1 - The objective(s) of the Welfare State - Why reforms have started in the eighties? - Cross-country differences in generosity - Common reform elements.

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- 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?

Reforming the Welfare StateReforming the Welfare State

MGTECON 580: Class 7

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The objective(s) of the Welfare StateThe objective(s) of the Welfare State

The Welfare state- Insures the population against “social risks”- thus increases social cohesion and equality

The Welfare state- Insures the population against “social risks”- thus increases social cohesion and equality

The five (partial) responsibilities:

• HealthHealth

• PensionsPensions

• Labor relationsLabor relations

• Income maintenanceIncome maintenance

• Poverty prevention, income redistributionPoverty prevention, income redistribution

The five (partial) responsibilities:

• HealthHealth

• PensionsPensions

• Labor relationsLabor relations

• Income maintenanceIncome maintenance

• Poverty prevention, income redistributionPoverty prevention, income redistribution

Differences exist for each pillar in

• Comprehensiveness: for all citizen or subset of peopleComprehensiveness: for all citizen or subset of people

• Generosity: to what extentGenerosity: to what extent

• Type of responsibility: primary, subsidiary, last resortType of responsibility: primary, subsidiary, last resort

Differences exist for each pillar in

• Comprehensiveness: for all citizen or subset of peopleComprehensiveness: for all citizen or subset of people

• Generosity: to what extentGenerosity: to what extent

• Type of responsibility: primary, subsidiary, last resortType of responsibility: primary, subsidiary, last resort

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Why reforms since the eighties?Why reforms since the eighties?

Economic reasons for change in upwards trend:

- Budgetary limits- Impact on competitiveness- Suboptimal incentive effects

Economic reasons for change in upwards trend:

- Budgetary limits- Impact on competitiveness- Suboptimal incentive effects

Background drivers:

- European Integration- Globalization- Benchmarking with US

Background drivers:

- European Integration- Globalization- Benchmarking with US

Ideological shift from left to rightIdeological shift from left to right

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Philosophical BackgroundPhilosophical Background

The Welfare state- Insures the population against “social risks”- thus increases social cohesion and equality

The Welfare state- Insures the population against “social risks”- thus increases social cohesion and equality

Three welfare philosophies:

1. Liberal philosophy: objectively defined entitlements1. Liberal philosophy: objectively defined entitlements

•Stigma-free rights, free determination to spendStigma-free rights, free determination to spend

2. Socialist dint: encourage use of benefits2. Socialist dint: encourage use of benefits

•Private firms not optimal in healthPrivate firms not optimal in health

3. Solidaristic systems including the middle and upper class3. Solidaristic systems including the middle and upper class

Three welfare philosophies:

1. Liberal philosophy: objectively defined entitlements1. Liberal philosophy: objectively defined entitlements

•Stigma-free rights, free determination to spendStigma-free rights, free determination to spend

2. Socialist dint: encourage use of benefits2. Socialist dint: encourage use of benefits

•Private firms not optimal in healthPrivate firms not optimal in health

3. Solidaristic systems including the middle and upper class3. 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 natureLiving with secure, high-income reveals the best in human nature

• peace, humanity, social responsibilitypeace, humanity, social responsibility

The optimistic view on human response to welfare

• Living with secure, high-income reveals the best in human natureLiving with secure, high-income reveals the best in human nature

• peace, humanity, social responsibilitypeace, humanity, social responsibility

The pessimistic view: the fundamental critique of the US reforms

• Welfare makes people lazy or what should alleviate poverty has Welfare makes people lazy or what should alleviate poverty has finally fostered dependency: resulting in isolation, costs, immoralityfinally fostered dependency: resulting in isolation, costs, immorality

The pessimistic view: the fundamental critique of the US reforms

• Welfare makes people lazy or what should alleviate poverty has Welfare makes people lazy or what should alleviate poverty has finally fostered dependency: resulting in isolation, costs, immoralityfinally fostered dependency: resulting in isolation, costs, immorality

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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 taxedTax incentives are hidden government expendituresMandatory requirements may substitute paymentsDifferences 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

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Expenses for the main pillars (1% of GDP)Expenses for the main pillars (1% of GDP)

Financing:DK, SF by general taxesSeveral EU countries payroll taxes

between 10% of wages in DK, SFand 40% in NI, Italy

EU Maximum MinimumPensions 12.30% I 15.7% US: 6.3%Sickness, health, disability 9.70% NI 12.8% US: 7.6%Unemployment 2.30% DK 4.5% US: 0.6%Family, housing, social exclusion, etc.

