WPS8295


Policy Research Working Paper                       8295




      Can Mothers Afford to Work in Poland
Labor Supply Incentives of Social Benefits and Childcare Costs

                                    Ali Bargu
                                 Matteo Morgandi




Social Protection and Labor Global Practice Group
January 2018
Policy Research Working Paper 8295


  Abstract
 This paper analyzes the incentives to labor supply faced                            wage. If they must also pay for childcare, having all adults
 by families, particularly mothers, with young children in                           working can cause losses of up to 30 percent compared
 the context of a recently introduced fertility promotion                            with if one adult stayed home. Although the 500+ pro-
 benefit in Poland. The paper is based on an adapted ver-                            gram radically contributed to reducing child poverty, in
 sion of the Organisation for Economic Co-operation and                              the absence of complementary reforms, these disincentives
 Development’s Tax-Benefit Model, which estimates house-                             could affect more than half a million households, dispro-
 holds’ net earnings after taxes and social transfers at different                   portionately in the lowest quintile. Vouchers for private
 levels of wages. Since the recent introduction of the 500+                          childcare have been adopted by some municipalities in
 benefit, some households face steep marginal tax rates due                          Poland to counter unmet demand for public nurseries. A
 to the benefit withdrawal rules. Single parents with two                            75 percent subsidy of typical childcare costs would restore
 children, and second earners with one child can expect their                        the financial viability of low-paying work for mothers with
 income to increase by only 30 and 25 percent of the mini-                           young children. Alternative remedies include a reform of
 mum wage, respectively, if they take up a job at minimum                            the eligibility and withdrawal rules of the 500+ program.



  This paper is a product of the Social Protection and Labor Global Practice Group. It is part of a larger effort by the World
  Bank to provide open access to its research and make a contribution to development policy discussions around the world.
  Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted
  at mmorgandi@worldbank.org.




          The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
          issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
          names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
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          its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.


                                                        Produced by the Research Support Team
                           Can Mothers Afford to Work in Poland?
                 Labor Supply Incentives of Social Benefits and Childcare Costs1
                               Ali Bargu* and Matteo Morgandi**




            * Oxford University                  ** World Bank, Social Protection and Jobs GP



JEL:              I38, J13, J22.

Keywords:         Female Labor Force Participation; Child Care; Social Assistance; Fertility




1
  This study was prepared as part of the Poland Labor Market and Social Policy Technical Assistance, with co-
financing of the World Bank Gender Umbrella Trust Fund. We thank for the valuable comments and feedback
provided at different stages of this research to the staff in the Ministry of Family, Labor and Social Policy of Poland,
peer reviewers Iga Magda (Institute for Structural Research, Warsaw) and Paulo Bastos (World Bank, Development
Research Group), as well as Michael Myck (CNEA), Manuel Salazar (World Bank), Karolina Goraus (Warsaw
University), Gabriela Inchauste (World Bank) and Wojciech Paczyński (European Commission). We are thankful to
Herwig Himmervoll and the team in charge of Tax and Benefit Models at the OECD for sharing the program file of
the 2014 Tax and Benefit Model for Poland, which this research built on.
  I.    Introduction and Main Findings
Among beneficiaries, one of the most discussed aspects of transfers that aim to alleviate poverty
in households is their potential disincentives to enter or participate in the formal labor force. In
particular, the introduction of a new noncontributory transfer in highly formalized economies can
move the household income schedule in a ‘poverty trap’, with high marginal tax rates on any
additional earning from formal work (Blundell and Walker, 2003; Blundell et al. 1998; Kell and
Wright 1990). While work disincentives from transfers are often an overstated concern, the
specific design features (for example, withdrawal rate or income cutoffs) of the programs and the
way in which different programs targeting the same families add up are central in the determination
of the final set of incentives.
Such issues can be exacerbated in families with young children, where the adult caretaker (usually
the mother) has to bear childcare costs if she wishes to work. This paper analyzes the Family 500+
program2 in Poland, to explore the labor supply incentive on mothers, resulting from the interaction
of a noncontributory transfer with childcare costs and the potential role of childcare subsidies as a
tool to make work pay. Such types of transfers are common in Organisation for Economic Co-
operation and Development (OECD) countries. The paper explores this question by revisiting and
updating the established model developed by the ‘OECD Tax-Benefit Model’, which is meant to
reproduce the incentives to formal labor supply faced by households at different levels of earnings,
based on a de jure analysis of program designs. The model allows decomposing the effects of
income taxes, social insurance contributions, and various noncontributory benefits to the overall
change in net earnings of households as their gross labor income increases.
Data to examine the effects of the most recent reforms, for instance, the Household Budget Survey
(HBS) 2016, will likely only become available in late 2017, making it difficult to capture an
immediate behavioral response of families. Coupled with the limited access to administrative data,
this exercise in plotting the theoretical levels complements existing analysis with current data to
predict the behavioral response of the Polish population (Goraus and Inchauste 2016; Myck 2016).
When the Family 500+ program was introduced by the Government of Poland in 2016, the Polish
welfare state underwent a systemic change: with an estimated cost of PLN 22.2 billion per year,
or 1.3 percent of gross domestic product (GDP), the 500+ came on top of all existing programs,
whose total expenditure was estimated at 0.7 percent of GDP in 2013. Due to the size of the transfer
and amount increasing with the number of children, the program is clearly progressive and is
recognized for its expected impact on reducing extreme poverty from 8.9 percent to 5.9 percent
and for nearly eliminating child poverty (Goraus and Inchauste 2016). At the same time, the
incentive compatibility of the 500+ with formal work has been questioned widely, both in the
popular press and in the literature (Myck 2016). This is rather new for Poland where social benefits
used to be rather ungenerous and they posed limited disincentives to work (World Bank 2014).
Moreover, the literature has explored the nexus between the cost of childcare and the withdrawal

2
  The Family 500+ program targets families with 2 or more children who receive an unconditional and universal
payment of PLN 500 monthly for each child (ages 0–17). In addition to the universal payment for the second and
each subsequent child, the same benefit can also be received for the first, if the income criterion (<PLN 800 per
person per month, PLN 1,200 for families with a disabled child in the household) is met. Distinguishing it from
many other benefits, 500+ is not included in calculations for taxes, contributions, or benefits.


                                                         2
rules of cash benefits much less, particularly in contexts where social norms also influence
preferences for staying home among mothers.
Against this backdrop, the paper focuses on three questions:
      (a) The financial disincentives to enter formal labor force, for different family types, in light
          of the current tax and benefit architecture
      (b) The accounting of additional disincentive effects arising from private and public childcare
          costs (for children ages 0–3) faced by parents with young children
      (c) The possible mitigation of these disincentives through the introduction of subsidies for
          childcare services
The analysis finds that for certain income levels, the new benefit creates strong disincentives to
enter the labor force, especially for (a) single mothers who work above the 500+ benefit
withdrawal threshold for their youngest child and (b) second earners, usually mothers, who are
disincentivized to enter the labor force for families. The marginal effective tax rates of moving
from inactivity into minimum wage (MW) employment reach up to 70 percent and 75 percent of
MW for single mothers with 2 children and for second earners in families with 1 child,
respectively.3 These results do not include childcare costs, which are incurred by a majority of
families when all adults are in full-time employment.
Once we include childcare costs for children ages 0–3 in Poland in the analysis, the disincentive
effects become even more drastic: when moving from inactivity to MW employment, income
losses could be as high as 30 percent. Table 1 summarizes the main findings of the analysis for
different typologies of households and with and without childcare costs taken into account.
Table 1: Projected income gains for moving into MW employment with varying levels of childcare costs
                                                   Income gains (in % of MW)
                                                                                      Income gains (in % of MW)
                               Income gains (in     accounting fora estimate of
          Family type                                                                accounting for childcare costs
                                  % of MW)           childcare costs at public
                                                                                      at prevailing market pricesb
                                                             facilities
    Single Parent with 1
                                     30.9                       16.4                              −23.9
    Child
    Single Parent with 2
                                     40.8                       26.3                              −14.0
    Children
    Married Couple (2
                                     24.9                       10.3                              −30.0
    Earners) with 1 Childc
    Married Couple (2
                                     45.6                       36.0                               −4.3
    Earners) with 2 Children

Note: The negative values indicate the scenarios within which moving into employment causes income losses.
a. The definitions of the different forms of childcare and their assumed costs (public or private) are in Box 1.
b. This estimate uses PLN 1,000 per month and assumes that only one child (if there are two) required a nursery
spot.
c. Principal earner fixed at approximately MW.
In sum, the reformed noncontributory transfer system in Poland, while successful in lifting many
out of extreme poverty, can disincentivize second earners and single parents to enter in a (formal)

3
 This assumes that the principal earner in the family is earning at MW. Different points for the principal earner are
examined in the paper’s subsequent sections.


