parameter file TaxBelgium. Therefore, we use the ‘Single’ sheets for the 
‘1Earner’ and the ‘Principal’ sheets. 

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Ireland 

The Family Income Supplement is a support for low-income families in which the principal 
earner  and/or  the  spouse  are  in  full-time  employment.  Following  the  OECD  TaxBEN 
model,  we  implement  it  as  an  in-work  benefit  decreasing  income  tax  rates.  Following 
Euromod (see Doorley and McTague, 2021), we assume a take-up rate of the benefit of 
33 percent. 

Spain 

In general, individuals are taxed separately in Spain, but families can opt to be taxed as 
married  couples  or  as  heads  of  households.  Notice,  however,  that  this  is  different  to  a 
splitting system. The TaxBEN model calculates tax liabilities on the basis of these different 
options and assumes that households opt for the more beneficial situation. That way, this 
system is also taken into account when calibrating tax rates in LMM. 

France 

Social security contributions in the TaxBEN model include ‘other’ contributions such as the 
supplemental pension, the CEG and the CET. These contributions also take into account 
reductions of  employer-paid social  insurance contributions.  The supplemental  pension  is 
also taken into account in the modelling of the pension system; see Section 2.9. 

CSG  and  CRDS  are  part  of  the  income  tax  in  the  TaxBEN  model  and  in  Revenue 
Statistics. The assessment base of the CSG and the CRDS is 98.25 percent of gross pay 
and  CSG  is  partly  deductible  for  income  taxation.  We  follow  the  OECD  and  categorise 
these two contributions as income tax. For simplicity, we assume that these contributions 
have the same assessment base as the income tax. Given that we make this assumption 
both  in  the  TaxFrance-file  and  in  LMM,  this  method  delivers  appropriate  results. 
Compulsory  employer  and  employee  contributions  are  deductible  for  income  taxation 
(except  for  CSG  and  CRDS).  As  the  latter  two  are  part  of  our  income  tax,  we  can  set 
‘xtax’=1. 

The  in-work  benefit  to  promote  a  return  to  full-time  work  for  low-income  households  is 
taken  into  account  in  the  calibration  of  average  tax  rates.  However,  application  of  the 
standard  OECD-TaxBEN-results-into-EU-SILC-data-approach  would  result  in  much  too 
high  expenditures  of  the  in-work  benefit.  Thus,  we  rescale  the  in-work  benefit  rates  in 
order  to  get  the  right  amount  of  aggregate  expenditures,  which  is  done  in  the  file 
‘EUSILC_variables_fr2022.xlsx’. 

Netherlands 

The  TaxBEN  model  includes  several  contributions  (premia  to  occupational  pensions, 
employee  contributions  for  basic  health  insurance,  employer  contributions  for  medical 
care)  which  are  interpreted  as  NTCP  (‘non-tax-compulsory-payment’).  We  follow  this 
approach and include them in LMM. For simplicity, we model basic health insurance as an 
earnings-dependent  contribution.  Even  though  it  is  a  flat  contribution,  the  care  benefit 

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compensates individuals with lower income for the contribution (the benefit declines with 
higher income), so that it can be seen as earnings-related. 

Poland 

The  contribution  to  the  National  Health  Fund  is  included  as  an  income  tax  in  LMM. 
Basically, this has the advantage that we do not have to do a complex derivation of ‘xtax’. 

Portugal 

Couples can opt for joint taxation based on an income-splitting system in Portugal. Based 
on the OECD TaxBEN model, which chooses the most favourable of the two options, the 
calibration of the LMM relies on the income-splitting system. 

As  described  in  chapter  2.6,  there  is  a  standard  deduction  of  EUR 4,104,  but  if  social 
security contributions are higher than this amount, the deduction will equal the amount of 
those  contributions.  Modelling  kinks  like  these  can  hardly  be  implemented  in  a  macro-
model.  Given  that  the  standard  deduction  is  relevant  for  the  majority  of  individuals 
(approximately  up  to  two-times  the  average  worker  according  to  the  OECD),  we 
implement the standard relief in the calibration of the LMM and set ‘xtax’=0. 

Finland 

The earned income tax credit is implicitly taken into account in average income tax rates. 

