SLIDE 1
Are Welfare Programs Just Keeping People Out
- f Work?
An Economist’s Take on Benefits Street
Camille Landais February 17, 2015
- C. Landais, LSE
Benefits Street 1 / 20
Are Welfare Programmes Just Keeping People Out of Work? An - - PowerPoint PPT Presentation
Are Welfare Programmes Just Keeping People Out of Work? An - - PowerPoint PPT Presentation
Department of Economics and Centre For Macroeconomics public lecture Are Welfare Programmes Just Keeping People Out of Work? An Economist's Take on Benefits Street D r Camille Landais Department of Economics, LSE Associate on the Public Economics
SLIDE 2
SLIDE 3
The rise of the welfare state
EVOLUTION OF TAX-TO-GDP RATIO IN THREE ADVANCED ECONOMIES
20% 30% 40% 50% 60%
Total Tax Revenue/GDP
United States United Kingdom Sweden Source: Kleven, Kreiner, and Saez (2009)
0% 10% 20% 30% 40% 50% 60% 1868 1878 1888 1898 1908 1918 1928 1938 1948 1958 1968 1978 1988 1998 2008
Total Tax Revenue/GDP
United States United Kingdom Sweden
- C. Landais, LSE
Benefits Street 2 / 20
SLIDE 4
The rise of the welfare state
- C. Landais, LSE
Benefits Street 3 / 20
SLIDE 5
Is it responsible for Benefits Street?
- C. Landais, LSE
Benefits Street 4 / 20
SLIDE 6
What is the case against Benefits Street?
The rise of the welfare state routinely accused of... Keeping individuals out of work Keeping recipients in poverty traps Inducing low investment in human capital Developing family welfare cultures Imposing tremendous costs on hard-working families to fund the out-of-work (“Us vs Them”)
- C. Landais, LSE
Benefits Street 5 / 20
SLIDE 7
Welfare programs in practice
Transfer money or ressources:
◮ Cash (WFTC) ◮ In-Kind transfers (housing benefits, NHS)
...to population in need
◮ Means-tested programs (assets, income) ◮ Categorical programs (single mothers, elderly, etc.)
- C. Landais, LSE
Benefits Street 6 / 20
SLIDE 8
The basic trade-off of welfare programs
We value welfare programs because they bring redistribution and/or insurance benefits
◮ These gains stem from decreasing marginal utility ◮ The more consumption I already have the smaller the
gain of one extra unit of consumption
◮ Other potential gains: higher trust level, social
cohesiveness, mobility, etc
But they come at the cost of distorting incentives and therefore behaviors:
◮ Moral hazard costs ◮ Stem from asymmetric information: individual actions /
types unobservable for gvt
- C. Landais, LSE
Benefits Street 7 / 20
SLIDE 9
Decreasing marginal utility
utility ( ) u c consumption c cL cH E c ( ) u E c ( ( )) E u c ( ( )) u c ( )
- C. Landais, LSE
Benefits Street 8 / 20
SLIDE 10
Moral hazard costs
Examples of moral hazard issues:
◮ More generous UI increases unemployment duration ◮ Labor force participation of individuals at the bottom of
the income distribution reacts strongly to tax incentives
◮ More generous health insurance increases health care
utilization
◮ Etc.