                                                          3
job, and these effects are further augmented by childcare costs. In addition, disincentives will affect
families in the lowest quintile disproportionally because of the withdrawal and general design of
the 500+ benefit. Hence, the overall labor market impact of this transfer could be significant, either
in terms of a reduction in labor supply or in terms of a shift of preferences toward informal
employment.
These results are particularly relevant not only because of the magnitude of the disincentive but
also because the effects could be widespread. HBS data suggest that about 595,000 families are
now facing the risk of falling in a ‘poverty trap’.
It is important to note that this paper is not able to review the potential effects of this program on
farmers, as for this large and important group, thresholds are calculated on the basis land size.
         II.                                 Women’s Labor Supply, Childcare and Fertility
After the transition from central planning to market economy, the share of women in the labor
force in many Eastern European countries declined (Brainerd 2000, Pignatti 2016). Compared to
1990, the labor force participation rate of women in Poland dropped by over 6 percent and the
share of those above 65 years increased by about 5 percent. This trend mirrored the one in other
countries in Eastern Europe (Figure 1). The fall in participation rates, in combination with lowering
fertility rates, outmigration, and demographic aging, has put the problem of shrinking labor force
at the forefront of labor market policy across these countries (Pignatti 2016).
Figure 1: Change in female labor force participation rate (1990–2016) and share of population ages 50–64
and 65+ in transition countries
                                       12
Percentage Change From 1990 To 2016 




                                        8

                                        4

                                        0
                                               China   Estonia    Kyrgyz     Belarus    Poland       Ukraine      Russia      Czech        Slovenia
                                                                 Republic                                                    Republic
                                        ‐4

                                        ‐8
                                                                             Change in Female Labor Force Participation
                                                                              Population Share 65+
                                       ‐12                                   Population aged 50‐64, female (as a % of female population)
Source: Authors’ calculations based on World Development Indicators 1990–2016 (World Bank).
http://data.worldbank.org/data-catalog/world-development-indicators.
Both participation and employment rates of women in Poland remain below that of men and
of the European Union (EU) average. The labor force participation rate of women is significantly
lower than men, 61.4 percent compared to 74.8 percent (OECD 2015), although the tertiary
education rates are higher among women than men in Poland. In addition, full-time employment




                                                                                        4
of women in Poland (59.4 percent) remains behind the EU-28 average of 63.5 percent (Eurostat
2016).
Barriers to female labor force participation in transition countries have a complex set of causes
with a multiplicity of policy realms playing a part. A look into the recent history of female labor
force participation in transition countries offers valuable lessons to understand the current
problems: generous maternity leave benefits and state contributions to child-rearing were common
instruments of socialist policy and part of a larger pro-natalist policy paradigm (Fodor et al. 2002).
Although prewar Eastern European policies expected both men and women to be part of the labor
force, a gendered division of caretaking duties was already present. Mothers usually raised their
children up to the age of 3, with little possibilities to find formalized caregivers. When
grandmothers took over, mothers were expected to take part in the paid labor force again, with the
availability of some provisions that permitted a better work-life balance for women (for example,
leave when children got sick), enabling their participation yet limiting the quality of their
employment opportunities (Fodor 2003).
After 1990, many Eastern European countries, including Poland, reduced the generosity of state
support to families, thus putting more burdens on women as caretakers. The fast restructuring of
the transition economies was accompanied by a sudden increase in unemployment rates (which
affected women the most), while both cash and in-kind provisions by the state to families declined
(Fodor et al. 2002). Rates of return to the labor market after childbirth decreased, mainly because
of the lower availability of jobs and the closure of many childcare services that used to be provided
at the municipal level. Not surprisingly, this period was also marked by a fall in fertility rates.
In spite of this drop in actual fertility, families maintained their preferences for number of
children. According to opinion polls, between 1996 and 2012, the number of desired children in
Polish couples has remained unchanged (CBOS 2012). Nevertheless, the difference between the
desired and actual number of children has increased and appears to be larger in Poland than in
comparable countries: this points to clear barriers to having children in Poland. CBOS also finds
that childbearing and professional plans are closely interlinked.
The relation between labor force participation and fertility is bidirectional and depends on many
factors, especially the availability of childcare. On the one hand, one may see high fertility as a
cause for lower labor supply. For instance, one-third of women ages 18–45 who have children in
Poland “were either forced to give up work or failed to start it due to difficulties in providing care
for their children” (CBOS 2013). Women who choose to postpone childbearing exhibit stronger
labor market attachment and are more likely to have fewer children (Bratti 2015). On the other
hand, the literature points that securing stable employment for women is a driver for couples to
decide on having a second child (in light of greater financial security) (Bussolo, Koettl, and Sinnott
2015; Levin et al. 2016). One of the key factors that determines whether women can afford to work
relates to those public policies that affect the cost and availability of childcare: these can really
weaken or even reverse the relation between childbearing and employment outcomes. Empirical
studies from a variety of countries have shown that there are positive effects of affordable childcare
on the labor supply of mothers, especially lone mothers (Bauernschuster, Hener, and Rainer 2013;
Cascio 2009; Lefebvre and Merrigan 2008) and that generally, when childcare costs are lower,
labor force participation of mothers is higher (Anderson and Levine 1999; Blau and Currie 2006).




                                                  5
In addition, the literature on birth grants like the 500+ benefit in Poland suggests that such transfers
frequently only have ephemeral effects on fertility rates. Gauthier (2007; 2016) suggests that
policies have been linked to change in the timing of childbearing, not to the number of children.
This leads to initial increases in numbers of children that slowly fades over time.
Further, a sizable literature has emerged suggesting that enrollment in high-quality formal child
care has substantial positive long-term effects on child development, especially among low-
income households (Brilli, Del Boca, and Pronzato, 2016; Carneiro, Løken, and Salvanes, 2011;
Havnes and Mogstad, 2011). These findings highlight, from a different perspective, the potential
benefits of child care subsidies or public provision of institutionalized care.
Considering the demographic structure and the current social policy agenda in Poland, a policy
package that enables the combination of greater labor force participation of women with increasing
fertility rates could solve long-standing structural problems. Matysiak and Weziak-Białowolska
(2016) suggest that the conditions for reconciliation of work and childbearing consist of three
elements: (a) family policy and possibilities created by this policy to combine work and children,
(b) the labor market structure and possibilities to have and keep the job, and (c) perceptions
regarding gender roles. Ranking EU countries by these measures reveals that Poland ranks fourth
lowest on the overall index for the ability to combine work and children (Matysiak and Weziak-
Białowolska 2016).
These three elements also represent the potential levers for policy to support women’s work
and childbearing. International examples show that packages addressed to tackle this issue by
introducing a broad set of policy bundles can succeed in raising the fertility rate and still enable
women to participate in the labor force if they choose to. The composition of these packages
heavily depends on the primary aims of the country, yet some experiences can help illustrate which
combination of policies and circumstances have worked. Nordic countries focused family policies
to support working parents of young children through the expansion of childcare facilities and
reliance on short, yet generously paid, parental leave.4 These include quotas to encourage fathers
to share childcare duties (Morgan 2012; Thévenon 2011). Denmark, for example, increased its
fertility rate from 1.4 in 1985 to 1.7 in 2012. In Sweden, after a record low of 1.5 births per woman,
the fertility rates have seen a resurgence to 1.91 in 2012 (World Bank 2016). These developments
have been associated with the emerging focus on ‘new’ social policies, including family policies
facilitating work-family reconciliation and female employment participation that shifted family
policy in Sweden in the late 1990s (Fleckenstein and Lee 2014). Another example is Singapore,
where, in 2007, a comprehensive package of policy to promote female employment was introduced
that included flexible work arrangements, targeted active labor programs, and training programs
(Teo 2010). Many other countries have attempted to tackle the issue of female labor force
participation and declining fertility rates with such policy packages, producing a rich set of
evidence that overall shows varying degrees of success (Bick 2015; Cheng 1999).
On some aspects in particular, however, the literature seems to converge. Vuri (2016) summarizes
the findings of many studies, that “investing in quality childcare facilities, especially for young
children, can help achieve this goal [female labor force participation]. Accessibility, affordability,

4
  Paid parental leave (mostly maternal, with additional weeks available to share between partners) ranges between
30 weeks and up to about 50 weeks in Nordic countries (depending on additional time granted for shared parental
leave).