For  employees  aged  53  to  62,  the  pension  insurance  contribution  increases  from  6.75 
percent to 8.25 percent. This is taken into account in the Stata-File. 

Sweden 

The EITC is taken into account in LMM via lower income tax rates. In Sweden, a tax credit 
equal  to  100 percent  of  compulsory  employee  social  security  contributions  is  granted, 
which  is  also  included  in  LMM  via  lower  tax  rates.  As  these  contributions  are  not 
deductible for income taxation, we set ‘xtax’ equal to zero in LMM. This issue is, however, 
somehow tricky to implement in the case of policy reforms. The amount of the tax credit 
(i.e., the average income tax rate) is changed if the employees’ rate changes because of a 
policy reform, which is implemented in the file ‘taxpreparationtess’.56  

Occupational pensions are included in the model by using information from  Pensions at a Glance. 

For simplicity, we assume that 92 percent of all employees are covered by the ITP scheme, which 

has a contribution rate of 4.5 percent below the threshold and 30 percent above. 

5.3.  Revenue Statistics 

This section provides information on adjustment to data from  Revenue Statistics that were carried 

out,  for  instance,  because  LMM  includes  items  (such  as  occupational  pensions)  that  are  not 

56 Assume, for example, an increase of the employee rate (in order to finance higher social expenditures). Given the 

institutional setting, this implies a one-for-one decrease of income tax revenues (as the tax credit increases in line with 
the increase of the employee’s rate). 

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included in Revenue Statistics or because contributions are classified differently in the model and 

Revenue Statistics. 

Bulgaria 

Contributions  to  the  second  pillar  Universal  Pension  Funds  are  included  in  LMM. 
Information about revenues are available at Bulgaria’s Financial Supervision Commission. 

Denmark 

Contributions  to  occupational  pension  schemes  agreed  between  the  social  partners  are 
not included in Revenue Statistics. We approximate contributions to these schemes in the 
calibration  of  LMM  via  the  modelling  assumption  of  Pensions  at  a  Glance  and  a 
comparison with the revenues from Labour Market Contributions. 

In contrast to most  other  countries,  there are  fixed  (non-earnings  related)  social  security 
contributions (unemployment, supplementary pension) in Denmark, which are included in 
the variables ‘zw’, ‘zu’ and ‘zf’. However, the variables ‘zw’ and ‘zu’ also include sickness 
benefits, which makes it difficult to distinguish these flat social security  contributions and 
sickness  benefits  in  the  model.  Therefore,  we  diminish  social  security  revenues  by  the 
expenditures  for  sickness  benefits  (taken  from  the  Social  Expenditures  database  of  the 
OECD).  The  ‘voluntary  social  security  contributions’  for  unemployment  and  early 
retirement schemes are both included in LMM. 

Germany 

Individuals who have earnings above the contribution ceiling can opt out of the mandatory 
public  health and  care  insurance  and choose  a private  insurance  provider  instead.  Their 
contributions to the private system are not included in Revenue Statistics. Therefore, LMM 
the 
Revenues 
item 
from 
‘Krankheitsvollversicherung’ 
the 
‘Gesundheitsberichterstattung des Bundes’ (Federal Health Monitoring). 

‘Social  Security’  are 
and 

increased  by  numbers  (for 

‘Pflegeversicherung’) 

derived 

from 

the 

the 

Estonia 

Contributions  to  the  second  pillar  pension  fund  are  included  in  the  LMM.  Information  on 
revenues is provided in the National Tax List. 

France 

According  to  INSEE,  occupational  pension  schemes  (such  as  the  ARRCO  scheme  for 
most private-sector employees) are included in the public sector in the national accounts. 
Thus, we do not increase public revenues by occupational pension premia. 

Croatia 

As  Croatia’s  funded  pension  scheme  is  included  in  the  LMM,  we  increase  ‘Social  Security’ 

revenues  for  the  calibration  of  the  model  by  an  amount  based  on  the  Country  Fiche  of  the AWG 

group. 

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Lithuania 

As Lithuania’s funded pension scheme is included in LMM, we increase ‘Social Security’ revenues 

in the model by an amount taken from the OECD’s Pension Fund Indicators. 

