11/19/18
1
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
11/19/18
2
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
an hour the entire population passes by, each person’s
height in relation to average height signifying their
income in relation to average income. In the first
minute we see only matchstick people such as women
doing casual work. After 10–15 minutes dustmen and
ticket collectors pass by, though only three feet high.
After 30 minutes, when half the population has
passed, skilled manual workers and senior office
clerks appear, though these are still well under five
feet tall. In fact we only reach the average height 12
minutes before the hour ends, when teachers, executive
class civil servants, social workers and sales
representatives pass by. After this, height increases
rapidly. Six minutes before the end come farmers,
headmasters and departmental heads of offices,
standing about six feet six inches. Then come the
giants: the fairly ordinary lawyer at eight feet tall, the
family doctor at 21 feet, the chairman of a typical
public company at over 60 feet, and various film stars
and tycoons resembling tower blocks.
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
income, but for simplicity of data collection they are
excluded from official tables. A further question is
whether an imputed rent should be credited as income
to those who own their dwelling. Again, strictly it
should, as a dwelling is a potential source of income
which could be spent without diminishing wealth, but
for simplicity it is usually excluded. Finally, what
should count as the income receiver, the individual or
the household? In practice we normally use the ‘tax
unit’ – the individual or family which is defined as one
unit for tax purposes.
The Lorenz curve and the Gini
coefficient
The conventional means of illustrating income distribution
is the Lorenz curve, shown in Fig. 14.1. The
horizontal axis shows the cumulative percentage of
population; the vertical axis the cumulative percentage
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
INCOME DISTRIBUTION BETWEEN PEOPLE 261
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.
Hospodářská politika ● 8. Přerozdělování, sociální politika a stát blahobytu
BOX Příjmová nerovnost ve vybraných zemích OECD (koef. Gini)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
6
11/19/18
3
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	
  professionaland	
  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	
  grossweekly	
  wage	
  
(female/male)	
  ratio
Managers	
  and	
  senior	
  officials 72	
  (78)
Professional	
  occupations 83	
  (89)
Associate	
  professionaland	
  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
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11/19/18
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The	
  distribution	
  of	
  wealth
Percentage	
  of	
  wealth	
  ownedby: 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.
08.11.17 16:33OECD iLibrary: Statistics / OECD Factbook / 2010 /
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OECD Factbook 2010: Economic, Environmental and Social Statistics BACK
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
11/19/18
5
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
13
OECD Insights – INCOME INEQUALITY © OECD 201548
3. WHY IS INCOME INEQUALITY RISING?
A range of factors have fuelled this decline in the “labour
share”, for example competition from exports from developing
countries and loosening in the rules covering jobs and employment.
But the biggest factor looks to be technology, accounting for perhaps
80% of the shift, according to OECD estimates (although others argue
that financial globalisation is the main factor). This represents the
increased use of robots and automation as well as the growing
sophistication of information processing. The implications are clear:
Income that once went to workers now goes to the owners of capital
who financed the machines or software that – to a greater or lesser
extent – have replaced those workers.
But is this shift in income share from labour to capital fuelling
income inequality? It’s difficult to say for sure. The two processes
have certainly moved in parallel with each other in recent decades,
but establishing a causal link between the two is challenging. One
obstacle, among many, is that the lines between labour and capital
are not as clear as they once were. In the early industrial age, when
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
14
3. WHY IS INCOME INEQUALITY RISING?
61OECD Insights – INCOME INEQUALITY © OECD 2015
a bit, than in the 2000s, when they declined.” Against that, many
economists argue that there are limits to the amount of extra revenue
that higher taxes can bring in. Higher taxes do inhibit growth, they
argue, and they also increase the incentives for high earners to engage
in aggressive tax planning, which allows them to reduce the share of
income and wealth exposed to tax. (see Section 5.5).
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
11/19/18
6
Global	
  social	
  protection	
   expenditure,	
  