                                                         6
and quality are all important. Women’s pre-subsidy employment statuses, average wages,
childcare arrangements, and other factors not directly associated with childcare costs and
availability are also important. These indirect factors include childcare regulations, welfare
systems, and social norms. All of these factors might strengthen or reduce the effectiveness of
family policies.”
With current substantial changes to the welfare state structure in Poland, the link between female
labor market participation and fertility needs to be assessed. With the introduction of the 500+
benefit for the second and every subsequent child, the structure of this system changed
considerably and needs to be reexamined for its effects on incentives to enter or remain in the labor
market and fertility decisions. This paper will aim to contribute to this intensive debate by
examining the externalities caused by the design of the 500+ benefit in Poland. For this, we will
focus on the disincentive effects of entering the labor market for women and point to new
developments in the childcare provision and its effect on childcare in Poland that need further
research to fully comprehend the issue.
III.   Method and Approach
   a. Tax-Benefit Model and Its Assumptions
The OECD Tax-Benefit Model (TBM) is a tool to simulate how multiple tax and benefit rules and
their interplay affect the net income of households. This de jure model seeks to visualize the net
returns from employment at different levels of total household income and to let this vary
according to different family types. It aims to incorporate all taxes and contributions (for example,
income tax, social security contributions, and health insurance payments) and any benefits (social
assistance, child benefit, family benefits, and so on) that are in the law of the examined country.
Its strength lies in the ability to incorporate the complex social policy system with all the different
eligibility criteria and thresholds into a unifying framework and statistical program. The model is
particularly useful to synthetize the effect of different benefits in a complex social assistance
system, as in Poland. Figure 2 illustrates a summary of the different eligibility thresholds for
different noncontributory programs in Poland.




                                                  7
Figure 2: Eligibility thresholds for benefits in Poland (per capita in household)
                                                •Caretaking of disabled. Caregiver allowance
                                                •Disabled and age 75+: Attendance allowance
               Any income
                                                •Emergency: Special Need Allowance
                                                •500+ for every child after 1st
                PLN 1,922                       •Child birth: Birth Grant (national)

                 PLN 800                        •500+ means tested for first child 

                 PLN 725                        •Child in separated family: Alimony fund

                                          Moderate poverty line: PLN 668.7
                                                •Disabled member: Family allowance and up to 7 supplements 
                 PLN 664
                                                 to family allowance
                 PLN 623                        •Caretaking of disabled: Special caregiver allowance

                 PLN 574                        •Children 0–18: Family Benefit and up to 6 supplements

            PLN 542 (single),                   •Disabled or Elderly: Permanent Benefit
            PLN 456 (family)                    •Difficult life situation: Temporary Benefit

                                           Absolute Poverty Line: PLN 519 

Source: World Bank 2015.


The model also allows for a computation of the marginal effective tax rates and a visualization of
the poverty/inactivity traps.5 The model has several assumptions: individuals respond to incentives
to the extent that they are aware of the eligibility rules of each benefit; net income affects their
decisions to work; and households receive all benefits that they are entitled to in full. Even when
some of these assumptions are relaxed, the results remain overall insightful for Poland.6
For this paper, we have updated the latest published OECD TBM (2014) to represent the 2016
policy realm, and it also has validity for the first semester of 2017 in light of the lack of significant
reforms to taxation, labor market, or social benefit parameters. The updates were extensive and
included (a) new regulations of existing programs, (b) changes to income thresholds across most
programs, (c) inclusion of the newly introduced 500+ program for families, (d) changes to the level
of MW, and (e) alignment of contributions on labor contracts. The paper adds to the literature by
illustrating the exact level of earnings at which disincentives to work may occur and which



5
  Poverty traps describe a mechanism where an increase in labor income leads to a stagnation or even loss of net
income because of (a) the loss of a benefit/transfer or (b) taxes and other contributions that have to be paid. Marginal
effective tax rates are useful in identifying these disincentives created by the interplay of the entire tax-benefit
system in a country.
6
  The take-up rate for housing benefits, for example, may be one of these cases. Housing benefits in Poland have an
element that incorporates the different sizes of apartments and an assessment by an inspector to determine the exact
amounts of the benefit. This very specific award of benefits cannot be exactly assessed in this model. In addition,
HBS 2014 data suggest that the take-up rate for this benefit is the lowest in Poland.


                                                           8
program leads to this outcome. Second, the paper incorporates, in the work incentive calculation,
updated and realistic estimates of childcare in Poland, in upper and lower bound estimates.
We summarize here the design of the 500+ program, while the details on all the changes made to
the model to update information on all the other taxes and benefits are in the appendix. This
flagship project of the incumbent government has an estimated annual cost of PLN 22 billion to
PLN 25 billion (1.3 percent of GDP) and implementation started in April 2016. The program’s
main objective is to promote fertility by reducing the cost of having a large family. The benefits
target families with children with the following criteria:

          A payment of PLN 500 monthly for the first child (ages 0–17) in a household if the net
           income is below PLN 800 per capita or PLN 1,200 per capita if the child has a disability
          A universal payment of PLN 500 monthly for each additional child (ages 0–17) after the
           first
Distinguishing it from many other benefits, 500+ is not included in calculations for taxes,
contributions, or benefits. It is estimated to reach 2.7 million families in Poland and have positive
effects on significantly reducing child poverty (Goraus and Inchauste 2016; Myck 2015).
However, the generosity and design of the program that withdraws the complete benefit for the
first child if the income threshold is exceeded by PLN 1 creates the possibility for strong
disincentives to enter the workforce. While labor market disincentives have been studied, this
model provides the possibility to disaggregate each part of the tax-benefit system to understand
the origin of potential disincentives and offers a basis for policy reforms.
      b. Explanation of the Use of Different Family Types
The model allows for specifications of the different types of households. The number of partners,
the number of earners, number and age of children, and earning levels can be specified to examine
the eligibility for benefits for most of the household types in any given country.
IV.        Results
The following section discusses the results of the TBM for Poland 2016, with a particular focus
on labor market disincentives after incorporating childcare costs. The results are presented by
family type. The analysis showcases that especially in families in the lowest income quintiles, the
500+ program benefit creates strong disincentives to enter the labor force. This is particularly the
case for single mothers and potential second earners, usually mothers, in a couple where one parent
is already working at a low wage.
      a. Single Parent with 1 Child
Figure 3 illustrates the earnings schedule of a family with 1 parent and 1 child, with earnings
expressed in percentage of the 2016 average wage (AW).7 The gray line indicates gross income,
the blue line is net income, and the red dotted line is net income including the new 500+ benefit
payments. The remaining lines represent all benefits according to eligibility criteria and the dotted
blue line is the sum of income tax and social security payments.


