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- The objective(s) of the Welfare State


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Title: - The objective(s) of the Welfare State

MGTECON 580 Class 7
Reforming the Welfare State
- The objective(s) of the Welfare State - Why
reforms have started in the eighties? -
Cross-country differences in generosity - Common
reform elements - The US Model welfare to
work - The UK Model the third way and the New
Deal - The NL Model Flexicurity to reduce costs
and increase employment - Evaluation of welfare
and labor reforms - Why does Europe have a
Welfare State, the US not?
The objective(s) of the Welfare State
The Welfare state - Insures the population
against social risks - thus increases social
cohesion and equality
  • The five (partial) responsibilities
  • Health
  • Pensions
  • Labor relations
  • Income maintenance
  • Poverty prevention, income redistribution
  • Differences exist for each pillar in
  • Comprehensiveness for all citizen or subset of
  • Generosity to what extent
  • Type of responsibility primary, subsidiary,
    last resort

Why reforms since the eighties?
Economic reasons for change in upwards trend -
Budgetary limits - Impact on competitiveness -
Suboptimal incentive effects
Background drivers - European Integration -
Globalization - Benchmarking with US
Ideological shift from left to right
Philosophical Background
The Welfare state - Insures the population
against social risks - thus increases social
cohesion and equality
  • Three welfare philosophies
  • 1. Liberal philosophy objectively defined
  • Stigma-free rights, free determination to spend
  • 2. Socialist dint encourage use of benefits
  • Private firms not optimal in health
  • 3. Solidaristic systems including the middle and
    upper class
  • The optimistic view on human response to welfare
  • Living with secure, high-income reveals the best
    in human nature
  • peace, humanity, social responsibility
  • The pessimistic view the fundamental critique of
    the US reforms
  • Welfare makes people lazy or what should
    alleviate poverty has finally fostered
    dependency resulting in isolation, costs,

Social protection in of GDP (1996 Eurostate,
OECD, BBN, p 32f)
Top group 30 - 34 DK, SF, S Middle
group 25 - 30 G, A, F, B, NL, UK Low
group about 20 SP, P, GR, IRE (18 EU
Min) US 15.9 EU 27.5
Remark 1 there are accounting issues Benefits
can be taxed Tax incentives are hidden
government expenditures Mandatory requirements
may substitute payments Differences in statuary
rates and in effective (exemption for South
Italy) Difference in net social protection
smaller 17 (US) vs. 38 (DK) Remark
2 Expenditure increased in EU up to 1995
(exception NL - 1.5 of GDP, IRE
0.0) Consolidation started in second half
Expenses for the main pillars (1 of GDP)
Conclusion main costs are pensions plus health
Financing DK, SF by general taxes Several EU
countries payroll taxes between 10 of wages
in DK, SF and 40 in NI, Italy
Goal income equality and poverty prevention
Minimum wage as instrument to prevent
poverty Some countries have statuary,
nation-wide minimum B, F, GR, NL, P, SP Others
define them in collective bargaining with
industry differences Some conditional on age
and apprenticeship Minimum wage ranges from 33
of average wage in Spain to 72 in
Italy Poverty rates as defined by 30 of US
median (post tax and transfer 1991S Kenworthy
1998 in BBN, p 65) percentage of citizens living
in households with below benchmark incomes SF,
Germany, B 2 UK, I, F 5 US 6.6 Income
inequality Highest in P, SP, GR, I, IRE,
F Lowest in SF, DK, S
Generosity indicators
Public pensions in of active income
(Replacement 1) Between 15 (SF) and 75 (F),
US 30 A miniscule convergence over
time Unemployment benefit in of active wage
(Replacement 2) Between 10 (I) and 70
(DK) Social assistance programs (means tested
for the needy) Between less than 10 (Greece,
S) and 80 Denmark
Four types of welfare reforms
  • Austerity reducing expenditures
  • Across the board cuts
  • Discourage program take-up
  • From encouragement to waiting days (sickness
    benefit NL)
  • More selective targeting of beneficiaries
  • Dental care to non-youth people (S gt 19 YR)
  • Radiation to old people (S gt 80 YR)
  • Widow in NL gets pension if too old to work
  • And no co-habit with a new partner
  • Actuarian reforms contributions should match
  • Calculated as an insurance would do (excl.
  • Administrative reforms
  • Better match w/ needs
  • Competition of institutions
  • Decentralization
  • Efforts to enforce duties
  • Specifically training, search, fair effort

Types of pension systems, trends in reforms
Three types of system possible
  • Solidaric pensions
  • Revenue financed and flat rate
  • Achievement systems
  • Contribution financed
  • Earnings related benefits
  • Residual pension plus individual responsibility
  • All northern countries shifted to insurance
  • Tax encouragement for second tiers (NL)
  • Increasing choices of investment
  • The main reform trends
  • Reducing benefits without systems change
  • Changing from pay as you go (flow) to funded
    accounts (stocks)
  • Bonus for working, malus for early retirement
    more actuarian elements
  • Stepping back to residual pension and two-tier
    or three-tier system
  • Minimum by government, firm plans, tax
    benefits for private programs
  • Increasing choices (towards privatization)