In  2019,  there  was  a  pronounced  shift  of  public  revenues  from  employers’  contributions  to 

employees’ contributions and  income taxes. For the  calibration  of  LMM, we  use the  aggregate of 

income  taxes  and  social  security  contributions  in  each  year  of  2015–2019  and  allocate  them 

according to 2019 revenues. 

Netherlands 

Occupational  pension  schemes  are  not  included  in  Revenue  Statistics.  ‘Social  Security’ 
revenues in the model are increased by an appropriate amount, taken from Vidlund et al. 
(2016). 

Poland 

Revenues  of  the  National  Health  Fund  are  included  in  the  item  ‘Social  Security 
Contributions’  in  Revenue  Statistics.  However,  given  that  this  contribution  is  part  of  the 
income  tax  rate  in  LMM,  these  revenues  (which  are  taken  from  NHF  publications)  are 
redirected to the item ‘Income’ for the calibration of the model. 

‘Social  Security’  in  Revenue  Statistics  does  not  include  contributions  to  the  defined 
contribution scheme (‘Open Pension Funds’). Therefore, ‘Social Security’ revenues in the 
model are increased by an appropriate amount. Data for this adjustment is taken from the 
OECD’s Funded Pension Indicators. 

Romania 

As  Romania’s  funded  pension  scheme  is  included  in  the  LMM,  we  increase  ‘Social  Security’ 

revenues in the model by revenues based on the OECD’s Pension Fund Indicators. 

In  2018,  there  was  a  pronounced  shift  of  public  revenues  from  employers’  to  employees’ 

contributions, which has an impact on income taxation as well. For the calibration of  the LMM, we 

use the aggregate of income taxes and social security contributions in each year of 2015–2019 and 

allocate them according to 2018 and 2019 revenues. 

Slovakia 

The OECD  considers  the  contributions  to  the  funded  second  pillar  of  Slovakia’s  pension 
scheme as a non-tax compulsory payment. As this pension type is included in LMM, we 
increase  ‘Social  Security’  revenues  in  the  model  by  an  amount  taken  from  the  OECD’s 
Pension Fund Indicators.  

Sweden 

Category  2000  (‘Social  Security’)  in  Revenue  Statistics  does  not  include  contributions  to 
occupational  pension  schemes.  Data  on  these  contributions  are  taken  from  the  Orange 
Reports,  which  are  annual  reports  of  the  Swedish  Pensions  Agency.  ‘Social  Security’ 
revenues in LMM are increased by an appropriate amount. 

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5.4.  Pension System 

This  section  provides  some  details  on  how  pension  systems  are  modelled  in  LMM.  We  provide 

some insights concerning the general approach as well as some country-specific issues. 

General Information 

Many countries explicitly link future adjustments of  pension benefits to increasing life expectancy. 

Given  that  life  expectancy  is  kept  constant  in  a  standard  LMM  simulation,  we  do  not  take  into 

account these reductions of future pension benefits. However, when explicitly analysing the impact 

of demographic ageing, this approach should be reconsidered. 

Pension  benefits  credited  for  childcare  (and  some  other  non-contributory  periods  like  long-term 

care)  are  not  explicitly  implemented  in  LMM  as  fertility  decisions  are  no  explicit  choice  variable. 

These  benefits  are  implicitly  taken  into  account  via  the  adjustment  of  the  flat  pension  benefit 

(‘p00adjustment’),  see  Section  2.9.  Analogously,  we  do  not  explicitly  implement  means-tested 

minimum pensions, but they are implicitly reflected in the flat pension benefit. 

In  some  countries  (Poland  for  instance),  pension  benefits  are  only  eligible  from  the  statutory 

retirement age onwards. In contrast to that, LMM’s approach assumes that individuals also receive 

pension benefits if they retire earlier (see, for instance, the first order condition for retirement in the 

model documentation). At first sight, one would assume that these two approaches do not match. 

However,  if  we  implement  actuarially  fair  deductions  to  pension  benefits,  our  approach  is  in  line 

with  these  institutional  settings,  both  in  terms  of  pension  expenditures  of  the  government  and 

labour market incentives (both incentives to acquire pension rights and retirement incentives). 

LMM  includes  occupational  pension  schemes  for  some  countries,  which  are  not  included  in  the 

OECD’s  Social  Expenditure  data.  The  R  file  ‘OccupationalPensionExp‘  includes  expenditure 

calculations  of  these  occupational  systems  within  the  LMM.  Subsequently,  aggregate  pension 

expenditures are adjusted by this amount for the calibration. 

