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Social policies: is it the case of
dismantling the welfare state?
Andrea Brandolini
Banca d’Italia, Department for Structural Economic Analysis
LAC-EU Economic Forum 2013
“Globalization, International Trade and the Welfare State at Crossroads:
Converging Views in European and Latam countries?”
Santiago, 21-22 January 2013
Outline
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Background
Do Europe’s welfare states work?
European social models
Common trends?
Underlying forces
Conclusions
Background
• Globalization, fragmentation of global supply chains,
unbundling, dematerialisation, reallocation …
→ stronger ‘competition’ → pressure to cut tax
wedge on labour to recover cost competitiveness
→ less resources for welfare
→ less stable employment relationships → shift of
risk to families → greater need of welfare
• Growing inequalities
• Population ageing
→ longer working life → productivity of older
workers and lifelong learning → long-term care
→ expansion of welfare
Do Europe’s welfare states work?
• One important test: the Great Recession (2007-09)
– Differences across countries, but fall in output not
experienced since Great Depression
– Household incomes did not fall as much as GDP
– Overall, small effects on income distribution: little
or no increase in poverty and inequality in majority
of countries …
– … but differences across age classes
→ largely due to tax-benefit redistribution
(both automatic and discretionary)
Great Recession: GDP & household income
(indices: 2007Q1=100)
Euro area (17 countries)
110
105
105
100
100
95
95
90
90
85
85
2003
2004
2005
2006
GDP
2007
2008 2009
United States
110
2010 2011
2012
Gross household disposable income
2003
2004
2005
2006
2007
2008 2009
Gross household adjusted disposable income
Source: elaborations on Eurostat data.
2010 2011
2012
Great Recession: GDP & household income
(percentage change 2007-09)
10
NO
8
6
CA
BE
SE
4
ES
PT
FI
2
UK
0
FR
CH
US
DE
IE
DK
AT NL
-2
GR
-4
IT
-10
-8
-6
-4
-2
0
Percentage change in real GDP, 2007-9
2
Source: Jenkins, Brandolini, Micklewright and Nolan, 2013.
Great Recession: household income
(percentage change 2007-09)
10
8
Disposable income
6
4
2
0
-2
-4
Disposable income net of changes
in taxes and benefits
-6
Source: Jenkins, Brandolini, Micklewright and Nolan, 2013.
Norway
Finland
Sweden
Spain
Ireland
Belgium
USA
UK
France
Austria
Germany
Netherlands
Switzerland
Denmark
Greece
Italy
-8
4
4
Relative poverty
4
3
3
3
2
2
2
1
1
1
0
0
0
-1
-1
-1
-2
-2
-2
-3
-3
-3
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Gini index
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Great Recession and income distribution
(percentage point changes 2007-09)
Anchored poverty
Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.
Great Recession and relative poverty
(percentage point changes 2007-09)
3
2
1
0
-1
-2
-3
-4
-5
Less than 18 years
From 18 to 64 years
Germany
Norway
France
Spain
Denmark
Luxembourg
Belgium
Netherlands
Sweden
Italy
Greece
Ireland
Portugal
Finland
Austria
UK
Switzerland
-6
65 years or over
Source: elaborations on EU-SILC data.
Share of individuals with equivalent income below 60% of median national equivalent income.
Do Europe’s welfare states work?
• More uncertain picture for post-GR period, because
of fiscal consolidation
– Inequality and poverty (esp. absolute) up in 2010 in
Ireland, not in UK
• Austerity packages differ in design
– Micro-simulations of 2009-11 measures using Euromod
by H. Sutherland and co-authors
4
4
Relative poverty
4
3
3
3
2
2
2
1
1
1
0
0
0
-1
-1
-1
-2
-2
-2
-3
-3
-3
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Gini index
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Great Recession and income distribution
(percentage point changes 2007-09)
Anchored poverty
Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.
4
4
Relative poverty
4
3
3
3
2
2
2
1
1
1
0
0
0
-1
-1
-1
-2
-2
-2
-3
-3
-3
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Gini index
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
UK
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Great Recession and income distribution
(percentage point changes 2007-09 and 2009-10)
Anchored poverty
Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.
