Economic	
  Policy	
  #09
Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
• Distribution	
  and	
  justice
– theoretical	
  approaches
– issues	
  in	
  distribution
– recent	
  trends	
  in	
  income	
  inequalities
• The	
  welfare	
  state
– the	
  concept	
  of	
  welfare	
  state
– worlds	
  of	
  welfare	
  states
– recent	
  challenges	
  to	
  welfare	
  state
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
2
Distribution	
  and	
  justice
• Distribution	
  of	
  income	
  and	
  wealth	
  has	
  been	
  a	
  major	
  
concern	
  throughout	
  the	
  history	
  of	
  economics.
• Positive	
  and	
  normative	
  economics	
  is	
  difficult	
  to	
  separate	
  
in	
  this	
  area.
Two	
  main	
  views	
  of	
  justice	
  in	
  distribution:
• commutative	
  justice:	
  each	
  person	
  should	
  receive	
  income	
  
in	
  proportion	
  to	
  his	
  contribution	
  to	
  the	
  productive	
  
process
• distributive	
  justice:	
  implies	
  approximate	
  equality	
  in	
  
income	
  distribution
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
3
Issues	
  in	
  distribution
The	
  are	
  several	
  specific	
  areas	
  of	
  concern	
  in	
  the	
  debate	
  
about	
  distribution:
• the	
  distribution	
  of	
  income	
  between	
  persons	
  irrespective	
  
of	
  the	
  source	
  of	
  income
• the	
  distribution	
  of	
  income	
  between	
  factors	
  of	
  
production,	
  in	
  particular	
  between	
  labor	
  and	
  capital
• the	
  distribution	
  of	
  earnings	
  between	
  different	
  types	
  of	
  
labor
• the	
  distribution	
  of	
  wealth
• poverty
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
4
Income	
  distribution	
  between	
  people
The	
  conventional	
  means	
  of	
  illustrating	
  income	
  distribution	
  
are	
  the	
  Lorenz	
  curve..
Fig. Lorenz	
  curve	
  in	
  UK
This illustration demonstrates two little-understood
features of personal income distribution. First,
the mean or average income is way above median
income, the median-income receiver being the person
who arrives after 30 minutes, with half the population
poorer and half richer. Roughly three-quarters of
the population have less than the mean or average
income. Put another way, the median income is only
about 85% of average income. Broadly speaking, this
is because at the top end there are considerable
numbers of very rich people who pull the average up.
Second, amongst the top quarter of income receivers
are people in fairly ordinary professions, such as
teachers and sales representatives, who would
perhaps be surprised to learn that the great majority
of the population were significantly less well off than
themselves.
Definition of income
When we come to collect precise data about income
we find various problems of definition. Should we
deduct taxes and add transfer payments? Should we
count capital gains as income? This latter question
raises the problem of distinguishing between income
which is a flow, and wealth which is a stock. Income
is defined in theory as the amount a person could
have spent whilst maintaining the value of his wealth
intact. By this definition capital gains should count as
age of total income they receive. The diagonal is the
‘line of perfect equality’ where, say, 20% of all people
receive 20% of all income.
Table 14.1 presents figures for the distribution of
income in the UK at selected dates since 1961. The
data for 2001 are plotted in Fig. 14.1 as a continuous
line, and are known as the Lorenz curve. The degree
of inequality can be judged by the extent to which the
Lorenz curve deviates from the diagonal. For
instance, the bottom 20% received only 7.5% of total
Fig. 14.1 Lorenz curve and Gini coefficient.
100
90
80
70
60
50
40
30
20
10
0 10 20 30 40 50 60 70 80 90 100
Cumulativeincomeshare(%)
Line of
perfect equality
Lorenz curve 2001
Lorenz curve
1979
Cumulative population share (%)
7.5
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
5
Income	
  distribution	
  between	
  people
..	
  and	
  the Gini	
  coefficient.BOX Příjmová nerovnost ve vybraných zemích OECD (koef. Gini)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
6
Income	
  distribution	
  between	
  factors	
  of	
  