7
    The average gross wage used in the model for Poland is PLN 45,521.41 per year.


                                                          9
If increasing labor income led to higher net earnings, both the blue and dotted red lines should rise.
While this was the case up to 2015, after introduction of the 500+ program, earning more than 25
percent of AW (PLN 11,380 per year) creates an income loss for single parents. In particular, when
earning is between 27 percent and 59 percent of AW,8 every marginal increase in income leads to
a reduction of net income (this is a ‘poverty trap’). The second small decrease in net income is
caused by the cutoff of the housing benefit, which is considerably lower in generosity.9
For a single parent, the difference between inactivity and working at MW full time with 500+ is
PLN 6,000.10 This is an increase by 27 percent of AW, where the difference was 47 percent of AW
before 500+. This does not mean, of course, that the family is necessarily worse off but, rather,
that the family attains a similar level of welfare without working.
Figure 3: TBM for single parent with 1 child

                           50,000
                           45,000
    Annual Income in PLN




                           40,000
                           35,000
                           30,000
                           25,000
                           20,000
                           15,000
                           10,000
                            5,000
                               -




                                                                                                                                                               100
                                         4
                                             8
                                                 12
                                                      16
                                                           20
                                                                24
                                                                     28
                                                                          32
                                                                               36
                                                                                    40
                                                                                         44
                                                                                              48
                                                                                                   52
                                                                                                        56
                                                                                                             60
                                                                                                                  64
                                                                                                                       68
                                                                                                                            72
                                                                                                                                 76
                                                                                                                                      80
                                                                                                                                           84
                                                                                                                                                88
                                                                                                                                                     92
                                                                                                                                                          96
                                    -




                                                                               Percent of Average Wage
                              T_TAX_SS           NETpl           FBpl               HBpl           GROSSpl              SApl           NET+500                 500+


Source: Authors elaboration based on TMB for Poland 2016

Figure 4 provides a decomposition of the effects at play when a family moves from inactivity to
an MW occupation, 0 percent to 48 percent of AW (vertical black dotted line in Figure 3).
Foregone social transfers amount to 52.2 percent of MW.11 In particular, the withdrawal of family
benefits is equivalent to 11.5 percent of MW, the loss of housing benefits is 13 percent, and the
500+ benefit withdrawal represents 27.5 percent of MW. When working at MW compared to
inactivity, the income of a single parent, therefore, only increases by 30.9 percent of MW (or PLN
6,751). Moreover, for a single parent with 1 child, working at an MW job likely requires having
to find some form of care for the child. Accounting a conservative estimate of the average costs in

8
  Once the Housing benefit is also withdrawn, the loss of income persists until 67 percent of AW.
9
  Technically, the lowest possible amount to receive the housing benefit is 2 percent of the lowest retirement.
Because the lowest retirement is fixed around PLN 880 (PLN 10,560 per year) now, this would mean that the lowest
possible housing benefit should be PLN 212 per year. However, in practice the payment up to this amount is
unlikely.
10
   MW is indicated by the vertical dotted black line in figure 4.
11
   All further percentages in this section refer to percentages of MW.


                                                                                      10
institutionalized care12 into the model, net income of a single parent increases by only 16.4 percent
of MW when working at an MW job compared to inactivity. This estimation does not yet account
for other costs of full-time work such as transportation costs. All in all, the incentive to start
working is noticeably low and does not encourage joining the labor force.
Figure 4: Change in income accounting for childcare costs

                               120
                               110
                                                           Total income
     % of Gross Minimum Wage




                               100
                                                             +16.4?%
                                90
                                80
                                70
                                60
                                50
                                40                           Transfers
                                30                            income
                                20                            -52.2?%
                                10
                                 0
                                       Earnings Composition before       Composition at MW      Composition of Earnings Lost


                                     ITpl   FBpl    HBpl     SCpl    SApl    500+   Net Labor Income    Child Care Costs

Source: Source: Authors elaboration based on TMB for Poland 2016.
Note: The figure represents earnings’ composition before a single parent is working (left) and after taking a job at
MW (center). Net labor income represents total labor income minus childcare costs, income tax, and social
contributions.




12
  Numbers taken from OECD calculations on the average cost for one child in public nursery. Because many have
to resort to private childcare, the actual average price in Poland for childcare is likely to be higher. After talks with
local think tanks and academics, the assumed cost for 1 child in urban areas is about PLN 1,000 per month. If these
costs are included in the analysis rather than the estimates used by the OECD, the incentive to join the workforce
would be completely eliminated. See Box 1 for a detailed explanation.


                                                                            11
 Box 1: Childcare costs for children between ages 0 and 3 years in Poland
 The OECD Tax-Benefit methodology indicates that “Childcare benefits for parents with children in externally
 provided childcare and the costs of that care have been introduced into the models but are not implemented for
 standard outputs.” (OECD 2015). This means that the calculated net income of families does not account for the
 fact that when all adults in the household move into employment, additional care responsibility will most likely be
 assumed by private institutions. To find out the real cost of care in Poland for children under the age of 3, we
 conducted interviews with local childcare researchers in Poland. During these interviews and subsequent research,
 we discovered that public spots in nurseries are hard to reach for most families because of an undersupply. The cost
 of private nurseries, which have been on the rise in Poland, varies between PLN 1,000 and PLN 1,500, depending
 on the region. A detailed report on the supply and cost of care can be found in Raport podsumowujący wyniki badań
 ogólnopolskich. For the analysis of childcare costs in this paper, we will assume the lower bound of PLN 1,000 per
 month, which we term ‘conservative estimate’.




     b. Single Parent with 2 Children
Figure 5 shows the case of a single parent with 2 children. The income boost of the 500+ program
in this case is very significant: the family receives a net income of PLN 28,416 per year compared
to PLN 16,416 if the 500+ program did not exist. This case illustrates what Goraus and Inchauste
(2016) have found in their estimation on the effect of the 500+ program: extreme poverty for
families with young children in Poland will nearly disappear. However, the additional income with
500+ when the single parent is out of the labor force nearly equals what the family would receive
if the single parent worked full time at MW (PLN 28,416 at inactivity with 500+; PLN 29,280 at
MW before 500+). After the introduction of 500+, the additional income gain from working at
MW is only about 31 percent of MW. The reason is that the additional income from work causes
the withdrawal of the means-tested part of the benefit.
Figure 5 shows that the ‘poverty trap’ spans from 42 percent to 84 percent of AW, meaning that
any additional earnings beyond PLN 39,751 per year will leave the single parent with less net
income until he/she can enter a job at around the AW.13
When accounting for childcare costs (Figure 6), only about a quarter of MW is gained when
moving into a full-time MW job for a single parent with 2 children.14 The computations assume
that only 1 child is in a public childcare facility, while the older child is either in a subsidized spot
that exists for children over 3 or already in school. However, in some cases where this is not
possible, the actual gains would recede to 11.7 percent of MW.




13
   These results do not take into account childcare costs yet. Considering that transportation costs and childcare costs
need to be added, the disincentives become even stronger.
14
   All charts (including pre-accounting for child care) can be found in the appendix.


                                                          12
Figure 5: TBM for single parents with 2 children

                               50000

                               45000

                               40000
   Annual Income in PLN




                               35000

                               30000

                               25000

                               20000

                               15000

                               10000

                                        5000

                                                      0
                                                           0
                                                           3
                                                           6
                                                           9
                                                          12
                                                          15
                                                          18
                                                          21
                                                          24
                                                          27
                                                          30
                                                          33
                                                          36
                                                          39
                                                          42
                                                          45
                                                          48
                                                          51
                                                          54
                                                          57
                                                          60
                                                          63
                                                          66
                                                          69
                                                          72
                                                          75
                                                          78
                                                          81
                                                          84
                                                          87
                                                          90
                                                          93
                                                          96
                                                          99
                                                                                         Percent of Average Wage
                                                                   T_TAX_SS                NETpl                FBpl                    HBpl
                                                                   SApl                    GROSSpl              Net+500                 500+
Source: Authors elaboration based on TMB for Poland 2016



Figure 6: Change in income accounting for childcare costs

160                                                                        Total income
                          % of Gross Minimum Wage




                                                                             +26.3?%
140

120

100
                                                                             Transfers
  80
                                                                              income
  60                                                                          -41.3?%

  40

  20

   0
                                                    Earnings Composition before           Composition at MW            Composition of Earnings Lost
                                                                                           Single 2 Children


                                                      ITpl     FBpl       HBpl    SCpl       SApl     500+     Net Labor Income       Child Care

Source: Authors elaboration based on TMB for Poland 2016.
Note: Earnings’ composition before the single parent is working (left) and after taking a job at MW(center). Net
labor income represents total labor income minus childcare costs, income tax, and social contributions.