Belgium 

Given  that  the  maximum  amount  of  the  holiday  pension  payment  is  fairly  low,  it  is  not  explicitly 

included in LMM and thus implicitly taken into account in the flat pension benefit p00. 

Denmark 

The basic pension benefit is only reduced if income from work exceeds a threshold. The pension 

supplement is tested against all sources of income (apart from public pensions), but the threshold 

for  reduction  is  fairly  high.  Therefore,  we  explicitly  include  the  basic  pension  and  the  supplement 

and  model a ‘smaller than  actual share’ of ATP  and occupational pensions that  we determine via 

the income shares by which the supplement is reduced. 

Under  some  conditions,  early  retirement  is  possible  in  Denmark  via  a  voluntary  early  retirement 

programme  linked  with  unemployment  insurance.  We  include  both  the  contributions  to  and  the 

benefits from this system in the model. Technically, this benefit is modelled as a flat pension ‘p00’ in 

case of early retirement. Given that this benefit is higher than the basic flat pension, we correct for 

too  high  benefits  by  subtracting  the  appropriate  difference  from  lump-sum  transfers  to  the 

households; see also the file Pensions.xlsx. 

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Germany 

The pension point value is uprated annually in line with gross wages as a starting point. However, 

different factors in the ‘Rentenanpassungsformel’ can reduce the size of annual adjustment of the 

value. According to a calculation performed in the Generationencheck (see for instance Berger et 

al. 2019), the long-run growth rate of the real Rentenwert is approximately 30 percent lower than 

the growth rate of real earnings. This value is implemented in LMM. 

For simplicity, we do not credit periods of Arbeitslosengeld II receipt (‘Anrechnungszeit’). 

Estonia 

From 2021, there has been a possibility to opt out the funded pension system in Estonia. Lacking 

valid information on how this impacts households decisions, we follow the European Commission’s 

AWG and treat the second pillar as fully mandatory. 

Ireland 

The flat-rate state pension is paid from the pensionable age of 66 years. Basically, we implement it 

via  ‘p00’  in  the  model.  However,  for  the  mixed  group  in  LMM,  p00  is  paid  from  the  effective 

retirement date (that is determined via the retirement decision). Thus, if we gave  p00 to the mixed 

group,  this  would  distort  lifetime  income  and  retirement  incentives  as,  for  example,  a  65-year-old 

individual would receive it in case they do not participate in the labour market. Thus, we pay p00 in 

Ireland  only  from  the  age  of  70  and  increase  the  amount  by  a  factor  that  is  determined  via  the 

expected  pay-out-phase.  Given  the  LMM  assumptions  (e.g.,  perfect  foresight,  perfect  capital 

markets), lifetime income, consumption and retirement incentives are reflected in the right way. 

Greece 

The  flat-rate  national  pension  is  paid  from  the  pensionable  age  of  67  years.  However,  as  p00  is 

paid from the effective retirement date in the LMM, we calibrate the model analogously to Ireland. 

We pay p00 only from the age of 70 and increase the amount by a factor that is determined via the 

expected pay-out phase. 

Spain 

For the calculation of the accrual rate, we take an approach similar to the method for France (see 

‘Pensionses.xlsx’). 

France 

Modelling a pension system that is based on (i) average earnings of the best 25 years and (ii) the 

total number of contributory periods is tricky in LMM. Even early in a lifetime, there are incentives to 

contribute because of (i) acquiring a period of insurance and (ii) contributing to the best 25 years if 

for  some  reason  earnings  later  in  lifetime  fail  to  increase.  Therefore,  we  follow  the  following 

approach:  (i)  calculate  an  ‘actual’  pension  for  an  individual  who  contributes  for  40  years  (at  an 

earnings profile determined by the Mincer estimation) and (ii) calculate a ‘lifetime’ accrual rate that 

is necessary to yield the same pension benefit (see the calculation in ‘Pensionsfr.xlsx’). 

Croatia 

Currently,  a vast majority of individuals opt out of the  funded scheme and  transfer their assets to 

the public scheme upon retirement. We follow the AWG group and assume that the share of new 

retirees who keep their assets in the funded scheme will increase to 30 percent. 