Netherlands model the first part time society of
the world
  • Original goal
  • Cost reduction traded against shorter workweek
  • But not across the board but individually
  • The surprise
  • Drastic diffusion of part time work without
  • Starting from low employment / lowest female
    participation (10, today 50)
  • To one and a half earner model 35 (EU 17)
  • Two breadwinner households 1m to 2.4 20 to 50
  • Success indicator
  • Employment increased by 1.8 p.a. (83-97)
  • Three quarters part time
  • Part time model strategy was partly not intended
  • Part time option first reinforced by adverse
    labor market
  • Then discovered and promoted by politician
  • Then adopted by trade unions and politicians p 26

History and policy in NL
Government promoted male dominance in work
relations Marriage bar for female civil
servants at government ended 57 (visser p.
28) But in municipalities 10 years longer Most
unions accepted ending married womens employment
contracts p. 28, unlawful since 1975 Highly
regulated 80 of Dutch employees covered by
collective bargains The background for the new
evaluation Weak unions, strong preference of
firms, to get young ICT experienced
people Women tried to keep job Local
government to save wages Disentangling of
working (shorter) and business hours
(longer) Within trade union teacher and social
workers started rethinking
Part time work without marginalisation
- Majority is voluntary part time work (Rubery et
al 99 table 7.5, Eurobarometer) 1997 only 5.5
of part time workers wanted to work full time
p.36 - four times higher ratio in EU
average Most part time jobs are standard
contracts, undetermined length (80) Subject to
full dismissal protection, pro-rata
insurance Only marginally more irregular working
time Minimum wage exemption for less than 30
eliminated (thirds rule 1993) Lowest difference
in gender wages (7 controlled for sector,
occupation, seniority) Elimination of women
discrimination in disability, pensions (under
conservative government) Remaining white spots
(9 seasonal, young, women, low pay - Finally
even center left (1989 - 94) and Lib-Lab (1994 -
2000) accepted part time model - The final
triumph in July 2000 part time work becomes
qualified right Individuals in firms with 10
employees Have a right to adjust their working
time by 20 From full to part and, under
somewhat more restrictive conditions, from part
to full Unless compelling reasons (no
replacement, impossibility of job-splitting, lack
of work) p 32
A final evaluation the latecomers advantage
- What caused the rapid diffusion? Uncoordinated
result of women faced with opportunities and
threats Seen as advantage relative to be
excluded - Necessary in absence of child care
facilities Contrast to B and F where part time
was seen as threat retrograde - How
marginalization was prevented Quality is higher
since it was supply driven And choices were made
by the employed (partly) Large numbers plus
coordinated wage policy (contr. To UK) -
Prospects it could be that part time women want
full time jobs See S and DK where given
public care provision for child and elderly
(Daly, Rubbery, OECD 1998)   Nl only 8 of
child below 3 places in nurseries , cresches (48
DK) - The future is open some believe part
time work is only transition finally full work
plus good child/old age institutions Care
responsibility equally divided on gender Is part
time model currently welfare maximizing? Money
perspective Income loss (but productivity
increase) Institutions are costly too Welfare
perspective Leisure has its value (in welfare
function) Personal care too (in welfare function)
US model welfare to work
Definition as condition for income support
recipients have to engage in activities
designed to increase their employment prospects
(Evans 1995 p 75) Elements Assisted job
search, Short term work preparation Subsidized
jobs Threat of benefit withdrawal Upper time
limit Starting philosophy Low efforts or low
incentives prevent adequate effort Long term
cash benefits create welfare dependency Low
motivation, inadequate employability   Neglects
demand as cause and cure Ignores importance of
complementary institutions Goals Removing the
option of a life on benefits Cost
cutting Increasing employment rate
Pre experiments Wisconsin, California, Florida
Wisconsin self-sufficiency ladder
(hierarchy) The most reported of 10 experiments
(W2 Wicsonsin works), 1987 after work prepare
phase came an assessment - Immediately
employed - Trial subsidized work (for those
without a work background) - Community service
jobs (needed to practice work habits) - Work
activity program for least employable   Generous
subsidies for all poor (not only ex
welfare) Child care and health care for all up
to 165 of poverty line State credit on top of
Earned Income Credit Scale as generous as in
Europe (Mead 2000) Historic compromise
Democrats gave up cash entitlement   Republicans
downsizing government Florida time limits for
benefits Riverside Gain (California greater
avenues of Independence) Message each job is a
good one Slightly higher earning than off work
control group Two thirds not working at three
years control term
Landmark 1996 PRWORA (Personal Responsibility
and Work Opportunity Reconciliation Act)
Focus on single mothers          Terminated
open- ended cash benefits to single mothers five
year lifetime limit Work requirements or seeking
activities within two years,            Federal
funds converted to block grant of 16.5
bn Decentralization with conditions to reach
limits   Bloc grant had 5 key propositions   Indiv
idual entitlement repealed, mutual
responsibilities Cash dependent on attempts to
prepare for self support States more discretion
for example using money for transportation, wage
subsidies, child care, pregnancy prevention
instead for cash only   States were required to