Conclusion: main costs are pensions plus healthConclusion: main costs are pensions plus health

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Goal: income equality and poverty preventionGoal: income equality and poverty prevention

Minimum wage as instrument to prevent poverty

Some countries have statuary, nation-wide minimum: B, F, GR, NL, P, SPOthers define them in collective bargaining with industry differencesSome conditional on age and apprenticeshipMinimum 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, FLowest in SF, DK, S

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Generosity indicatorsGenerosity 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

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Four types of welfare reformsFour types of welfare reforms

Austerity: reducing expenditures

• Across the board cutsAcross the board cuts

• Discourage program take-upDiscourage program take-up

•From encouragement to waiting days (sickness benefit From encouragement to waiting days (sickness benefit NL)NL)

• More selective targeting of beneficiariesMore selective targeting of beneficiaries

•Dental care to non-youth people (S > 19 YR)Dental care to non-youth people (S > 19 YR)

•Radiation to old people (S > 80 YR)Radiation to old people (S > 80 YR)

•Widow in NL gets pension if too old to workWidow in NL gets pension if too old to work

And no co-habit with a new partnerAnd no co-habit with a new partner

Austerity: reducing expenditures

• Across the board cutsAcross the board cuts

• Discourage program take-upDiscourage program take-up

•From encouragement to waiting days (sickness benefit From encouragement to waiting days (sickness benefit NL)NL)

• More selective targeting of beneficiariesMore selective targeting of beneficiaries

•Dental care to non-youth people (S > 19 YR)Dental care to non-youth people (S > 19 YR)

•Radiation to old people (S > 80 YR)Radiation to old people (S > 80 YR)

•Widow in NL gets pension if too old to workWidow in NL gets pension if too old to work

And no co-habit with a new partnerAnd no co-habit with a new partner

Administrative reforms

• Better match w/ needsBetter match w/ needs

• Competition of institutionsCompetition of institutions

• DecentralizationDecentralization

Administrative reforms

• Better match w/ needsBetter match w/ needs

• Competition of institutionsCompetition of institutions

• DecentralizationDecentralization

Efforts to enforce duties

• Specifically training, search, fair effortSpecifically training, search, fair effort

Efforts to enforce duties

• Specifically training, search, fair effortSpecifically training, search, fair effort

Actuarian reforms: contributions should match pensions

• Calculated as an insurance would do (excl. profits)Calculated as an insurance would do (excl. profits)

Actuarian reforms: contributions should match pensions

• Calculated as an insurance would do (excl. profits)Calculated as an insurance would do (excl. profits)

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Types of pension systems, Types of pension systems, trends in reformstrends in reforms

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 systemMinimum by government, firm

plans, tax benefits for private programs

• Increasing choices (towards privatization)

Three types of system possible:

Solidaric pensions

• Revenue financed and flat rateRevenue financed and flat rate

Solidaric pensions

• Revenue financed and flat rateRevenue financed and flat rate

Achievement systems

• Contribution financedContribution financed

• Earnings related benefitsEarnings related benefits

Achievement systems

• Contribution financedContribution financed

• Earnings related benefitsEarnings related benefits

Residual pension plus individual responsibility

• All northern countries shifted to insurance All northern countries shifted to insurance (Overbye)(Overbye)

• Tax encouragement for second tiers (NL)Tax encouragement for second tiers (NL)

• Increasing choices of investmentIncreasing choices of investment

Residual pension plus individual responsibility

• All northern countries shifted to insurance All northern countries shifted to insurance (Overbye)(Overbye)

• Tax encouragement for second tiers (NL)Tax encouragement for second tiers (NL)

• Increasing choices of investmentIncreasing choices of investment

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Netherlands model: the first part time society of the world

Netherlands model: the first part time society of the world

Original goal:

• Cost reduction traded against shorter workweekCost reduction traded against shorter workweek

• But not across the board but individuallyBut not across the board but individually

Original goal:

• Cost reduction traded against shorter workweekCost reduction traded against shorter workweek

• But not across the board but individuallyBut not across the board but individually

The surprise:

• Drastic diffusion of part time work without Drastic diffusion of part time work without marginalizationmarginalization

• Starting from low employment / lowest female Starting from low employment / lowest female participation (10%, today 50%)participation (10%, today 50%)

• To one and a half earner model 35% (EU 17%)To one and a half earner model 35% (EU 17%)

• Two breadwinner households 1m to 2.4 20% to Two breadwinner households 1m to 2.4 20% to 50%50%

The surprise:

• Drastic diffusion of part time work without Drastic diffusion of part time work without marginalizationmarginalization

• Starting from low employment / lowest female Starting from low employment / lowest female participation (10%, today 50%)participation (10%, today 50%)