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Luxembourg 

In  Luxembourg,  there  is  no  explicit  actuarial  adjustment  of  pension  benefits  for  early  retirement. 

However, for the calibration of the LMM, we interpret the higher accrual rates for older individuals 

with longer contribution periods economically and treat them as an actuarial adjustment of pension 

benefits.  Thus,  the  LMM’s  accrual  rate  is  higher  than  the  standard  accrual  rate  (reflecting  older 

individuals and/or longer periods) and we implement deductions for retirement before the statutory 

retirement age. 

Hungary 

Differently to  almost all  other Member States (but analogously to  Slovenia), the  calculation of  the 

pension  benefit is  based on net earnings. In order to keep  the equations of  the model consistent 

with the LMM, we reduce the accrual rate ‘mp’ by age- and skill-specific tax and employee social 

security contribution rates (in the calib programme code). 

Eligibility for pension benefits before the statutory retirement age was largely eliminated in previous 

years. However, people in the ‘mixed group’ receive pension benefits in the LMM if they withdraw 

from  the  labour  market.  In  the  model,  we  assume  that  actuarially  adjusted  pension  benefits  are 

paid for individuals who leave the labour market earlier. Given the LMM assumptions (e.g., perfect 

foresight,  perfect  capital  markets),  lifetime  income,  consumption  and  retirement  incentives  are 

reflected in the right way. 

Malta 

The pension benefit in Malta is based on pensionable income, which is determined by the average 

of the highest salaries of ten years (for people born in 1962 or later) or earnings of the last 10–13 

years for people born before 1962. Thus, we take an approach similar to the method for France for 

the calculation of the accrual rate (see ‘Pensionsmt.xlsx’). 

Netherlands 

In the Netherlands, a flat-rate basic pension is available from the statutory retirement age onwards. 

Analogously  to  Ireland,  we  pay  p00  in  the  Netherlands  only  from  the  age  of  70  and  increase  the 

amount by a factor that reflects the longer pay-out phase. 

Poland 

As the funded system is increasingly phased out (significant reduction of contribution rate, explicit 

opting in to the system from 2014, plans to terminate the OFE), we implement the NDC system in 

LMM. 

The government pays the contributions to the pension system during unemployment (based on the 

unemployment  benefit).  As  the  benefit  is  a  flat  benefit  and  not  earnings-related,  we  model  this 

contribution  in  the  part  connected  to  labour  market  participation  (reflected  in  ‘m1’  in  the  model) 

instead of the earnings-related part (‘b1’ in the model). 

Romania 

A major change in the Romanian public pension system was drafted in 2018 and legislated in 2019. 

Different to pension reforms in many other countries that go along with long transitional periods, the 

legislated  reform  has  rather  strong  short-  and  medium-term  impacts  both  for  pensions  already  in 

payment as well as for labour market incentives. According to the AWG pension group, the average 

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impact  of  the  recalculation  of  each  pension  benefit  according  to  the  new  pension  law  will  be  a 

14 percent increase. In order to balance pension expenditures and labour market incentives for the 

calibration period 2015–2019, we implement a part of this pension increase in the calibration of the 

model. 

Slovenia 

The PRB is calculated on the basis of net earnings. This is different to most other countries, where 

pensions are based on gross earnings. In order to keep the equations of the model consistent with 

LMM, we reduce the  accrual rate  ‘mp’ by age- and skill-specific tax and  employee social security 

contribution rates (in the calib programme code). 

The  fact  that  the  PRB  is  based  on  the  best  24  consecutive  years  (and  not  lifetime  income)  is 

modelled analogously to France: we calculate an ‘actual’ pension for an individual who contributes 

for 40 years (at an earnings profile determined by the Mincer estimation) and calculate a ‘lifetime’ 

accrual rate necessary to yield the same pension benefit (see the calculation in ‘Pensionssi.xlsx’). 

Finland 

We  do  not  include  the  flat  basic  state  pension  in  the  model.  The  national  pension  is  reduced  by 

50 percent with higher earnings (so that no basic pension  is paid at all once the earnings-related 

pension  exceeds  around  EUR  1,300)  and  the  amount  of  flat  pensions  is  changed  in  the  LMM 

calibration procedure anyhow to reflect total pension benefits. 

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