production
1973 1989 2009
Compensation	
  of	
  employees 66.4 63.8 62.2
Gross	
  operating surplus 24.5 27.1 25.2
Non-­‐financial	
  companies
Private	
  corporations 17.8 23.1 19.0
Public corporations 3.2 1.5 0.8
Financial	
  corporations 3.5 2.5 5.4
Other	
  income 9.1 9.1 12.6
Total 100.0 100.0 100.0
Source:	
  Griffiths&Wall (2012)
Table:	
  Factor	
  shares	
  as	
  a	
  percentage	
  of	
  gross	
  value	
  added	
  at	
  factor	
  costs	
  (UK)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
7
The	
  earnings	
  distribution
Occupational	
  group Median	
  gross	
  weekly	
  wage
(all	
  occupations =	
  100)
Managers	
  and	
  senior	
  officials 146
Professional	
  occupations 142
Associate	
  professional and	
  technical	
  occupations 113
Administrative	
  and	
  secretarial	
  occupations 76
Skilled	
  trades	
  occupations 93
Personal	
  service	
  occupations 67
Sales	
  and	
  customer	
  service	
  occupations 61
Process, plant	
  and	
  machines	
  operatives 85
Elementary	
  occupations 66
All	
  occupations 100
Table:	
  Relative	
  earnings	
  by	
  occupational	
  groups
Source:	
  Griffiths&Wall (2012) EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
8
The	
  earnings	
  distribution	
  (cont.)
Occupational	
  group Median	
  gross weekly	
  wage	
  
(female/male)	
  ratio
Managers	
  and	
  senior	
  officials 72	
  (78)
Professional	
  occupations 83	
  (89)
Associate	
  professional and	
  technical	
  occupations 80	
  (89)
Administrative	
  and	
  secretarial	
  occupations 79	
  (89)
Skilled	
  trades	
  occupations 92	
  (81)
Personal	
  service	
  occupations 68	
  (92)
Sales	
  and	
  customer	
  service	
  occupations 67	
  (71)
Process, plant	
  and	
  machines	
  operatives 67	
  (71)
Elementary	
  occupations 44	
  (79)
All	
  occupations 63	
  (80)
Table:	
  Relative	
  earnings	
  by	
  sex,	
  2009	
  (UK)
Source:	
  Griffiths&Wall (2012) EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
9
The	
  distribution	
  of	
  wealth
Percentage	
  of	
  wealth	
  owned by: 1971 1986 2006
Most	
  wealthy	
  1	
  %	
  of population 31 18 21
Most	
  wealthy	
  5	
  %	
  of population 52 36 40
Most	
  wealthy	
  10	
  %	
  of population 65 50 54
Most	
  wealthy	
  25	
  %	
  of population 87 73 77
Most	
  wealthy	
  50	
  %	
  of population 97 90 94
Table:	
  Ownership	
  of	
  marketable	
  wealth	
  (UK)
Source:	
  Griffiths&Wall (2012)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
10
Poverty
Poverty	
  can	
  be	
  described	
  in	
  absolute or	
  relative	
  terms.
OECD Factbook 2010: Economic, Environmental and Social Statistics
Quality of life
Income inequality and poverty
Poverty rates and gaps
Poverty rates and poverty gaps
Mid-2000s
Statlink http://dx.doi.org/10.1787/822560430054
Fig.:	
  Poverty	
  rates	
  and	
  gaps	
  (mid	
  2000s)
Source:	
  OECD EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
11
Why	
  is	
  income	
  inequality	
  rising?
• Globalisation:	
  a	
  key	
  role	
  for	
  technology
• Labor	
  vs.	
  capital:	
  a	
  shifting	
  balance
• The	
  workplace:	
   traditional	
   jobs	
  are	
  declining
• Societies:	
  love,	
  life	
  and	
  inequality
• The	
  state’s	
  role:	
  less regulation,	
  less redistribution
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
12
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
13
A range of factors have fuelled this decline in the “labour
Data: Labour’s share of national income fell in almost all OECD countries
in recent decades.
Labour share of national income in OECD countries, 1990 and 2009
Source: OECD (2012), OECD Employment Outlook 2012,
http://dx.doi.org/10.1787/888932651503.
40
50
45
55
60
65
70
75
80
85
%
Level in 2009 Level in 1990
Slovak
R
ep.
Japan
U
nited
S
tates
G
erm
any
P
ortugal
Iceland
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
14a bit, than in the 2000s, when they declined.” Against that, many
economists argue that there are limits to the amount of extra revenue
Data: Tax rates on top incomes fell substantially between the 1980s and
the financial crisis.
Maximum, minimum and average statutory tax rates on top incomes
in OECD countries, 1981­2013 (or latest)
Source: OECD (2014), “Focus on Top Incomes and Taxation in OECD Countries: Was
the crisis a game changer?”, http://dx.doi.org/10.1787/888932965953.
0
30
20
10
40
50
60
70
80
90
100
%
434143
47
51
201320082005200019901981
OECD average: 66%
OECD maximum: 93%
OECD minimum: 15%
Welfare	
  state	
  (WS)
• There	
  are	
  various	
  definitions..
• The	
  WS	
  is	
   a	
  concept	
  of	
  government	
  in	
  which	
  the	
  state	
  
