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 Programme, STICERD Professor Wouter Den Haan Chair, LSE Suggested hashtag for Twitter users: #LSEecon
Are Welfare Programs Just Keeping People Out of Work? An Economist’s Take on Benefits Street Camille Landais February 17, 2015 C. Landais, LSE Benefits Street 1 / 20
The rise of the welfare state EVOLUTION OF TAX-TO-GDP RATIO IN THREE ADVANCED ECONOMIES 60% 60% 50% 50% United States United States United Kingdom United Kingdom 40% 40% Total Tax Revenue/GDP Total Tax Revenue/GDP Sweden Sweden 30% 30% 20% 20% 10% 0% 1868 1878 1888 1898 1908 1918 1928 1938 1948 1958 1968 1978 1988 1998 2008 Source: Kleven, Kreiner, and Saez (2009) C. Landais, LSE Benefits Street 2 / 20
The rise of the welfare state C. Landais, LSE Benefits Street 3 / 20
Is it responsible for Benefits Street? C. Landais, LSE Benefits Street 4 / 20
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
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
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
Decreasing marginal utility utility u c ( ) ( ) u c ( ( )) u E c E u c ( ( )) consumption c c L E c ( ) c H C. Landais, LSE Benefits Street 8 / 20
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
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
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
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
The limits of ordeal mechanisms C. Landais, LSE Benefits Street 13 / 20
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
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
� � � � Social security and poverty in the US State pension spending and elderly poverty 40 4.5 32 4.0 Poverty Rate for 65+ (%) SS Spending (% of GDP) 24 SS Spending 3.5 Elderly Poverty Rate 16 3.0 8 2.5 0 2.0 1959 1965 1971 1977 1983 1989 1995 2001 Year Gruber (2007) C. Landais, LSE Benefits Street 15 / 20
Unemployment and consumption 25000 Consumption relative to last quarter before U (cst SEK) 0 Consumption drop (%) after 1 year -26.91 (.92) -25000 -50000 -3 0 1 4 8 Quarter relative to start of unemployment spell Source: Kolsrud & al. 2015 C. Landais, LSE Benefits Street 16 / 20
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 or 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
Chetty et al. 2012 Event Study around Switches to Firm with >3% Increase in Employer Pension Rate Individuals with Positive Pension Contributions or Savings Prior to Switch Contribution or Taxable Saving Rate (% of income) 12 Δ ¡Employer ¡ Pensions = 5.64 Δ ¡ Individual Pensions = -0.56 8 4 0 -4 -2 0 2 4 Year Relative to Firm Switch Employer Pensions Individual Pensions C. Landais, LSE Benefits Street 18 / 20
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
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
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 Programme, STICERD Professor Wouter Den Haan Chair, LSE Suggested hashtag for Twitter users: #LSEecon
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