                                                                                                13
     c. Married Couple with Second Earner Moving into Employment
A second set of scenarios in the TBM considers earning incentives for second earners in the
household when the first is already working. Take a household with 1 child where the principal
earner income is set at the MW: in the model, the family net income schedule shifts according to
the wage of the second earner, who, in 24 percent of the cases in Poland, tends to be the mother.15
Table 2: Gender of highest earning member by family type (for families with two earners)
                                                            Married, with 1 child      Married, with 2 children
            Sex                     Overall (%)
                                                                   (%)                          (%)
 Male                                   74                           72                          75
 Female                                 26                           28                          25
Source: Authors’ calculations with HBS 2014 data.
This allows representing the trade-offs faced by families when deciding if the second earner should
stay home looking after the children or enter the labor force. Under the current set of taxes and
benefits, Figure 7 shows that for the second earner, moving into work leads to only minimal
welfare gains for the household, even before accounting for childcare and other costs. In the most
extreme cases, when the second earner makes between 21 percent and 46 percent of the AW (which
is equivalent to a full-time MW job), the household will be actually worse off financially if the
mother works rather than if she stays home.16 If the second earner moves from inactivity to MW
employment, there is a moderate surplus in family income (PLN 4,800 per year), yet this does not
account for the fact that it is likely that additional costs such as childcare and transportation will
be incurred by the family.
Accounting for childcare costs, the moderate surplus from moving into work is almost completely
wiped out (Figure 8). This means that most of the time a mother has no financial incentive to return
to the labor market. While this concern has long existed, the introduction of the 500+ benefit
intensified it. Over half of the lost income in transfers (50.5 percent of MW) when the second
earner moves into employment is accounted for by the withdrawal of the 500+ benefit (27 percent
of MW).




15
   In Poland, this case is typically characterized by the man working full time with the woman staying home having
to assume caretaking duties. This can be confirmed when examining Labor Force Survey (LFS) data on causes of
inactivity. Please refer to Figure 8.
16
   At 22 percent of AW earnings for the second earner, the annual household income drops to PLN 28,830. With the
secondary earner staying at home, the annual income is PLN 29,660.



                                                       14
Figure 7: TBM for married couple with 2 earners (principal fixed approximately at MW) - 1 child

                           50000

                           45000

                           40000

                           35000
Annual Income in PLN




                           30000

                           25000

                           20000

                           15000

                           10000

                                      5000

                                         0
                                              46.9

                                              51.1
                                              53.2
                                              55.3
                                              57.4
                                              59.5
                                              61.6
                                              63.7
                                              65.8
                                              67.9

                                              72.1
                                              74.2
                                              76.3
                                              78.4
                                              80.5
                                              82.6
                                              84.7
                                              86.8
                                              88.9

                                              93.1
                                              95.2
                                              97.3
                                              99.4
                                                49




                                                70




                                                91




                                              112
                                             101.5
                                             103.6
                                             105.7
                                             107.8
                                             109.9

                                             114.1
                                             116.2
                                                             Percent of Average Wage – Total HH Labor Income
                                               T_TAX_SS             NETpl               FBpl               HBpl              SApl
                                               GROSSpl                                  Net+500            500+




Figure 8: Change in income accounting for childcare costs for married couple with 1 child

                                      160                           Total income 
                                                                      +10.3?%
                                      140
                  % if Minimum Wage




                                      120

                                      100

                                       80

                                       60

                                       40
                                                                       Transfers
                                       20                               income 
                                                                        ‐50.5?%
                                        0
                                             Earnings Composition before           Composition at MW       Composition of Earnings Lost
                                                        Married 2 Earner - Principal fixed at MW Spouse moving into Labor

                                             ITpl    FBpl    HBpl      SCpl    SApl        500+   Net Labor Income   Child Care

Source: Authors’ calculations.
Note: Earnings’ composition before the single parent is working (left) and after taking a job at MW (center). Net
labor income represents total labor income minus childcare costs, income tax, and social contributions.




                                                                                      15
Interestingly, in case the couple has two children, rather than one, the disincentive to work for the
second earner is much less severe (Figure 9). Although the 500+ is the most generous benefit, it is
withdrawn at the highest income level. The ‘poverty trap’ for this family type occurs when the
combined gross income of both partners reaches AW levels. This means that the disincentive is
shifted upwards considerably to about twice the MW. Therefore, while the family will be
financially worse off because of the loss of the 500+ payments when both adults earn at MW, the
disincentive does not affect families who are in the lowest two quintiles. Again, when accounting
for the fact that if the previously inactive partner decides to enter the labor market, there will be a
need for childcare, the incentive to enter further diminishes, and based on the assumption of
childcare costs, total earnings from work would increase between 22 percent and 36 percent.17
Figure 9: TBM for married couple with 2 earners (principal fixed approximately at MW) - 1 child

     60000

     50000

     40000

     30000

     20000

     10000

        0
              46.9
               49
              51.1
              53.2
              55.3
              57.4
              59.5
              61.6
              63.7
              65.8
              67.9
               70
              72.1
              74.2
              76.3
              78.4
              80.5
              82.6
              84.7
              86.8
              88.9
               91
              93.1
              95.2
              97.3
              99.4
             101.5
             103.6
             105.7
             107.8
             109.9

             114.1
             116.2
              112
                      T_TAX_SS                 NETpl                    FBpl                      HBpl
                      SApl                     GROSSpl                  Net+500                   500+




 V.          Empirical Relevance of the de jure Model
There is, of course, a chance that the level of earnings that could make families susceptible to
poverty traps is actually uncommon in reality. To verify this, we exploit the Polish HBS 2014, and
map the frequency of families in and around those earning levels where working more does not
pay off.
First, the family typologies that the model takes into account are frequent (about 4 million
households): the largest are married couples with 1 child (2 million families), followed by married

17
  Bar chart in the appendix only accounts for one child in need of nursery care, with the other one old enough to
take advantage of a subsidized spot in care for 0–6-year-olds or in school. If we were to assume that (a) both
children are in need of nursery care (0–3 years old) and/or (b) that only the regular, private spots are available for a
much higher price, the percentage increase in MW for the second earner moving into work would decrease from 36
percent to 22 percent (for scenario a) or even lead to a loss of 4 percent of net income for the family (scenario b). In
the case where both scenarios a and b were to occur at the same time, up to 59 percent of MW could be lost for the
family.


                                                           16
couples with 2 children (1.46 million), single parents with 1 child (0.44 million), and single parents
with 2 children (157,000). About 15 percent, 595,14618 families, display earning levels within the
critical threshold that would generate poverty traps if the inactive parent was to enter formal
employment.19 However, single parent families are those at greatest risk, as nearly a third fall
within these critical thresholds. Appendix A includes earnings’ distribution for all family
typologies. When restricting the distribution of earnings to families with children of similar age to
those in the model, it is still apparent that as many as 29 percent of earners were, in 2014, at the
critical levels that would today make employment unattractive.20
This finding is consistent with microsimulations that have been carried out to synthetically
estimate the labor supply response of 500+ (Myck 2016).21
Further, according to the LFS data, among the inactive 47 percent of the total population who
report the reason for inactivity to be ‘household matters’, only 22 percent are male while 62 percent
are female (Appendix C). This, in turn, means that while the TBM model presented in this paper
is silent as to whether the principal earner is male or female, it is likely that the second earners
affected by work disincentives are women.
However, using this type of model also has drawbacks. It cannot account for potential broader
effects that the 500+ program may have in the long run, e.g. on the improved ability for long-term
family planning. Further, this analysis only provides a preliminary look at the de jure system and
needs to be corroborated with actual data on labor market behavior of women in Poland to create
a coherent picture. Once these data (e.g. LFS) become available, a clearer picture on the labor
market effects of the 500+ program will emerge. Further, this type of analysis only regards labor
market entry incentives on the basis of net income. While income is certainly an important aspect,
it is not the only factor that influences labor market choices and therefore might disregard e.g. the
motivation to work for increased pension contributions over time as a long-term investment
strategy.
VI.      The Price of Making Work Affordable for Mothers of Young Children
      a. The Rationale for a Childcare Subsidy
Issues of care and family support have risen to the top of the Polish policy agenda with much of
the new national government initiatives focusing on these efforts. However, as childcare
availability remains low, local governments are increasing their efforts to support families. For
example, the municipalities in Szczecin and Nysa have introduced childcare vouchers for children
under the age of 3. The care voucher introduced under the ‘Family-friendly Szczecin’ program has