plays	
  a	
  key	
  role	
  in	
  the	
  protection	
  and	
  promotion	
  of	
  the	
  
social	
  and	
  economic	
  well-­‐being	
  of	
  its	
  citizens
• WS	
  is	
  funded	
  through	
  taxes	
  a	
  provides	
  cash	
  or	
  in-­‐kind	
  
transfers.
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
15
Global	
  social	
  protection	
  expenditure,	
  
2012	
  or	
  latest	
  (%	
  of	
  total)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
16
systems in the future.
In fact, Merkel’s data are somewhat inaccurate. The EU’s welfare spending was 40 per cent of the world
total in 2012 (see Figure 1), while its share of nominal world GDP in 2014 was 24 per cent (at current
prices and current exchange rates, and thus making no allowance for differing price levels).1
In
addition, as Figure 2 shows, per capita spending on social protection in the United States and Japan was
broadly the same as in Europe, higher in Switzerland and Australia, and very slightly lower in Canada.
Figure 1: Global social protection expenditure aggregates, 2012 or latest (% of total)
39.6%
44.9%
6.2%
0.6%
7.5%
1.6%
EU
OECD minus EU and Latin America
Latin America
ASEAN
Other large economies*
Other countries**
* Large economies are China, Egypt, India, Nigeria, Russia, Saudi Arabia, South Africa, United Arab Emirates.
** Other countries exclude American Samoa, Andorra, Bermuda, Cabo Verde, Cayman Islands, Channel Islands, Comoros, Curacao, Djibouti,
Faeroe Islands, French Polynesia, Gabon, Greenland, Guam, Haiti, Isle of Man, North Korea, Kosovo, Liberia, Liechtenstein, Macau, Malawi,
Micronesia, Monaco, Montenegro, New Caledonia, Northern Mariana Islands, Palau, Puerto Rico, Republic of the Congo, Romania, San Marino,
Serbia, Sierra Leone, St Martin (Dutch and French parts), Somalia, South Sudan, Suriname, Syria, Taiwan, Timor-Leste, Tonga, Turkmenistan,
Turks and Caicos Islands, Tuvalu, Virgin Islands (US), West Bank and Gaza.
Sources: EUROSTAT (for social expenditure in EU member states); OECD SOCX database (for social expenditure in non-EU OECD countries);
ILOSTAT (for social expenditure in non-EU non-OECD countries); World Bank Data (for GDP and population data).
1
An alternative means of measurement, converting national data using ‘purchasing power parities’ (reflecting differences in price levels),
Social	
  protection	
  expenditure	
  and	
  GDP	
  per	
  capita	
  in	
  EU	
  
and	
  selected	
  countries,	
  US$,	
  2012	
  or	
  latest
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
17
seek to strengthen welfare provision. As a result, the EU’s share of global social spending can be
expected to fall simply because the share accounted for by the rest of the world will rise. It is already
clear, for example, that China will soon have to take steps to deal with its rapidly ageing population
by introducing higher social support to maintain the incomes of older people.
Figure 2: Social protection expenditure and GDP per capita in EU and selected countries,
US$, 2012 or latest
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
EU
India
ChinaSouth
Africa
Turkey
BrazilSouth
Korea
JapanUnited
States
Canada
AustraliaSw
itzerland
Social expenditure
per capita
GDP per capita
Sources: EUROSTAT (for social expenditure in EU member states); OECD SOCX database (for social expenditure in non-EU OECD countries);
ILOSTAT (for social expenditure in non-EU non-OECD countries); World Bank Data (for GDP and population data).
While Merkel’s point is that something will need to ‘give’ in Europe’s approach to its welfare
model, the affordability of the welfare state is a tricky concept. The linked concern that high
welfare spending is undermining European competitiveness has to be looked at with care, even if
Welfare	
  state	
  functions
• The	
  WS	
  fulfils	
  three	
  distinctive	
  functions:
• The	
  ’Robin	
  Hood’	
  function:	
  redistributingin	
  various
ways from better-­‐off members of society	
  to	
  those
faced with material or other deprivationor subject to	
  
higher social risks
• The ‘piggy bank‘	
  function:	
  the WS	
  enables citizensto	
  
insure themselvesagainst social hardship
• The social investment function:	
  enablesthe state to	
  
investin	
  the nation’s human and	
  social capital.	
  
