The limits of the welfare state

The purpose of this paper is to discuss the links between the welfare state and economic development using Swedish data between 1970 and 1995. Our main arguments are that political decisions give rise to long-term structural changes in welfare that do not follow structural changes in the economy. Changes in the business cycle may strengthen or weaken these long-term effects. The main results point to the rising problem that face a society with a high degree of labor participation, universal coverage in social insurance, and a relatively low growth rate. There is a hidden labor market problem in social insurance. The redistribution policy is based on a short-run perspective affecting long-run effects negatively. The process in political decision may be considered as a source of government failure.     

A reformulation of the foundations of welfare economics

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

The enfranchisement of women and the welfare state

We offer a rationale for the decision to extend the franchise to women within a politico-economic model where men are richer than women, women display a higher preference for public goods, and women's disenfranchisement carries a societal cost. Men and women are matched within households which are the center of the decision process. We derive the optimal tax rate under two alternative regimes: a males-only enfranchisement regime and a universal enfranchisement regime. The latter is associated with a higher tax rate but, as industrialization raises the reward to intellectual labor relative to physical labor, women's relative wage increases, thus decreasing the difference between the tax rates. When the cost of disenfranchisement becomes higher than the cost of the higher tax rate which applies under universal enfranchisement, the male median voter is better off extending the franchise to women. A consequent expansion of the size of government is only to be expected in societies with a relatively high cost of disenfranchisement.We empirically test the implications of the model over the 1870–1930 period. We proxy the gender wage gap with the level of per capita income and the cost of disenfranchisement with the presence of catholicism, which is associated with a more traditional view of women's role and thus a lower cost. The gender gap in the preferences for public goods is proxied by the availability of divorce, which implies marital instability and a more vulnerable economic position for women. Consistently with the model's predictions, women's suffrage is correlated positively with per capita income and negatively with the presence of catholicism and the availability of divorce, while women's suffrage increases the size of government only in non-catholic countries.     

The generosity of the welfare state towards the elderly

This paper distinguishes among three types of generosity of social security systems: average generosity, generosity towards early retirement and generosity towards the poor. On the basis of theoretical predictions, it examines the statistical correlations among those types of generosity for 14 OECD countries over the period 1985–2000. It also shows how they have evolved over time and tries to relate this evolution to the process of economic integration. There are three main findings, the first one being a positive relation between average social security spending and poverty alleviation. There is the negative relation between average spending and inequality reduction. Finally, over the period 1985–1995 one sees that poverty alleviation increases on average, but to a degree that decreases with economic openness.     

Axiomatic foundations of Hicksian measures of welfare change

The aggregate Hicksian measures Σλ_iEV_i and Σλ_iCV_i are characterized by three simple properties. One property concerns the ranking of two states. The measures are Paretian. A second property expresses the postulate that welfare changes are to be evaluated in money. The third one deals with redistributions of incomes. Distributional considerations are taken into account by employing variable distributional weights λ_i.     

Positive arithmetic of the welfare state

This paper argues that social security enjoys wider political support than other welfare programs because: (i) retirees constitute the most homogeneous voting group, and (ii) the intragenerational redistribution component of social security induces low-income young to support this system. In a dynamically efficient overlapping generation economy with earnings heterogeneity, we show that, for sufficient income inequality and enough elderly in the population, a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system represents the political equilibrium of a two-dimensional majoritarian election. Social security is sustained by retirees and low-income young; while intragenerational redistribution by low-income young. Unlike unidimensional voting model, our model suggests that to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups.     

Incorporating affirmative action into the welfare state

In this paper, we discuss a novel aspect of affirmative action policy. We examine its redistributive role, asking whether in an egalitarian society, supplementing the tax-transfer system with an affirmative action policy would enhance social welfare. We demonstrate that affirmative action could be a desirable policy tool even if racial discrimination does not exist in the labor market.     

International migration and the welfare state revisited

Immigration is a controversial topic in most developed economies. The presence of a redistributive welfare state in all major immigrant host countries creates a margin on which immigration affects native welfare. The primary focus of the paper is whether a large intake of immigrants reduces welfare state effort. It is usually argued that steady increases in immigration lead to public pressure for lower levels of publicly-funded social expenditures. In contrastz to the earlier empirical literature on this topic, we find little evidence in favour of this hypothesis. While immigration does have a relatively modest effect on the welfare state, if anything there is some support for the view that a greater influx of immigrants has lead policy-makers to increase welfare state spending.     

Does the welfare state induce risk-taking?

In cross-national data on individual and country-level characteristics, the variance of log annual income is shown to correlate positively with indicators of redistribution. The database comes from the Panel Comparability (PACO) project, which provides uniquely comparable cross-national panel data, including both Eastern and Western Europe and the US. A random effects permanent income regression is used to estimate income variance. The variance estimates are then regressed on individual and country characteristics. The results indicate robustly that various measures of risk are higher in countries with a higher share of social spending in GDP. The evidence can be interpreted as support for the argument that the Welfare State encourages risk-taking and thereby economic growth.     

The modern welfare state: Problems and suggested reforms

This article examines some of the major market failures and government failures at work in the modern welfare state and investigates the political reasons for ignoring these failures in formulating welfare state policy. Next, the article examines some recent economic developments that endanger the welfare state: the expansion of international trade, skill-biased technological change, and the restructuring of firms. Finally, it suggests some policy approaches that may help make the welfare state more efficient and equitable.     

Exports, unemployment, and the welfare state

Abstract .  The paper analyzes the labour market effects of globalization when foreign market entry is costly and risky. With flexible labour markets, a fall in foreign market entry cost tends to generate more income inequality, but not necessarily so, as more firms pay foreign entry cost. By contrast, when labour markets are inflexible in the short run, globalization tends to increase unemployment. In this situation, government unemployment benefits reduce the wages that exporting firms need to pay workers as risk compensation. Thus more firms within an industry and more industries enter the foreign market, which in turn tends to increase unemployment.     