18
    Breakdown by each family type that falls within the poverty traps: Married 1 Child: 271,297 families; Married 2
Children: 132,446 families; Single Parent 1 Child: 138,964 families; Single Parent 2 Children: 52,440 families.  
19
    These estimates drop zero income households from the analysis and include all family types, before accounting
for the age of children.
20
    This number refers to single parent families. For married couples, restricting the distribution of earnings to
families with children of similar age to those in the model leads to a 2 percent increase in families who fall into the
poverty trap.
21
    In his paper, Myck (2016) finds that the 500+ program will reduce labor supply among families with children by
about 240,000 individuals, principally mothers in families with one child or two children. This finding is consistent
with the results in this paper.



                                                          17
gained wide media attention because of its innovative approach in supporting families with PLN
500 per month for their chosen form of private care, which includes nannies, nurseries, and daycare
centers (Kowalewska 2015; Wójcik 2015).
A salient question is to what extent families could be subsidized to make market childcare prices
more affordable and restore the incentive to work among second earners. This would have the
immediate advantage of restoring choice between caretaking or working among recent mothers,
and from a societal point of view, it would be a way to reduce the scarring effects of long-term
inactivity on future labor market outcomes.
The optimal design for subsidy, at a given cost of childcare, is assumed to be the one that restores
the incentives to work. Therefore, the question is, “how high does the subsidy for care (for
example, in the form of vouchers) have to be, until the disincentives to enter employment, created
by the 500+ program as shown in the previous sections, are nullified?”
   b. Simulating a Childcare Subsidy and Its Impact on the Affordability of Working
The following section models the effect of introducing a subsidy to cover the cost of private
childcare on the net income from formal work for mothers with young children. The results are
based on the outputs provided by the updated TBM for Poland, yet they provide more realistic
childcare cost figures. The basis upon which childcare costs for children below 3 years were
calculated is shown in Box 1. Different levels of subsidies are introduced to examine how high the
subsidy would have to be to restore the incentives to work for parents. Based on existing small-
scale voucher programs, we have chosen to increase the voucher amounts in increments of 25
percent of the total costs of care.
Single Parents
Figure 10 shows the net income for a single parent when moving from inactivity into MW
employment, accounting for childcare cost, with varying amounts of care subsidies. When no
subsidy is provided (Net+500+childcare cost), single parents with 2 children have a lower income
compared to inactivity until they earn 87 percent of the AW. To make it worthwhile, including
transportation and other costs that may occur when moving into employment and childcare, the
net gain for single parents with 2 children compared to not working occurs much later: even
working at AW levels, the added income for single parents is only PLN 3,355 more compared to
inactivity. Note that this estimation assumes that the parent only has to pay for one child in private
care, while the other can already take advantage of spots in public daycare centers for children
above the age of 3, which are highly subsidized and more readily available compared to the
provision for children ages 0–3. A loss of net income can still be observed with the 25 percent
subsidy, where the same income in inactivity is only achieved when reaching income above 55
percent of the AW. Only with a subsidy of half of the childcare costs there is a net income gain,
though only PLN 865 annually, from moving into MW employment. Subsidies that are at 75
percent and 100 percent of childcare costs offset the disincentives to enter the labor force by PLN
3,865 and PLN 6,865 per year, respectively, encouraging labor force entry.




                                                 18
Figure 10: Net household incomes accounting for different levels of childcare subsidies and labor income

                                                                           Single Parent 2 Children 
                                                                Moving  from Inactivity into MW Employment
     Annual Net Household Earnings (PLZ)




                                           37400



                                           28700



                                           20000
                                                   0 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
                                                                              Labor Earnings as a % of AW
                                                        Net +500+ CCC    CCS 25%         CCS 50%      CCS 75%   CCS 100%


Similar results can be observed when examining families of single parents with 1 child. A 50
percent subsidy of childcare costs equalizes the disincentives created by the design of benefits and
taxes, a 75 percent subsidy creates a mild incentive, and a 100 percent subsidy creates a strong
financial incentive to move from inactivity to MW employment (Appendix F).
Married Couple with 1 Child
For families with two parents, it is assumed that once the second earner moves into employment,
private childcare will become necessary.22 When examining the simulations on labor market entry
for the second earner, the first earner’s income has to be fixed. We simulate the labor market
incentives of the second earner for families with fixed principal earners’ income at three levels:
(a) MW, (b) median wage for the particular family type, and (c) mean wage for the family type.23
This allows examining different types of families across the income spectrum and the effect the
combination of the 500+ benefit withdrawal and childcare costs may have on their decision to
enter or stay out of the labor market.
For a family with 1 child, where the principal earner is fixed at MW, the picture looks similar to
the one seen earlier. Because of the design of the tax-benefit system in Poland, the withdrawal of
the 500+ benefit, and childcare costs, the net annual income of this family would drop by PLN
6,581 when the second earner moves from inactivity into MW employment. Providing a subsidy
of 25 percent of the childcare costs still leaves the family worse off (PLN 3,581) when the second
earner moves into employment. Even when half of the childcare costs are covered by a subsidy, a
slight disincentive remains (income loss of PLN 581 annually). Only when a subsidy of 75 percent
or 100 percent of childcare costs is available to families, there is a net gain (of PLN 2,451 and PLN
5,451 respectively) from moving into employment for secondary earners (Figure 11).


22
   At the same time, it is assumed that in the case where only one parent is currently employed, no private childcare
will be utilized by the family.
23
   Tables with detailed information of these values can be found in the appendix.


                                                                                    19
Figure 11: Labor market incentives for second earners for families with 1 child

                                          Second Earner Moving from Inactivity into MW Employment                          
 Annual Net Household Earnings 


                                                        (Principal Earner Fixed at MW)  
                                  44300


                                  39440
             (PLZ)




                                  34580

                                  29720


                                  24860

                                  20000
                                           47
                                           95
                                           95
                                           96
                                           97
                                           97
                                           98
                                           99
                                           99
                                          100
                                          101
                                          102
                                          102
                                          103
                                          104
                                          104
                                          105
                                          106
                                          106
                                          107
                                          108
                                          109
                                          109
                                          110
                                          111
                                          111
                                          112
                                          113
                                          113
                                          114
                                          115
                                          116
                                             Net+500+CCC         CCS 25%          CCS 50%        CCS 75%         CCS 100%


Examining the income distribution of top earners in families in Poland reveals that the bottom 20
percent make less than MW.24 This means that the aforementioned incentive issues occur mostly
in families at the bottom 20 percent of the income distribution, whom programs such as the 500+
benefit were partly designed to support.
When income of the principal earner is fixed at median wage for this family type, in this case 81
percent of AW,25 even without a subsidy for childcare there is a gain in income by PLN 3,851
when the secondary earner moves into MW employment (Appendix F). It is important to note that
while there is no disincentive in this case, there is still no large economic incentive for the second
earner to enter the labor force because of the additional 100 percent of MW income that the
secondary earner gets, only 18 percent is not taxed. Only at a subsidy of 50 percent of the childcare
costs the family receives a considerable net income gain (around half of the MW). Therefore, while
the disincentive effects are strongest for the poorer deciles of the population, they persist.
Married Couple with 2 Children
While for married couples with 2 children the situation looks similar, it illustrates the underlying
system of benefits and their disincentive effects well. Because the calculation of the means-tested
aspect of the 500+ benefit for the first child is based on the number of individuals in the family,
the withdrawal of the benefit occurs at a much higher point of the income schedule. This allows to
separately observe the two aspects of the tax-benefit system under scrutiny. First, we will examine
what happens when the principal earner is fixed at MW while the secondary earner is moving from
inactivity to an MW job.
Without subsidies for childcare costs, there is a net income loss (PLN 1,122) for moving into MW
employment for the second earner. While providing a 25 percent subsidy for childcare costs leads
to a marginal increase in net income, when moving from inactivity to MW employment (PLN

24
   This includes all types of incomes that are used to determine eligibility criteria for benefits and taxes in Poland,
including farm income.
25
   81 percent of AW = PLN 36,904 annual gross income.


