Evaluating Labour Supply Responses to an In-Work Benefit for Spain

Spain records one of the highest rates of in-work poverty in the European Union (Eurostat, 2024). Despite this, the development of policies specifically targeted at supporting low-income workers has been limited, especially when compared to other European countries (Laun, 2019). This policy gap, combined with the expansion of minimum income guarantees schemes, may weaken work incentives by narrowing the income gap between employment and nonemployment, thereby increasing the risk of poverty traps among low-income households (Domínguez-Olabide & Zalakain, 2023).

This paper proposes the introduction of an in-work benefit in Spain, inspired by the American Earned Income Tax Credit (EITC), with the aimed of improving the living conditions of the low-wage workers while strengthening labour market incentives. As in the EITC, the benefit is implemented through the Spanish personal income tax system as a refundable tax credit, varying according to household type. In particular, we propose a more generous credit for families with dependent children, as they face higher poverty rates. The reform is simulated using the EUROMOD microsimulation model, based on 2022 EU-SILC data. Labor supply responses are estimated using a structural labour supply model.

The main results suggests that the proposed in-work benefit would not generate negative labour supply effects. On the contrary, the reform is associated with an overall increase in labour supply, particularly in full-time employment. Positive effects are found for both single and couples, with stronger impacts among households with dependent children.