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The Unemployment Trap Meets the Age-Earning Profile

Author

Listed:
  • Bruce Chapman
  • James Jordan
  • Ken Olivier
  • John Quiggin

Abstract

The relative costs of taking employment or receiving welfare are usually understood through comparisons of a person’s social security entitlements and their wage alternative, known as replacement rates. In some situations it appears that the additional income from working is negligible, and this is said to constitute an “unemployment trap”. However, conventional replacement rates ignore the fact that age-earnings profiles slope upward through the acquisition of labour market experience. We offer a dynamic reinterpretation and compare alternative calculations for Australia in 2000. The usual and incorrect approach exaggerates significantly the likelihood of unemployment traps, but the presence of children mitigates considerably, and can even reverse, this assessment.

Suggested Citation

  • Bruce Chapman & James Jordan & Ken Olivier & John Quiggin, 2000. "The Unemployment Trap Meets the Age-Earning Profile," CEPR Discussion Papers 415, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    • Handle: RePEc:auu:dpaper:415
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    File URL: https://www.cbe.anu.edu.au/researchpapers/CEPR/DP415.pdf
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    References listed on IDEAS

    as
    1. Ann Harding & Josh Polette, 1995. "The Price of Means‐Tested Transfers: Effective Marginal Tax Rates in Australia in 1994," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 28(3), pages 100-106, July.
    2. Peter Whiteford, 1995. "The use of replacement rates in international comparisons of benefit systems," International Social Security Review, John Wiley & Sons, vol. 48(2), pages 3-30, April.
    3. Owen, John D., 1989. "Labor supply over the life cycle: The long-term forecasting problem," International Journal of Forecasting, Elsevier, vol. 5(2), pages 249-257.
    4. Jeff Borland & Joseph Hirschberg & Jenny Lye, 2004. "Computer knowledge and earnings: evidence for Australia," Applied Economics, Taylor & Francis Journals, vol. 36(17), pages 1979-1993.
    5. Blundell, Richard & Duncan, Alan & Meghir, Costas, 1992. "Taxation in Empirical Labour Supply Models: Lone Mothers in the UK," Economic Journal, Royal Economic Society, vol. 102(411), pages 265-278, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    unemployment traps; social security; age-earnings profiles; wages;
    All these keywords.

    JEL classification:

    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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