• To one and a half earner model 35% (EU 17%)To one and a half earner model 35% (EU 17%)

• Two breadwinner households 1m to 2.4 20% to Two breadwinner households 1m to 2.4 20% to 50%50%

Success indicator:

• Employment increased by 1.8% p.a. (83-97)Employment increased by 1.8% p.a. (83-97)

• Three quarters part timeThree quarters part time

Success indicator:

• Employment increased by 1.8% p.a. (83-97)Employment increased by 1.8% p.a. (83-97)

• Three quarters part timeThree quarters part time

Part time model strategy was partly not intended:

• Part time option first reinforced by adverse labor Part time option first reinforced by adverse labor marketmarket

• Then discovered and promoted by politicianThen discovered and promoted by politician

• Then adopted by trade unions and politicians p 26Then adopted by trade unions and politicians p 26

Part time model strategy was partly not intended:

• Part time option first reinforced by adverse labor Part time option first reinforced by adverse labor marketmarket

• Then discovered and promoted by politicianThen discovered and promoted by politician

• Then adopted by trade unions and politicians p 26Then adopted by trade unions and politicians p 26

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History and policy in NLHistory 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 longerMost unions accepted ending married women’s 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 jobLocal government to save wagesDisentangling of working (shorter) and business hours (longer)

Within trade union: teacher and social workers started rethinking

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Part time work without marginalisation

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 averageMost part time jobs are standard contracts, undetermined length (80%)Subject to full dismissal protection, pro-rata insuranceOnly marginally more irregular working timeMinimum 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 employeesHave a right to adjust their working time by 20%From full to part and, under somewhat more restrictive conditions, from part to fullUnless compelling reasons (no replacement, impossibility of job-splitting, lack of work) p 32

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A final evaluation: the latecomers advantage

A final evaluation: the latecomers advantage

- What caused the rapid diffusion?

Uncoordinated result of women faced with opportunities and threatsSeen as advantage relative to be excluded

- Necessary in absence of child care facilitiesContrast to B and F where part time was seen as threat retrograde

- How marginalization was preventedQuality is higher since it was supply drivenAnd 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 jobsSee 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 transitionfinally full work plus good child/old age institutions

Care responsibility equally divided on gender

Is part time model currently welfare maximizing?

Money perspectiveIncome loss (but productivity increase)Institutions are costly too

Welfare perspectiveLeisure has its value (in welfare function)Personal care too (in welfare function)

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US model welfare to workUS 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)

ElementsAssisted job search, Short term work preparationSubsidized jobsThreat of benefit withdrawalUpper time limit

Starting philosophyLow efforts or low incentives prevent adequate effortLong term cash benefits create welfare dependencyLow motivation, inadequate employability

 Neglects demand as cause and cureIgnores importance of complementary institutions

GoalsRemoving the option of a life on benefitsCost cuttingIncreasing employment rate

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Pre experiments: Wisconsin, California, Florida

Pre experiments: Wisconsin, California, Florida

Wisconsin self-sufficiency ladder (hierarchy)

The most reported of 10 experiments (W2 = Wicsonsin works), 1987after 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 lineState credit on top of Earned Income CreditScale 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 oneSlightly higher earning than off work control groupTwo thirds not working at three years control term

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Landmark 1996 PRWORA Landmark 1996 PRWORA (Personal Responsibility and Work Opportunity (Personal Responsibility and Work Opportunity

Reconciliation Act)Reconciliation Act)

Landmark 1996 PRWORA Landmark 1996 PRWORA (Personal Responsibility and Work Opportunity (Personal Responsibility and Work Opportunity

Reconciliation Act)Reconciliation Act)

Focus on single mothers

         Terminated open- ended cash benefits to single mothersfive year lifetime limitWork requirements or seeking activities within two years,  

         Federal funds converted to block grant of $16.5 bnDecentralization with conditions to reach limits Bloc grant had 5 key propositions Individual entitlement repealed, mutual responsibilitiesCash dependent on attempts to prepare for self supportStates 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 programse.g. 50 % in work programs for minimum of 30 hoursIndividuals State not allowed to use federal cash for families longer than 5

years in programs

         Also restrictions on food stampsPersons between 18 and fiftyNon working prime age persons could receive food stamps only

3 month per yearLegal immigrants barred from food stamps, Medicaid, disabled

benefits

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Evaluation of US reformsEvaluation of US reformsEvaluation of US reformsEvaluation 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 riseChild poverty is at minimum

