Earned Income Tax Credit in a Disaggregated Labor Market with Minimum Wage Contracts

An earned income tax credit is introduced in a dynamic CGE model with overlapping generations and imperfectly competitive labor market segments. The model is calibrated to a 10 percent sample of a register of all persons and workplaces in Denmark and scaled to the level of National Accounts. Each labor market segment is covered by a collective bargaining agreement, except one that is competitive. In all segments a distribution of workers with different productivity exists. A tax credit, which increases the net income of the poorest full.time employed workers in the economy by DKK 5000, reduces unemployment by 2.5 percentage points. Since the marginally employed have a productivity lower than the average worker, employment measured in productivity units increases only by approximately 1.5 percentage points. Women and younger generations tend to gain from the policy. The effect of the policy depends crucially on the initial level of unemployment because the productivity distributions are highly non-linear: if the initial level of unempolyment is halved to 5 percent so are the effects of unemployment and employment.