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Welfare state1. Concept, evolution and challenges
1) Welfare state, traditional definition:
A system in which the government undertakes the chief responsibility for providing for the social
and economic security of its population, usually through unemployment insurance, old-age
pensions, and other social-security measures.
2) OECD on
• Social policy
o “Social policy addresses social needs and protects people against risks, such as
unemployment, poverty and discrimination, while also promoting individual and
collective well-being and equal opportunities, as well as enabling societies to
function more efficiently. The OECD analyses social risks and needs and
promotes measures to address them and improve societal well-being at large.”
• Economy and society
o Effective social policy protects individuals and their families and helps them lead
a fulfilling life. We identify policies that help individuals and their families, and
make societies and economies work more effectively.
3) Why/what government?
Why does government produce/distribute certain goods (such as health and education) and
leave other goods (such as food) to the private sector?
→ Economic theory offers a framework to explain/justify this, the main arguments are:
✓ Efficiency (section 2)
✓ Social justice (section 3)
4) Objectives of the welfare state
Efficiency
Private sector (free markets) needs
government corrections
Social justice
✓ Supporting living standards
▪ Poverty relief
▪ Protection of accustomed
living standards
✓ Inequality reduction
✓ Social integration
5) Update – social spending OECD (as % of GDP)
“Social expenditure comprises cash benefits, direct in-kind provision of goods and
services, and tax breaks with social purposes”
6) History of social policy – for compensation to prevention
After the second world war – the ‘golden sixties’
Feelings of national solidarity (shared by all classes) + economic growth and prosperity →
generous and unconditional system of social security
→ Curation and compensation (for damage, e.g. Income loss due to social risks) using
income benefits
“After the fact” social insurance
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, After 1973/79 (oil shocks and economic recession)
Fiscal austerity / increasing social needs / inactivity and poverty / …
→ Prevention and activation and (social) investment
Notion of social investment:
Rather than to remediate the impacts of social risks retrospectively, it is preferable to prevent
them from occurring in the first place.
7) Challenges for social security
“Since 2000”, the world is changing:
▪ Technology (health / communication / AI / …)
▪ Labour (situations / relations /…)
▪ Internationalisation (trade / migration / …)
▪ Culture (e.g. Family composition / labour participation)
▪ Ageing in modern economies
▪ High costs (e.g. Technology in health care, ageing, …)
▪ …
Changes → New Challenges for the “New welfare state”:
▪ More uncertainty (economic / social / political)
▪ More inequality
▪ More adaptation needed (e.g. Changing labour and skills)
▪ Employability is important (keep “in touch” with the changing labour market /
with the changing world in general)
▪ More flexibility
▪ …
Note! In the meanwhile, the “old risks” (sickness, pension, …) are still there
The “New welfare state” aims at
▪ Creating jobs
▪ Active labour market participation policy (ALM)
▪ Adaptation to the “new economy” (services, sharing, internet, flexibility, …)
▪ Promoting development of skills
▪ ….
→ The new welfare state is promoting “policies in favour for the market economy” (not
“policies against”)
New Social welfare state must pay attention to:
We need to avoid “Matthew-effects” = situation in which the advantages go (mostly) to the
higher income groups
What with people with less skills? People “at the bottom”?
Poverty remains a structural problem
If we are concerned for redistribution and want efficient use of resources, we need more
selectivity in the benefits, but this is in contradiction with the objective to provide insurance for
everybody
In the presence of scarcity, cost – effectiveness is an ethical obligation. There are always
people in (real) need.
Who is responsible? Is the unemployed person responsible for his unemployment situation? Is
the sick person responsible, depending on his lifestyle?
There should be a shared responsibility between the individual and society.
2
, 8) Everything has a price, also redistribution
Be aware of the incentives
→ It is not impossible that policy choices to divide the cake in a certain way also
influence the size of the cake
→ Main reason: social security can have “discouragement effects” (working less,
being more sick,…)
→ Note that there are also encouragement effects, too often forgotten (e.g.
Feelings of financial ‘safety’)
9) Efficiency-equity trade-off
About incentives: in general, this is called the “Efficiency-Equity trade-off” (developed by
Okun, 1975):
→ Tax more progressive (more equity):
▪ More redistribution
▪ More discouragement effects (less efficiency)
Be aware of these trade-offs, include these effects in policy (proposals) and in research
▪ Example: Theory of optimal taxes
= Higher tax revenue due to lower taxes rates: (‘Terugverdieneffecten’) – Principle of the Laffer
curve
2. Economic motivation: Efficiency
1) First Theorem of Welfare Economics
Theorem: a competitive equilibrium is Pareto efficient
▪ A competitive equilibrium is reflected in the price in a perfectly competitive
market situation
▪ Pareto efficiency implies that nobody can get better off (without making
someone else worse off)
→ Limitations of the first theorem show the need for a government
2) The need for a government
There are limitations to the first theorem of welfare economics → we need a correction = we
need a government
▪ “Market failures”: External effects = Externalities (people do not take into account the
effect of their decisions or behaviour on the welfare of others)
▪ Public goods
And
▪ Distribution (and Social Justice) is not addressed in the first theorem (theorem is only
about efficiency)
3) WTP for Public goods
For each consumer, the same level of public good provision.
Difficult to know what the optimal level of public good provision AND we is cannot rely on
the market for public good provision
→ Theory: The (amount of) provision of the public good should respect the rule of Samuelson:
the social willingness to pay for public goods is the sum of the individuals’ willingness to pay
→ Reality: political (democratic) decision making process
4) Free Riders
“The tragedy of the commons” = the market cannot provide sufficient amount of public goods
If you contribute for the provision of a public good (that I can use as well), I can benefit without
paying.
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