                                                                             20
1,878 per year), these gains are lost when the 500+ benefit withdrawal occurs at 100 percent of
AW of combined household income. This means that if only one of the partners is earning slightly
more than the MW, which is likely when examining the earnings’ distribution (see Appendix D),
even with a 25 percent childcare subsidy, a disincentive due to income loss (PLN 2,284 per year)
compared to inactivity of the second earner persists. As seen earlier, the 50 percent subsidy mostly
neutralizes the disincentive for the second earner to enter the labor market once 500+ for the first
child is withdrawn.26 While the 75 percent subsidy provides a considerable net income gain when
the second earner moves into employment (PLN 7,878 per year), this economic incentive is also
weakened once the family jointly earns at 100 percent of AW (PLN 3,716 per year). Therefore,
broadly in line with the previous results, a 75 percent childcare subsidy provides moderate
incentives, while a 100 percent subsidy to childcare costs can incentivize second earners to move
into the labor force.
Figure 12: Labor market incentives for second earners for families with 2 children

                                 Second earner moving from inactivity into MW employment  (principal earner 
                         53040                             fixed MW)  2 children
     Annual Earnings in PLN




                         45360




                         37680




                         30000
                                  47
                                  94
                                  95
                                  95
                                  96
                                  97
                                  97
                                  98
                                  99
                                  99
                                 100
                                 101
                                 102
                                 102
                                 103
                                 104
                                 104
                                 105
                                 106
                                 106
                                 107
                                 108
                                 109
                                 109
                                 110
                                 111
                                 111
                                 112
                                 113
                                 113
                                 114
                                 115
                                 116
                                 116
                                       Net+500+CCC       CCS 25%       CCS 50%       CCS 75%       CCS 100%

It is important to note that when the principal earner’s income is fixed at median wage for this
family type, the disincentive still exists, but it is less pronounced (Table 3). Again, this leads us to
assume that the negative labor market disincentive effects of the combination of the design of the
500+ benefit and the childcare costs for children between the ages of 0 and 3 will affect the poorer
sections of the population more strongly.
When examining Table 3, it becomes apparent that not providing a subsidy for childcare costs for
children ages 0–3 leads to a strong disincentive effect when the second earner moves from
inactivity into MW employment. The exception is married couples with 1 child whose principal
earner makes the median wage, while the second earner moves into MW. The negative income
effect, caused by a combination of the 500+ withdrawal and childcare costs, is stronger for families
in the lowest quintile of the population. In terms of a subsidy to mitigate the labor market
disincentives, the 25 percent subsidy for childcare costs is not high enough to counter the effects
as seen in Table 1, and the 50 percent subsidy barely neutralizes the negative effects in most cases.

26
 Even if the second earner would move to MW employment and the principal earner also does not make more than
MW, the annual income gain is relatively low: PLN 4,878.


                                                                    21
Starting with the 75 percent subsidy of childcare costs for children ages 0–3, it is observed that an
incentive to enter the labor force is restored. Logically, the best incentives for parents and second
earners are observable with a full coverage of childcare costs (100 percent subsidy).
Table 3: Summary of childcare subsidy simulations
           % of typical child care costs that is     No
                                                               25%   50%        75%               100%
                                    subsidized subsidy
                    Net gain from moving from inactivity to MW employment (PLN)
                                         including childcare cost
 Single Parent with 1 Child                        −5,620      2,620  380      3,380              6,380
 as a percentage of MW                              −26         −12    2         15                29

 Single Parent with 2 Children                       −5,135    2,135         865       3,865      6,865
 as a percentage of MW                                 −24      −10           4          18         31
 Principal Earner fixed at MW
 Married Couple with 1 Child                         −6,581    3,581        −581       2,419      5,419
 as a percentage of MW                                 −30      −16          −3          11         25
 Married Couple with 2 Children                      −1,122    1,878        4,878      7,878      10,878
 as a percentage of MW                                 −5         9           22         36         50
 Principal Earner Fixed at Median
 Married Couple with 1 Child                          3,851    6,851        9,851     12,851      15,851
 as a percentage of MW                                 18        31           45         59         73
 Married Couple with 2 Children                      −3,270     −270        2,730      5,730      8,730
 as a percentage of MW                                 −15       −1           12         26         40
                        Moving from inactivity to point of 500+ withdrawal (PLN)
 Married Couple with 2 Children at 100
                                                     −5,284    2,284        7,16       3,716      6,716
 percent of AW
 as a percentage of MW                                 −24      −10           3          17         31
Note: <0 = disincentive; 0–10 = neutral/no gains; 10–25 = moderate gains; +25 = considerable income gains.



VII.    Conclusion
This paper modeled the labor supply incentives from noncontributory benefits with sharp
eligibility cutoffs, with a particular focus on families with children ages 0-–3, taking the case of
the 500+ program in Poland. While on the one hand the program has shown to be very effective at
reducing extreme child poverty in Poland, unintended consequences on the labor market
participation incentives might occur. The analysis revealed that, especially in families in the lowest
income quintiles, the 500+ program benefit creates strong disincentives to enter the labor force.
This is particularly the case for single mothers and potential second earners, usually mothers, in a
couple where one parent is already working at a low wage. When including updated prices for
private institutionalized care for young children in Poland, it becomes clear that working for
parents, especially mothers, in 595,146 families results in a net loss of salaries that are below the
AW.
The consequences of the benefit are at odds with the partial aim of the 500+ benefit to help exactly
this demographic with the provision of the means-tested aspect of the benefit for the first child and


                                                       22
may also be counterproductive to the central aim of incentivizing fertility. Further, this could create
an incentive for unregistered employment and envelope payments.
We then explore which level of childcare subsidy could cancel out, or reverse, the disincentives
created by the current tax and transfer system. This is important given that local governments
across Poland are experimenting with this type of instrument. Even a 50 percent subsidy of average
childcare costs barely neutralizes the observed work disincentives. A 75 percent subsidy of average
private childcare costs for children ages 0–3 would be necessary to restore a significant incentive
to enter the labor force.
The results of this paper further support that providing quality, affordable childcare also for
children ages 0–3 is indispensable in the Polish context. A subsidy that is higher than 75 percent
of the current market costs for childcare in private institutions or public provision of more spots in
nurseries and daycare centers could help boost attendance and possibly also supply by the private
sector. While the government has recently increased the budget for the Maluch program, which
provides financial support for the creation of alternative forms of childcare for children up to the
age of 3, more needs to be done to offset the negative labor market incentive effects created by the
500+ program. Finally, reforms to the means-tested element of the benefit could reduce these
disincentives. Solutions include a taper that is similar to the one recently introduced to the family
benefits in Poland or a transformation of the universal benefit for children in Poland into a
childcare benefit altogether.




