WHAT HAS HAPPENED TO REPLACEMENT RATES? ESRI Working Paper No. 76, May 1996

Callan, Tim and Nolan, Brian and O'Donoghue, Cathal (1996) WHAT HAS HAPPENED TO REPLACEMENT RATES? ESRI Working Paper No. 76, May 1996. [Working Paper]

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Abstract

Financial incentives to take up and stay in work, and the impact of the tax and social welfare systems on these incentives, have become a major preoccupation of Irish policy-makers. Recent Budgets have highlighted measures to "reward work" through income tax and PRSI relief for the low paid, and one aim of the expert working group set up to advise on the integration of the tax and social welfare systems is to point towards ways of improving work incentives. Empirical studies of work incentives generally measure the financial incentive facing individuals in the form of replacement rates, the ratio of income when unemployed to income when in work.1 In calculating replacement rates, choices about precisely what is to be included in the numerator or the denominator have to be made and can matter. More fundamentally, though, different approaches to deriving replacement rates, relying on different types of data, can be distinguished and may not tell the same story about the situation at a particular point in time or changes over time. This paper sets out the alternative approaches which have been used to measure Irish replacement rates, compares the pattern they show for these rates over time, and assesses the implications for our picture of how work incentives have evolved and for measurement practice.

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