Implied behavioral elasticities are rarely ≥ .5 Behavioral responses to welfare programs are not only driven by moral hazard, but also by wealth / liquidity effects
- C. Landais, LSE
Benefits Street 9 / 20
SLIDE 11
Culture of welfare across generations
Does welfare promote a culture of dependency? Correlation in welfare use across generations is obviously not necessarily causal Dahl, Kostol, Mogstad (2013) analyze causal effect of parental use of Disability Insurance (DI) on children use of DI in Norway Identification uses random assignment of judges to denied DI applicants who appeal [some judges are severe, some lenient] Find evidence of causality: parents on DI increases odds of kids on DI over next 5 years by 6 percentage points Mechanism seems to be learning about DI availability rather than reduced stigma
- C. Landais, LSE
Benefits Street 10 / 20
SLIDE 12
Long-term effects: the Kibbutz
Abramitzky ’13: Perfect sharing in Kibbutz has negative effects on high school students performance High school students study harder once their kibbutz shifts away from equal sharing
◮ Students are 3% points more likely to graduate ◮ Students are 6% points more likely to achieve a
matriculation certificate that meets university entrance requirements
◮ Students get an average of 3.6 more points in their
exams Effect is overall small in magnitude but driven by students whose parents have low schooling
- C. Landais, LSE
Benefits Street 11 / 20
SLIDE 13
Reducing moral hazard costs
Can moral hazard costs be reduced / mitigated? Better information / harsher monitoring to reduce information asymmetry Tagging
◮ Make benefits depend on characteristics that cannot be
altered, are observable, and correlated with being in need
◮ Limits: lower efficiency costs but lower redistributive
ability
Ordeal mechanisms
- C. Landais, LSE
Benefits Street 12 / 20
SLIDE 14
The limits of ordeal mechanisms
- C. Landais, LSE
Benefits Street 13 / 20
SLIDE 15
The limits of ordeal mechanisms
Ordeal mechanisms impose costs to welfare recipients to induce self-revelation
◮ Waiting time, queues, complex forms to fill in, stigma
Reduce take up but efficiency gains highly debatable Depends on correlation between actual need for the program and utility cost of ordeal
- C. Landais, LSE
Benefits Street 13 / 20
SLIDE 16
Redistribution and insurance value
We know (almost) everything about costs of welfare programs But surprisingly little on the benefit side! Main reason: critical lack of good data on consumption Yet, redistributive and insurance value of welfare programs should not be minimized
- C. Landais, LSE
Benefits Street 14 / 20
SLIDE 17
Social security and poverty in the US
- SS Spending
Elderly Poverty Rate
Gruber (2007)
8 16 24 32 40 1959 1965 1971 1977 1983 1989 1995 2001 Year Poverty Rate for 65+ (%) 2.0 2.5 3.0 3.5 4.0 4.5 SS Spending (% of GDP)
State pension spending and elderly poverty
- C. Landais, LSE
Benefits Street 15 / 20
SLIDE 18
Unemployment and consumption
Consumption drop (%) after 1 year
- 26.91 (.92)
- 50000
- 25000
25000 Consumption relative to last quarter before U (cst SEK)
- 3
1 4 8 Quarter relative to start of unemployment spell
Source: Kolsrud & al. 2015
- C. Landais, LSE
Benefits Street 16 / 20
SLIDE 19
Is welfare crowding out self-insurance?
Welfare programs may simply crowd out individuals’ own means of insurance, limiting insurance value of these programs Example: do mandated contributions to retirement accounts affect individuals’ total saving? Chetty et al. 2012. Idea: compare impacts of sharp increases
- r decreases in employer pension contributions at the time of
job change Empirical analysis using Danish data suggests the presence of very large fraction (85%) of passive savers Mandates increase total savings of passive savers, with no crowding out
- C. Landais, LSE
Benefits Street 17 / 20
SLIDE 20
Chetty et al. 2012
4 8 12
- 4
- 2
2 4 Year Relative to Firm Switch Contribution or Taxable Saving Rate (% of income)
Δ ¡Employer ¡Pensions = 5.64
Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch Employer Pensions Individual Pensions
Δ ¡Individual Pensions = -0.56
- C. Landais, LSE
Benefits Street 18 / 20
SLIDE 21
Is welfare crowding out private charity?
Big Society Speech: reduce welfare state and private charity will take over Pervasive argument: US has low welfare state and biggest charitable sector in the world... Debunking the crowding out argument:
◮ Difference in size of charitable sector btw US &
Scandinavia = 2% of GDP
◮ Difference in welfare state size = 10 to 15% of GDP ◮ Overall, crowding out estimates are relatively low ≤ .1
(Gruber & Hungerman 2005)
- C. Landais, LSE
Benefits Street 19 / 20
SLIDE 22
Long term benefits of the welfare state?
If anything positive correlation between size of the welfare state and income and social status mobility... Positive correlation between redistribution and trust Redistribution and welfare programs are costly, but benefits may be substantial as well, along dimensions that we still know very little about...
- C. Landais, LSE
Benefits Street 20 / 20
SLIDE 23