Austerity packages and household income
(micro-simulated percentage point changes)
0
0
0
-2
-2
-4
-6
-2
-4
-8
-10
-6
-12
-14
-4
-8
1 2 3 4 5 6 7 8 9 10
income decile group
IT
LT
UK
1 2 3 4 5 6 7 8 9 10
income decile group
EE
ES
RO
1 2 3 4 5 6 7 8 9 10
income decile group
EL
LV
Source: Euromod estimates from Figari, Tandullia and Taddei 2012.
PT
European social models
• There is no European social model, but many models
• Account for diversity:
– Size
– Structure: tax composition
– Structure: in-kind vs. cash benefits
– Structure: means vs. non-means-tested benefits
–…
Receipts from taxes and social contributions
(2007, % of GDP)
Denmark
Sweden
Belgium
France
Austria
Finland
Italy
Hungary
Cyprus
Germany
Netherlands
Spain
UK
Slovenia
Luxembourg
Malta
Portugal
Czech Rep.
Poland
Greece
Bulgaria
Taxes on income
and wealth
Ireland
Estonia
Social security
contributions
Latvia
Lithuania
Taxes on imports
and production
Romania
Slovakia
0
5
10
Source: Eurostat.
15
20
25
30
35
40
45
50
Social protection benefits: functions
(2007, % of GDP)
Total
France
Sweden
Denmark
Austria
Germany
Netherlands
Italy
Belgium
Finland
Greece
Portugal
UK
Hungary
Slovenia
Spain
Luxembourg
Cyprus
Malta
Poland
Ireland
Czech Rep.
Slovakia
Lithuania
Bulgaria
Romania
Estonia
Latvia
Sickness/health
29.2
28.6
28.0
26.9
26.7
26.7
25.5
25.4
24.6
24.2
22.6
22.3
22.3
20.8
20.2
19.0
17.8
17.8
17.8
17.5
17.5
15.4
14.0
13.7
13.2
12.0
11.0
0
5
10
15
% of GDP
Source: Eurostat.
20
25
30 0
Old age, survivors, disability
5
% of GDP
10
Unemployment, family
15.0
16.1
14.9
15.4
13.6
13.3
17.1
12.0
12.6
13.8
13.6
11.2
11.9
11.4
10.0
9.4
8.9
10.4
12.4
8.7
7.5
6.4
7.0
8.0
8.6
6.6
7.3
6.5
6.8
6.4
7.6
5.7
6.7
6.4
4.9
4.5
5.2
3.9
7.2
5.9
4.7
4.3
3.7
3.5
4.0
3.4
5.5
5.1
6.7
4.6
5.1
4.8
1.8
6.1
5.6
3.6
2.6
3.5
4.7
2.7
3.8
4.6
4.4
2.2
1.4
4.6
2.5
2.6
1.8
1.8
2.4
1.6
1.8
5.7
9.1
8.1
8.0
8.2
7.3
6.4
5.8
0
5
10
% of GDP
15
20 0
5
% of GDP
10
Social protection benefits: structure
(2007, % of GDP)
France
France
Sweden
Sweden
Denmark
Denmark
Austria
Austria
Germany
Germany
Netherlands
Netherlands
Italy
Italy
Belgium
Belgium
Finland
Finland
Greece
Greece
Portugal
Portugal
UK
UK
Hungary
Hungary
Slovenia
Slovenia
Spain
Spain
Luxembourg
Luxembourg
Cyprus
Cyprus
Malta
Malta
Poland
Poland
Ireland
Ireland
Czech Rep.
Czech Rep.
Slovakia
Slovakia
Lithuania
Lithuania
Bulgaria
Romania
Estonia
Means-tested
benefits
Bulgaria
Benefits in kind
Romania
Non meanstested benefits
Estonia
Cash benefits
Latvia
Latvia
0
5
Source: Eurostat.
