Welfare State Reforms: Objectives, Differences, and Impact

1. 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?

2. 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 people • Generosity: to what extent • Type of responsibility: primary, subsidiary, last resort

3. 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

4. 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 entitlements • 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, immorality

5. 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

6. 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

7. 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

8. 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

9. 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 > 19 YR) • Radiation to old people (S > 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 pensions • Calculated as an insurance would do (excl. profits) • Administrative reforms • Better match w/ needs • Competition of institutions • Decentralization • Efforts to enforce duties • Specifically training, search, fair effort

10. 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 (Overbye) • 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)

11. 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 marginalization • 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

12. 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 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 job Local government to save wages Disentangling of working (shorter) and business hours (longer) Within trade union: teacher and social workers started rethinking

13. 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

14. 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)

15. 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

16. 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

17. 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 Individual 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

18. 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

19. Difficulty 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 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

20. 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)

21. 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 Redistribution 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 punishment

22. 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

23. 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 telecommunications 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 necessary • 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

24. (A1) Why doesn’t 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)? Economic 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