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
18
Welfare	
  spending	
  in	
  Europe	
  #1
function or in order to protect particular segments of the population for political reasons, and tha
of this occurred despite the pervasive ‘austerity’ narrative (see Figure 3). More generally, it is har
to cut or even restructure social benefits for the simple political economy reason that those who lo
out protest loudly. This leads many governments to opt instead for less conspicuous cuts in public
investment when public finances are under pressure.
Figure 3: Social protection benefits – all functions (expenditure as % of GDP)
0
5
10
15
20
25
30
35
EU-28
EU-27
EU-25
LV
EE
RO
LT
BG
PL
SK
MT
CZ
HR
HU
CY
LU
SI
ES
PT
DE
UK
IT
AT
BE
SE
EL
FI
IE
NL
FR
DK
2000
2007
2012
Source: EUROSTAT.
Fig.:	
  Social	
  protection	
  benefits	
  – all	
  functions	
  (expenditures	
  as	
  %	
  GDP)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
19
Welfare	
  spending	
  in	
  Europe	
  #2
spending, it is striking just how stable the shares of old-age outlays were up to the crisis and how they
appear to have been protected (and have indeed increased) since 2008. Healthcare, similarly, has been
gently increasing its share. The share going to unemployment benefit, albeit small, jumped after 2007 as
the number of unemployed people rose. Overall, as a share of GDP, social spending has varied less than
might be expected, only jumping in 2009 when GDP, the denominator of the ratio, fell sharply.
Figure 4: Expenditure on social protection benefits – all functions (PPS* basis per capita,
relative to GDP per capita, 2012)
0
10
20
30
40
50
60
70
EU-28
EU-15
BG
RO
HR
LV
HU
PL
LT
EE
EL
SK
PT
SI
CZ
MT
CY
ES
IT
FR
UK
FI
BE
DE
DK
SE
AT
IE
NL
LU
GDP per capita in PPS
Social protection benefits
in PPS per capita
¤’000s
in PPS
* Purchasing power standard.
Source: EUROSTAT.
Fig.:	
  Expenditures	
  on	
  social	
  protection	
  benefits	
  -­‐ all	
  functions
(PPS	
  basis	
  per	
  capita,	
  relative	
  to	
  GDP	
  per	
  capita,	
  2012)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
20
Welfare	
  spending	
  in	
  Europe	
  #3
10 | Chatham House
0
10
EU-28
EU-15
BG
RO
HR
LV
HU
PL
LT
EE
EL
SK
PT
SI
CZ
MT
CY
ES
IT
FR
UK
FI
BE
DE
DK
SE
AT
IE
NL
LU
* Purchasing power standard.
Source: EUROSTAT.
Figure 5: Expenditure on social protection benefits – by function (as % of GDP in EU*, 1993–2012)
0
5
10
15
20
25
30
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Social exclusion
Housing
Unemployment
Family/children
Disability
Sickness/healthcare
Survivors
Old age
* EU is taken as EU-15 for 1993–99, EU-25 for 2000–04, EU-27 for 2005–07, EU-28 for 2008–12.
Source: EUROSTAT.
Fig.:	
  Expenditure	
  on	
  social	
  protection	
  benefits	
  – by	
  function	
  (as	
  %	
  GDP
in	
  EU,	
  1993-­‐2012)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
21
Welfare	
  spending	
  in	
  Europe	
  #4
The main differences between EU countries are in the proportion of revenue raised from explicit
social charges, the consequence of which is that general taxation has to make up the difference. At one
extreme, Denmark generates only a fifth of the income through charges on employers and workers,
whereas in Estonia the proportion is four times as high. Differences between the share paid by workers
as opposed to their employers are also noteworthy, with Slovenia and Germany among those asking
workers to shoulder more of the burden.
Figure 6: Social protection receipts – by type (% of total receipts in 2012)
0
10
20
30
40
50
60
70
80
90
100
EU-28
EU-27
EU-25
EU-15
DK
IE
UK
CY
PT
SE
BG
FI
MT
RO
LU
EL
IT
ES
SK
HU
BE
HR
FR
AT
LV
DE
PL
SI
NL
LT
CZ
EE
Other
General government
contribution
Social charges –
protected person
Social charges –
employer
Source: EUROSTAT.
Fig.:	
  Social	
  protection	
  receipts	
  – by	
  type	
  (%	
  of	
  total	
  receipts	
  in	
  2012)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
22
Diversity	
  of	
  welfare	
  states
• Differing	
  welfare	
  models	
  evolved	
  after	
  WWII.
• These	
  models	
  can	
  be	
  categorized	
  in	
  various	
  ways
– E.g..	
  G.	
  Esping-­‐Andersen	
  (The	
  Three	
  Worlds	
  of	
  Welfare	
  