Culture,diversity, and the welfare state

We examine how cultural socialization and diversity influence welfare systems. Our sample includes 134 countries (1975-2014). We employ spatial patterns and biological characteristics as instrumental variables for culture. The results show that culture is an important predictor for the generosity of welfare states: welfare provision is higher in countries with loose family ties and individualistic attitudes, high prevalence of trust and tolerance, and low acceptance of unequally distributed power. These channels explain 20-50% of the cross-country variation in welfare provision. Cultural heterogeneity (diversity) influences redistribution non-linearly: moderate diversity levels impede redistribution, while higher levels offset the negative effect.     

On justifying a minimum welfare state

Since anarchy is not viable, limited government is the best that the realistic libertarian can hope for. But limited government will itself always be threatened by an inherent tendency to transgress its limits. In modern western societies the regulatory and redistributive welfare state is the major threat to a constitution of liberty. However, a “minimum welfare state” which redistributes personal income among its citizens may comply with the same principles of individual liberty and the rule of law that are embodied in the protective state. Since any state, including the minimal state, necessarily incorporates regulation and redistribution and thus is a welfare state of sorts the non-anarchist liberal should turn against welfare state privileges rather than against redistribution and regulation per se. He may even have good reason to go beyond the minimal state to found a “minimum welfare state” if this is instrumental in securing liberty under the rule of law. I am grateful to the Center for the Study of Public Choice, George Mason University for hospitality both during the period in which this paper was written and on other occasions. I am deeply indebted to the people at the Center for their criticisms and comments. As far as this paper is concerned Geoffrey Brennan's and Richard Wagner's comments were particularly helpful. I should also like to acknowledge helpful oral comments from Kevin Mulligan and Philip van Parijs, who of course is much more of an expert on demogrant schemes than I am. I also wish to thank two anonymous referees for their valuable suggestions. The general caveat applies.     

Reforming the dutch welfare state: A scenario approach

The Dutch social protection system has been under reconstruction since the early 1980s. After describing the structure of the current system and addressing recent developments as to the treatment of families and individuals, this paper presents three scenarios that could develop in future years. In full individualization, benefits and conditions are attuned to individual citizens without considering their care for others and the financial means of others in their household. In a mini-system, statutory benefits are restricted to some minimum level. In further differentiation of the social minimum by household size, benefits are better attuned to the composition and size of household types. These three scenarios are evaluated based on four criteria. The differentiation scenario appears to meet nearly all criteria and seems to offer a new solution for the problem of the weak income position of households with children relative to other household types on the minimum income level.The author would like to thank David Rasmussen for his valuable comments on an earlier version of this paper.     

Unemployed immigrants and voter sentiment in the welfare state

Adverse voter sentiment can arise when immigrants are unemployed and receive tax-financed income transfers. The explanation for unemployment however determines the consequences for the local population, and an efficiency-wage explanation for unemployment is consistent with mutual benefit to national workers and employers from the presence of unemployed immigrants receiving tax-financed income transfers. The mutual benefit requires credible labor-market disciplining through job offers to immigrants and willingness of immigrants to accept job offers. Acceptance of job offers results in displacement in employment of national workers by immigrants, which can compromise the effectiveness of efficiency wages as a counter to anti-immigrant voter sentiment in the welfare state.     

Interpreting income distributions in a welfare state: The case of Sweden

It is shown in this paper that the distribution of purchasing power, and hence probably also ‘economic well-being’, in a Welfare State like Sweden is not tightly connected with the contribution of households in the production system. Moreover, economic inequality is drastically exaggerated when income statistics are not adjusted for differences in working time and in the time-profile of income over life. However, it is also shown that some important inequalities are not removed even by the very ambitious tax and Welfare State system in Sweden, and that some new inequalities are in fact introduced. The paper also tries to highlight the wide wedges which in an ‘advanced’ Welfare State are necessarily driven between factor costs for firms and factor rewards for households. All this holds in particular for annual income.     

The impact of state economic differentials on household welfare and labor force behavior

This paper calculates state-specific income expectations for low-income households, using a simultaneous model of household labor force and welfare participation decisions. A variety of simulations indicate the interlocking effects of existing state differences in welfare, wages and taxes on work/welfare choices and income. Significant differences among similar households in different states occur. Equalization of welfare benefits eliminates some but not all of these differences, but generates potentially serious policy problems for the states.     

Theoretical foundations of sustainable economic welfare indicators — ISEW and political economy of the disembedded system

The conceptual foundations of the Index of Sustainable Economic Welfare (ISEW) are surveyed and critiqued. It is argued that the three underlying theories of community, psychic income, and social welfare economics supply certain theoretical foundations for the ISEW. The focal point of the theories is to evaluate the positives and negatives of economic growth, with the hope of achieving a practical measure of sustainable economic welfare. However, they are not as well developed as they should be: the three theories have partial, underdeveloped explanations of the benefits (services) and costs (disservices) generated in the system. The theoretical particulars of ISEW abstract from the workings of the capitalist system, because the ISEW advocates have not specified a society in the socioeconomic system which we currently have. Specifically, there is no underlying linked systems view of the disembedded economy — where the exchange economy tends to dominate other aspects of culture. Without a systematic understanding of the political economy of capitalism, the ISEW is potentially flawed in design. Therefore, there is a need to search for a critical approach to sustainable economic welfare. As a point of departure, it is better to have a political economy theory. The political economy of the disembedded system provides an alternative theoretical approach to ISEW.