Economic Policy #12 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#12: 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 the productive process •distributive justice: implies approximate equality in income distribution EP#12: 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#12: 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 EP#12: Redistribution, social policy and welfare state 5 Income distribution between people •.. and the Gini coefficient. EP#12: 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#12: Redistribution, social policy and welfare state 7 The earnings distribution 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#12: Redistribution, social policy and welfare state 8 Earnings trends Fig.: Relative hourly male earnings by percentile (index 1966=100) Source: Griffiths&Wall (2004) EP#12: 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#12: Redistribution, social policy and welfare state 10 Poverty •Poverty can be described in absolute or relative terms. Fig.: Poverty rates and gaps (mid 2000s) Source: OECD EP#12: Redistribution, social policy and welfare state 11 Box. 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#12: Redistribution, social policy and welfare state 12 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#12: Redistribution, social policy and welfare state 13 Welfare state functions •The WS fulfils three distinctive functions: •The ’Robin Hood’ function: redistributing in various ways from better-off members of society to those faced with material or other deprivation or subject to higher social risks •The ‘piggy bank‘ function: the WS enables citizens to insure themselves against social hardship •The social investment function: enables the state to invest in the nation’s human and social capital. • EP#12: Redistribution, social policy and welfare state 14 Welfare spending in Europe #1 Fig.: Social protection benefits – all functions (expenditures as % GDP) EP#12: Redistribution, social policy and welfare state 15 Welfare spending in Europe #2 Fig.: Expenditures on social protection benefits - all functions (PPS basis per capita, relative to GDP per capita, 2012) EP#12: Redistribution, social policy and welfare state 16 Welfare spending in Europe #3 Fig.: Expenditure on social protection benefits – by function (as % GDP in EU, 1993-2012) EP#12: Redistribution, social policy and welfare state 17 Welfare spending in Europe #4 Fig.: Social protection receipts – by type (% of total receipts in 2012) EP#12: Redistribution, social policy and welfare state 18 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#12: Redistribution, social policy and welfare state 19 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#12: Redistribution, social policy and welfare state 20 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#12: Redistribution, social policy and welfare state 21 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#12: Redistribution, social policy and welfare state 22 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#12: Redistribution, social policy and welfare state 23 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 and saving •new technologies and the changing mix of jobs EP#12: Redistribution, social policy and welfare state 24