Capitalism,	
  1990)	
  identified	
  models	
  of	
  welfare	
  state	
  according	
  to	
  
levels	
  of	
  decommodification,	
  stratification and	
  the	
  different	
  
providers	
  of	
  welfare.
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
23
Social-­‐democratic	
  (scandinavian)	
  
model
• prevalent	
  in	
  Denmark,	
  Sweden
• generous	
  replacement	
  of	
  market	
  earnings	
  through	
  the	
  
state
• stratification	
  of	
  universal	
  social	
  citizenship/social	
   welfare	
  
as	
  a	
  universal	
  right	
  
• state	
  as	
  main	
  provider	
  of	
  social	
  welfare
• characterized	
   by	
  high	
  social	
  expenditure,	
  active	
  labour
market	
  policies	
  and	
  increased	
  public-­‐sector	
   employment	
  
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
24
Corporatist	
  (continental)	
  model
• northern-­‐central	
   Europe,	
  typified	
  by	
  Germany	
  and	
  France
• varying	
  degrees	
  of	
  decommodification and	
  stratification,	
  
preserving	
  the	
  status	
  of	
  workers
• main	
  provider	
  of	
  welfare	
  is	
  the	
  family,	
  but	
  contributory	
  
principle	
  ties	
  many	
  benefits	
  to	
  employment	
  history
• basic	
  security	
  supplemented	
  with	
  contributory	
   benefits	
  
(pensions,	
  unemployment,	
  etc.)
• opening	
  up	
  jobs	
  through	
  earlier	
  retirement.	
  
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
25
Liberal	
  (Anglo-­‐Saxon)	
  model
• United	
  Kingdom,	
  Ireland
• minimal	
  decommodification;	
   stigmatizing	
  stratification
• seeks	
  to	
  increase	
  demand	
  for	
  labor	
  through	
  liberalization	
  
and	
  wage	
  flexibility
• mostly	
  private	
  forms	
  of	
  insurance
• benefits	
  comparatively	
   low	
  and	
  linked	
  to	
  means-­‐testing
• poverty	
  relief	
  through	
  minimum	
  wages,	
  but	
  less	
  of	
  a	
  
focus	
  on	
  equality.
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
26
Southern	
  model
• Spain,	
  Italy,	
  Greece,	
  Portugal
• insider-­‐based	
  entitlements
• extended	
  family	
  as	
  core	
  unit
• income	
  maintenance
• strong	
  jobs	
  protection	
  – favouring,	
  for	
  example,	
  full-­‐time	
  
over	
  temporary	
  workers.
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
27
Challenges	
  for	
  welfare	
  states
• demographic	
   change:	
  population	
  aging	
  and	
  living	
  longer	
  
increases	
  financial	
  burden
• globalization:	
  reducing	
  governments’	
  ability to	
  sustain or
reform welfare institutions
• changes	
  in	
  the	
  family	
  structure	
  (societal	
  change):	
  e.g.	
  
increase	
  the	
  participation	
   rate	
  of	
  women,	
  the	
  shift	
  away	
  
from	
  the	
  male-­‐breadwinner	
   model	
  affects	
  certain	
  
aspects	
  of	
  the	
  welfare	
  model
• problem	
  of	
  welfare	
  state	
  and	
  efficiency:	
   especially	
  
administrative	
  costs	
  and	
  the	
  disincentive	
  effects	
  on	
  the	
  
labor	
  supply	
  
• new	
  technologies	
  and	
  the	
  changing	
  mix	
  of	
  jobs
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
28