                                                  23
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                                               26
IX.      Appendix
Appendix A: Definitions, Explanations, and Threshold of Relevant Policy Changes in Poland
Changes to Family Benefit
The Act on Family Benefits of November 28, 2003 (Polish Journal of Laws of 2015, item 114)
builds the legal foundation of the Polish family benefit. It was amended in 2014 and 2015. The
latest reforms changed the income thresholds of the benefit and slightly increased the amounts of
the benefit paid out. Since the last OECD TBM for Poland in 2014, the following changes were
not included in the model: (a) changes in the amount of benefits awarded per child, (b) income
threshold adjustment, and (c) the new ‘penny-for-penny rule’ that introduces a taper. The following
sections will discuss these changes in detail.
      Changes in the Benefit Amount Awarded
The new amounts that were used in the model are PLN 89 for children up to the age of 5, PLN 118
for children up to the age of 18, and PLN 129 for children up to the age of 24 (if still studying).
Compared to the regulations introduced in November 2012, the family benefit increased by PLN
12 per child in the first two age groups and by PLN 14 in the oldest age group.
      Income Threshold Adjustment
While earlier the withdrawal rate for the family benefit was fixed at a net income per family
member that is above PLN 574 per month, the newest reforms included a considerable increase in
the withdrawal rate by raising it to PLN 674 per family member per month. This had led to an
increase in the families that are eligible for the benefit and may change the incentive structure,
depending on the policy mix.
      Zloti-for-Zloti Rule
While the two previous reforms constitute a first-order change that is incremental in nature, the
‘zloti-for-zloti’ reform signifies a second-order change according to Peter Hall’s classification of
policy change (Hall 1993). While earlier the benefit was withdrawn fully when exceeding the
threshold, the penny-for-penny rule introduces a taper.
Adjusted Income Thresholds and Amounts in Benefit Awarded
All changes that were made to eligibility thresholds of benefits by Polish lawmakers were included
and updated in the model. This contains the aforementioned family benefits, housing benefit,
income tax, social security contributions, and other small adjustments to ensure the best possible
translation of the laws into the model.
Newly Introduced 500+ Benefit
The Family 500+ program consists of a monthly payment of PLN 500 (€115) for every second and
subsequent child until the age of 18. The benefit is also extended to the first child in families with
income per capita below PLN 800 or below PLN 1,200 (€274) if there is a disabled child in the
family. The program does not include an income threshold for high-income earners, and payments



                                                 27
are to be administered by municipal social assistance units based on the funding from the state
budget (Goraus and Inchauste 2016).
Family Income Included in 500+ Means Test for First Child
The family income considered for the 500+ means test for the first child includes the following:

      Taxable income under the Income Tax Act from individuals reduced by deductible
       expenses, taxes, social security contributions, and health
      Income from leases, subleases, and so on reduced by a flat-rate income tax and national
       insurance contributions and health (declared by the taxpayer in the previous fiscal year)
      Income taxed under tonnage tax with respect to part of the income earned by shipping
       companies using commercial vessels
      Income from farms taxed - agricultural tax
      Income earned in other countries less paid abroad Polish income taxes and social security
       contributions and compulsory health insurance, income family benefits
      Income non-taxable or tax exempt under the provisions of the income tax from
       individuals (for example, pensions, cash benefits, global energy, additives veterans,
       sickness benefits, child support, and doctoral scholarships)




                                               28
Appendix B: Poland: Households and Families with Children (from Goraus and Inchauste
2016)
Table B1: Poland: Households and families with children
                            Households                                  Families
                          Percentage     Estimated                                     Estimated
            Number of                                     Number of    Percentage
                              of       monthly payment                                  monthly
            households                                     families    of families
                          households       (PLN)                                     payment (PLN)
 0 kids      9,429,211      68.92            —            10,604,496      71.11            —
 1 kid       2,350,037       17.18         412,707,000    2,436,284       16.34       441,130,000
 2 kids      1,474,660       10.78        1,069,167,000   1,459,893        9.79      1,065,536,125
 3 kids       334,194         2.44         444,781,875     321,418         2.16       428,786,500
 4 kids       68,108          0.50         131,400,875     65,993          0.44       127,566,750
 5 kids       20,281          0.15         50,002,250      18,847          0.13        46,416,625
 6 kids        3,501          0.03         10,503,750       3,042          0.02        9,126,750
 7 kids        1,217          0.01          4,198,250       1,217          0.01        4,198,250
 8 kids         221           0.00           882,000         221           0.00         882,000
 9 kids         268           0.00          1,206,000        268           0.00        1,206,000
 10 kids        103           0.00           515,000         103           0.00         515,000
 11 kids        106           0.00           580,250         106           0.00         580,250
 Total      13,681,906      100.00        2,125,944,250   14,911,886     100.00      2,125,944,250
Source: Own estimates using HBS 2014.




                                                   29
Appendix C: Reasons for Inactivity, by Public Employment Services (PES) Registration and
Gender for Workable Population

 100
  80
  60
  40
  20
  0
            Female             Male                  Total            Female              Male                Total
                       Inactive PES registered                                 Inactive, not PES registered

  found job/waiting to start   discouraged       household/family matters   retired/elderly   own illnes/ disability   other

Source: Activation and Public Employment Services in Poland - Enhancing Labor Market Policies for the Out-of-
Work Population: LFS Poland, 2013.


Appendix D: Distribution of Highest Monthly Wage (Principal Earner) by Family Type
using HBS 2014




                                                             30
Appendix E: Additional Bar Charts for Families Where Earner Moves from Inactivity to
MW Earnings
Figure E1: Change in income composition from moving from inactivity to MW for single parent with 1 child


 120                                                                      Total
 110                                                                     income
 100                                                                     +30.9?%
                             % of Gross Minimum Wage




  90
  80
  70
  60
  50
  40                                                                    Transfers
                                                                         income
  30
                                                                         -52.2?%
  20
  10
      0
                                       Earnings Composition Inactivity                Composition at MW            Composition of Earnings Lost


                                                              ITpl   FBpl     HBpl    SCpl         SApl   500+   Net Labor Income

Figure E2: Change in income accounting for childcare costs for married couple with 2 children

                              220


                              170
   %	of	Gross	Minimum	Wage




                                                                             Total income 
                                                                                +36 ?%
                              120


                                        70


                                        20

                                                       Earnings	Composition	before      Composition	at	MW          Composition	of	Earnings	Lost
                                  ‐30
                                                       ITpl   FBpl    HBpl     SCpl    SApl        500+   Net	Labor	Income    Child	Care

Source: Authors’ calculations.
Note: Earnings’ composition before the single parent is working (left) and after taking a job at MW (center). Net
labor income represents total labor income minus childcare costs, income tax, and social contributions.




                                                                                              31
Appendix F: Additional Figures with Simulations with Varying Levels of Childcare
Subsidies
Figure F1: Single parent with 1 child moving into employment
   Annual Earnings in PLN




                            33,888




                            16,944




                                0
                                     0 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
                                                                         Earnings as a % of AW
                                           NET 500+ CCC        CCS 25%           CCS 50%         CCS 75%        CCS 100%



Figure F2: Single parent with 2 children moving into employment

                            46800
   Annual Earnings inPLN




                            28400




                            10000
                                     0 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
                                                                         Earnings as a % of AW

                                          Net +500+ CCC        CCS 25%         CCS 50%           CCS 75%       CCS 100%


Figure F3: Single earner moving from inactivity to MW employment (principal earner fixed at 81 percent of
AW-median)

 61,188


 45,792


 30,396


 15,000
                               81 128130131132133134136137138139140142143144145146148149150151153154155156157159160161
                                               Earnings as a % of AW (for household ‐ Principal Earner fixed at 81%)
                                          Net+500+CCC         CCS 25%         CCS 50%            CCS 75%       CCS 100%




                                                                            32
Figure F4: Second earner moving from inactivity to MW employment (principal earner fixed at 96 percent of
AW-mean)


 65,819


 50,546


 35,273


 20,000
          96 143144146147149150152153154156157159160162163165166167169170172173175176177179180182183
                          Earnings as a % of AW (for household ‐ Principal Earner fixed at 95%)

                     NET+ CCC          CCS 25%          CCS 50%         CCS 75%         CCS 100%



Figure F5: Second earner moving from inactivity to MW employment (principal earner fixed at 88 percent of
AW-median) - 2 children


58672




46836




35000
           88       135         136       138        139          140      142       143          144   145
                          Earnings as a % of AW (for household ‐ Principal Earner fixed at 88%)
                    Net+500+CCC          CCS 25%           CCS 50%        CCS 75%          CCS 100%




                                                       33