put an escalating percentage of workload in work
programs e.g. 50 in work programs for minimum
of 30 hours Individuals State not allowed to use
federal cash for families longer than 5 years in
programs          Also restrictions on food
stamps Persons between 18 and fifty Non working
prime age persons could receive food stamps only
3 month per year Legal immigrants barred from
food stamps, Medicaid, disabled benefits
Evaluation of US reforms
        The success story Welfare rolls decline
by more than half from 14.2 mill in 94 to 6 in
2000 More single women are working (to 65 from
49) Single parents income rise Child poverty is
at minimum          Some caveats    But rolls
started to decline 94 not 96 It was an
extraordinary good time          The
shortcomings 50 of Household who left had
afterwards lower income than before
(50/month) despite of working loss of food
stamps, Medicaid many of those which left
welfare, later returned 40 dropped out without
working poorest group lost income, higher group
of ex welfare recipients gained p 12 EITC credit
given to low wage earner with children up to 2
per hour          Case study mother with two
children in 2001 Monthly benefit between 120 in
Mississippi, 923 Alaska, 403 in Penn Food
stamp 403 Medicaid 320 Sum 1,640
Difficulty in evaluation welfare to work
        Strong growth period         Complementa
ry poverty relief poverty was prevented by
EITC, this raised for a 2children family with
single mother from 1700 to 3.900 (93, resp 99 p
24   minimum wage was raised from 4.25 to 4.75
(1996 and 5.15 1997) child care subsidies for
working became an entitlement          Regional
variations    states can increase 5 years limit
at their own money (?) states define 20 hardship
Empirics of regional variations
        Empirically some states set tougher time
limits Some extended them for example for
children p 70ff Some that lower limits 2
years, but then requalified         Sanctions 14
states partial termination 22 partial for
first violation, termination for repeated
14 at first instance of non compliance       
Requirement also defined differently Non
attending No good faith effort
Quitting or being fired
UK The third way or the new New Deal
Welfare to work experiment focusing on youth
unemployment   Tony Blair s third way philosophy
Third Manifesto Blair 1997 Not to protect people
from the market But improve and possibly
equalize ability of individuals Welfare is to
teach people how to do without it Knowledge
based economy founded on empowerment and
opportunity   Welfare to work
element Gateway phase evaluation of need and
aspirations plus intensive job search
assistance - 40 are leaving, adding to those
who prevented to be get in   subsidized (mostly
in private sector) full time education and
training voluntary sector schemes or
environmental task force UK enlists local
partnerships in the delivery of welfare to work
programs   Compared to US Based on higher level
of protection Continuing elements of
training Differences in rhetoric (not unemployed
are lazy, but then need assistance)
General critique of welfare to work programs
        Philosophical level Pessimistic
philosophy on human motives Individualisation of
unemployment problem Incentives and punishment
dominate assistance idea Cost savings in the
group with lowest incomes streamlining,
selecting, hierarchization of persons denying the
opting out of work even for child
rearing          Hardliner critique    Redistrib
ution of risks an burden of job market from state
to unemployed Solution for hard core is one way
transition into low paid work Forced labor supply
for contingent jobs          Economic
evaluation Cost cutting had been
reached Employment rate increased directs people
into the lower reaches, drag on payment and
condition privilege initial transition into work,
hoping for stepstones exacerbates churning
revolving doors (danger of substitution of normal
by subsidized job long run skill
erosion          Shifts attention from demand
side to supply side (individual efforts)   The
details matter very much   Actual empowerment vs.
forcing people into work Assistance versus
Conclusions on Welfare and Labor reforms
  • General shift of the aspiration level
  • From maximal to optimal
  • From optimal to the minimum concept
  • Cost reducing attempts nearly independent of
    starting level
  • From unconditional claims to obligations
  • From solidaric to achievement or need oriented
  • Some convergence in aspirations and cost

The mega surprise
Some of the most successful countries in Europe
in the nineties - Retained a level of welfare
larger than European average - Combined reforms
with training and encouragement of
The promotion of part time job is possible
without marginalization - This contributed to
safeguarding the welfare state via an increase in
employment rate
  • Welfare to work systems increase employment
  • Dequalification must be prevented
  • Complementary institutions and incentives are
  • The target group has to be well selected
  • Empowering is not easy and cheap
  • Backlashes are always to be expected
  • The philosophy behind matters a lot

(A1) Why doesnt the US have a European-style
Welfare State? (Alesina, A., Glaeser E. Sacerdote
B BPEA2, 2001 p. 1-277)
  What explains the higher redistributive effect
(broader ad narrower than size question)?   Econom
ic explanations Pre tax variance larger not
valid Social cost of taxing (excess burden) no
evidence Volatility of income not
larger Expected upward mobility of median
voter some evidence Political
explanations Proportionality voting in many EU
countries Strong courts rejected redistribution
(shelter property from government) Poor are
them not us, lacy not unlucky EU society
play role Racial fractions, welfare expenditures
go to minorities, therefore opposed
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