2012	
  or	
  latest	
  (%	
  of	
  total)
EP#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
16
4 | Chatham House
Introduction
There is a growing sense that the European social model is unsustainable and in need of reform. As the
German chancellor, Angela Merkel, is fond of claiming, the European Union (EU) accounts for roughly
7 per cent of the world’s population and 25 per cent of its GDP, but over 50 per cent of its welfare
spending. The implication is that Europe’s welfare states are not only generous in comparison with
provisions elsewhere, but will become unaffordable without major recasting. They undeniably face a
range of demographic, fiscal and other pressures, exacerbated by weak economic growth or recession
since the 2008–09 financial crisis. Changing work patterns and competition from emerging economies
with lower labour and social welfare costs are also raising fundamental questions that Europe’s
leaders have struggled to answer. These include dilemmas about the extent of the state’s responsibility
to its citizens and, specifically, whether governments can or should maintain comprehensive welfare
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),
would lower the EU’s shares of global GDP and social protection spending by about 20 per cent, and push up the corresponding shares of
emerging-market economies.
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
The Welfare State in Europe: Visions for Reform
5 | Chatham House
The real gap in social spending is between the ‘old’ industrial economies and the emerging markets,
including China, India, Brazil and South Korea. For these countries, social spending is a small fraction
of that in the more advanced economies, but it is likely to rise as their prosperity increases and they
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
it is accepted that adjustments need to be made. Today’s political and economic context for such
an adjustment is not benign. In the wake of the financial crisis and a protracted recession in parts
of Europe, national politics is fragmenting in both the more and less wealthy members of the EU.
Populist parties are on the rise, as seen in the results of the 2014 European Parliament elections and
several national elections since then. There is a pervasive concern that neither national governments
nor the EU as a whole will prevent globalization from further constraining median wages while
widening income inequality.
This paper aims to lay out the scope of the challenge ahead. It starts by describing the core functions
of the welfare state. Second, it outlines the evolution of particular welfare models across Europe
and introduces the concept of social investment. Third, it assesses the ways in which socio-economic
change threatens welfare state sustainability. It then considers the dilemmas for the welfare state and
the potential for recasting the welfare model to cope more effectively with the challenges it faces.
Three areas for deeper research are suggested. These will form the basis of an additional series of
papers, focusing on the economic, social and governance dimensions of the welfare challenge. These
papers will suggest changes in strategy and specific policy approaches to welfare provision, with the
aim of enabling European countries to achieve sustainable welfare systems for the coming decades.
Welfare	
  state	
  functions
• The	
  WS	
  fulfils	
  three	
  distinctive	
  functions:
• The	
  ’Robin	
  Hood’	
  function:	
  redistributing in	
  various
ways from better-­‐offmembers of society	
  to	
  those
faced with material or other deprivationor 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#09:	
  Redistribution,	
  social	
  policy	
  and	
  
welfare	
  state
18
11/19/18
7
Welfare	
  spending	
  in	
  Europe	
  #1
9 | Chatham House
healthcare does not conform to the principles that are expected of a well-functioning market (being
subject, for example, to imperfect information or incomplete provision of insurance that can deny
protection to many of the most needy).
• This explains why the United States, which relies heavily on private finance, spent almost twice as much
(16.2 per cent of GDP) on healthcare in 2012 as the average for other OECD countries (8.8 per cent of GDP).
By contrast, the figures were 8.9 per cent for the United Kingdom, 9.1 per cent for Sweden and 10.9 per cent
for Germany. The mode of delivery, on the other hand, varies in different countries (from mostly public to
mixed forms to mostly private) since it interferes less with efficiency.
• For similar reasons, school education is predominantly both financed and delivered publicly in most
countries, while the provision of university education is more diverse.
Welfare spending in Europe
It is clear from recent data that governments continued to allow spending on social protection to
increase before and after the financial crisis, whether because it played its automatic stabilizing
function or in order to protect particular segments of the population for political reasons, and that all
of this occurred despite the pervasive ‘austerity’ narrative (see Figure 3). More generally, it is hard
to cut or even restructure social benefits for the simple political economy reason that those who lose
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
The Welfare State in Europe: Visions for Reform
10 | Chatham House
Some of the differences between EU countries can be discerned from considering the scale and mix
of welfare spending (see Figures 4 and 5). These differences partly reflect national traditions and
preferences, but also the differing economic conditions in countries. Per capita spending on welfare
is lower as a share of GDP in the lowest-income EU countries, but clearly higher in France than in the
United Kingdom, two countries with similar levels of GDP. Yet it is also noteworthy that per capita
spending levels are similar across the northern European countries. Among the headings of welfare
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.
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.:	
  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
The Welfare State in Europe: Visions for Reform
10 | Chatham House
Some of the differences between EU countries can be discerned from considering the scale and mix
of welfare spending (see Figures 4 and 5). These differences partly reflect national traditions and
preferences, but also the differing economic conditions in countries. Per capita spending on welfare
is lower as a share of GDP in the lowest-income EU countries, but clearly higher in France than in the
United Kingdom, two countries with similar levels of GDP. Yet it is also noteworthy that per capita
spending levels are similar across the northern European countries. Among the headings of welfare
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.
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
11/19/18
8
Welfare	
  spending	
  in	
  Europe	
  #4
The Welfare State in Europe: Visions for Reform
11 | Chatham House
Governments across Europe raise the revenue needed to meet their welfare commitments from a mix of
explicit social charges levied on employers and employees, general taxation and some charges for specific
benefits (Figure 6). Even in the United Kingdom, for example, ‘free at the point of need’ healthcare
includes a flat charge for some drug prescriptions and various fees for dental care. With public finances
under pressure, how to fund welfare states will be an increasingly delicate governance issue.
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
11/19/18
9
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
11/19/18
10
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