         Some caveats  But rolls started to decline 94 not 96It 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, Medicaidmany of those which left welfare, later returned40 % dropped out without workingpoorest group lost income, higher group of ex welfare recipients

gained p 12EITC 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

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Difficulty in evaluation welfare to workDifficulty in evaluation welfare to workDifficulty in evaluation welfare to workDifficulty in evaluation welfare to work

        Strong growth period        Complementary 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

        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

Empirics of regional variationsEmpirics of regional variationsEmpirics of regional variationsEmpirics of regional variations

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Welfare to work experiment focusing on youth unemployment Tony Blair’ s third way philosophy Third Manifesto Blair 1997

Not to protect people from the marketBut improve and possibly equalize ability of individualsWelfare is to teach people how to do without itKnowledge 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 trainingvoluntary sector schemes or environmental task forceUK enlists local partnerships in the delivery of welfare to work programs

 Compared to US:

Based on higher level of protectionContinuing elements of trainingDifferences in rhetoric (not unemployed are lazy, but then need assistance)

UK: The third way or the new New DealUK: The third way or the new New Deal

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General critique of General critique of welfare to work programswelfare to work programs

General critique of General critique of welfare to work programswelfare to work programs

        Philosophical level

Pessimistic philosophy on human motivesIndividualisation of unemployment problemIncentives and punishment dominate assistance ideaCost savings in the group with lowest incomesstreamlining, selecting, hierarchization of personsdenying the opting out of work even for child rearing

         Hardliner critique  Redistribution of risks an burden of job market from state to unemployedSolution for hard core is one way transition into low paid workForced labor supply for contingent jobs

         Economic evaluation

Cost cutting had been reachedEmployment rate increaseddirects people into the lower reaches, drag on payment and conditionprivilege initial transition into work, hoping for stepstonesexacerbates churning revolving doors (danger of substitution of normal

by subsidized joblong run skill erosion

         Shifts attention

from demand side to supply side (individual efforts) The details matter very much Actual empowerment vs. forcing people into workAssistance versus punishment

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Conclusions on Conclusions on Welfare and Labor reformsWelfare and Labor reforms

Conclusions on Conclusions on Welfare and Labor reformsWelfare and Labor reforms

• General shift of the aspiration levelFrom maximal to optimalFrom 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

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The mega surpriseThe mega surprise

Some of the most successful countries in Europe in the nineties- Retained a level of welfare larger than European average Retained a level of welfare larger than European average- Combined reforms with training and encouragement of Combined reforms with training and encouragement of telecommunicationstelecommunications

Some of the most successful countries in Europe in the nineties- Retained a level of welfare larger than European average Retained a level of welfare larger than European average- Combined reforms with training and encouragement of Combined reforms with training and encouragement of telecommunicationstelecommunications

Welfare to work systems increase employment

• Dequalification must be preventedDequalification must be prevented

• Complementary institutions and incentives are necessaryComplementary institutions and incentives are necessary

• The target group has to be well selectedThe target group has to be well selected

• Empowering is not easy and cheapEmpowering is not easy and cheap

• Backlashes are always to be expectedBacklashes are always to be expected

• The philosophy behind matters a lotThe philosophy behind matters a lot

Welfare to work systems increase employment

• Dequalification must be preventedDequalification must be prevented

• Complementary institutions and incentives are necessaryComplementary institutions and incentives are necessary

• The target group has to be well selectedThe target group has to be well selected

• Empowering is not easy and cheapEmpowering is not easy and cheap

• Backlashes are always to be expectedBacklashes are always to be expected

• The philosophy behind matters a lotThe philosophy behind matters a lot

The promotion of part time job is possible without marginalization- This contributed to safeguarding the welfare state via an increase This contributed to safeguarding the welfare state via an increase in employment ratein employment rate

The promotion of part time job is possible without marginalization- This contributed to safeguarding the welfare state via an increase This contributed to safeguarding the welfare state via an increase in employment ratein employment rate

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(A1) Why doesn’t the US have a (A1) Why doesn’t the US have a European-style Welfare State?European-style Welfare State?

(Alesina, A., Glaeser E. Sacerdote B BPEA2, 2001 p. 1-277)(Alesina, A., Glaeser E. Sacerdote B BPEA2, 2001 p. 1-277)

 What explains the higher redistributive effect (broader ad

narrower than size question)? Economic explanationsEconomic explanations

Pre tax variance larger not validSocial cost of taxing (excess burden) no evidenceVolatility of income not largerExpected upward mobility of median voter some evidence

Political explanationsPolitical explanationsProportionality voting in many EU countriesStrong courts rejected redistribution (shelter property from government)Poor are “them” not “us”, lacy not unlucky; EU society play roleRacial fractions, welfare expenditures go to minorities, therefore opposed