10
15
20
25
30
0
5
10
15
20
25
30
European social models
• Taxes and benefits are stratified systems, resulting
from cumulative changes, need not correspond to a
rational and organic design
• Systems evolve over time
• Account for change
– Hartz reforms, Germany, 2003-05
– Revenu de solidarité active, France, 2009
– Universal Credit, UK, 2013
– Assicurazione sociale per l’impiego (Social
Insurance for Employment), Italy, 2012
–…
Common trends?
• Family policies:
“… Societies approach the relationship between family,
state and market in rather different ways … A range of
factors have conditioned this set of interrelations
historically; the homogenizing tendency of economic
growth and development being reined in by the
specificities of political philosophy and politics at nation
state level.
… the distinctiveness of family policy across countries
is being eroded. While no country has exactly the
same reform programme and none is following exactly
the approach endorsed by the EU and OECD, they
have in common a proclivity to ‘mix and match’. The
result is a hybridization of existing systems ….”
(Daly 2012)
Source: elaborations on OECD data.
Portugal
Greece
Italy
Spain
France
2.0
Netherlands
3.0
Germany
Sweden
Belgium
Austria
Finland
Slovak Republic
Czech Republic
Denmark
Poland
Hungary
Ireland
United Kingdom
Strictness of employment protection, 1998-2008
(1-6 scale)
4.0
3.5
1998
2.5
2008
1.5
1.0
0.5
0.0
Source: elaborations on OECD data.
Denmark
United Kingdom
Sweden
Spain
Portugal
Poland
Netherlands
Ireland
Finland
Austria
Germany
Slovak Republic
Luxembourg
58
Hungary
66
France
Czech Republic
Belgium
Greece
Italy
Men’s pensionable age, 1993-2030
(years; updated to January 2011)
68
2030
64
62
60
1993
56
54
52
50
Net replacement rates, 2001-2010
(%; single person, no children, 67% of average wage )
100
90
80
2010
70
60
50
2001
40
30
20
10
Denmark
Luxembourg
Sweden
Portugal
Belgium
Spain
France
Netherlands
Slovak Republic
Finland
Germany
Hungary
Greece
Austria
Poland
Italy
Czech Republic
Ireland
United Kingdom
0
Source: elaborations on OECD data. Initial phase of unemployment; not qualifying for cash
housing assistance or social assistance "top ups“.
Cross-country coefficient of variation
of policy indicators
0.32
Employment protection
0.28
Net replacement rate
0.24
0.20
1990
0.06
1995
2000
0.05
2005
2010
2015
2020
2025
2030
2020
2025
2030
Men’s pensionable age
0.04
0.03
1990
1995
2000
2005
2010
2015
Source: elaborations on OECD data.
Underlying forces
• Tendency to policy harmonization:
– Commonality of underlying socio/economic change
• Tension between “targeting” and “universalism”
– Best practices, guiding role of international
organizations
– “Standardization” of conceptual approach
• Role of evidence and theory
The Mirrlees Review
• The role of evidence and theory:
“… these empirical relationships are brought
together with the structure of mechanism design
from economic theory to determine efficiency
costs, overall optimality, and improvements to tax
design.” (Blundell 2012)
“There are three key ingredients to any optimal tax
analysis: the accurate measurement of response
elasticities, the detailed description of the
distribution of income, and some view of social
welfare weights.” (Blundell 2012)
Underlying forces
• Tendency to policy harmonization:
– Commonality of underlying socio/economic change
• Tension between “targeting” and “universalism”
– Best practices, guiding role of international
organizations
– “Standardization” of conceptual approach
• Role of evidence and theory
• Policy evaluation tools
• Concern for behavioural responses – but what if
we move beyond utilitarianism?
Conclusions
• European tax-and-benefit systems played positive
roles but need reform: citizens may not be all equally
protected, context is different, spending cuts, …
• Reform process:
– “Politics” matters
– Economic theory and empirical evidence provide
useful guidance, but be aware of their limits
• Novelty: European dimension?
– Status quo vs. break-up of MU: no alternative?
• Van Rompuy’s EU level unemployment benefit
• Atkinson’s EU level child benefit
Thank you for your attention!