Incentive Effects of Welfare Transfers on Individual Labour Market Behaviour in Finland

This paper analyses the simultaneous impact of various transfer programs on individual labour market transitions in a local Finnish labour market. The purpose is to study if the disincentive situations that arise in hypothetically constructed household models are of empirical importance for the transitions from unemployment into employment and out of the labour force. Cox proportional hazard models are used. A stock sample and a flow sample are analysed separately. After allowing for time-varying effects of the used replacement rate, one can see that a high pecuniary gain of the transfer system has a negative impact on the transition probability from unemployment. The results also suggest that the effect of the replacement rate on the transition probability is increasing, i.e. positive, in unemployment duration.