Public 8: Welfare Reform Flashcards
What is the difference between social insurance and redistribution?
Social insurance insures people against the risk of low earnings - due to unemployment, disability, or old age. It is primarily justified on efficiency grounds: risk-averse individuals wish to insure each other against these events, but a private insurance market would work very poorly, and so is provided by the state.
Redistribution, by contrast, performs similar functions for very different reasons. We have equity concerns on ethical grounds, and wish to make the poor better off, either on grounds of fairness or welfarism.
Why does the state provide social insurance?
Risk-averse agents would demand insurance against the risk of unemployment, disability, or low earnings. However, these insurance markets would work very badly in a private market. Since individuals know a lot more about their skills, health and dispositions than an insurer, the market would exhibit significant adverse selection. Insured individuals would also then face no risks from losing their job, creating problems of moral hazard. Unemployment risks are also correlated between claimants (in recessions), and are thus difficult to insure even in the absence of informational asymmetries.
Are there efficiency reasons, as well as equity ones, for the state to want to relieve poverty?
Yes. Poverty creates significant externalities - harm to dependents, worsened health, increased crime, political dissatisfaction and unrest.
What tradeoffs exist when setting guaranteed income levels and work subsidy rates?
Given limited resources, if we want to transfer resources to the poorest we must reduce transfer levels at higher income levels. However, this creates large marginal tax rates on the poorest, leading to ‘poverty traps’. Reducing the slope of this taper means that we make transfers to greater portions of the population, reducing the level we can transfer to the poorest.
Work subsidy rates encourage people into work, increasing tax revenues and making recipients better off. However, they will reduce work incentives for those already working that number of hours.
Why do many benefit programmes try to move people into work?
We might think there are internalities such as labour market scarring and skill hysteresis that workers do not fully take into account. Nudging people back into work may therefore make them better off.
If moving into work leads to human capital development and further pay progression, they will be made better off and the government will have a reduced benefits bill.
Are minimum hours conditions a good idea for working tax credits?
Minimum hours conditions can encourage people to work higher hours than they would have otherwise chosen, which may be desirable for the reasons above. However, they may induce inefficiently high hours of work (for example, if childcare costs mean that the work is not economically worth it), or fail to help the poorest (who cannot afford to work that many hours).
Does the empirical evidence suggest that threatening benefit cutoffs is good for employment?
Only in the short term. Card and Hyslop (1995) look at the Canadian Self-Sufficiency Programme and conclude that employment spikes for those who needed to find a job within 12 months, but there are negligible long-term benefits.
What is ‘indicator targeting’ of benefits? Does it avoid the ‘welfare trap’ problems of income tests?
‘Indicator targeting’ links benefits receipt to other exogenous characteristics, like being a single mother. The aim is to be able to avoid the ‘welfare trap’ by giving greater support to those who need it, without needing to taper the benefit away, as eligibility is exogenous. Whilst this can work for some characteristics, it has limited usage due to concerns of horizontal equity.
What is a UBI?
An unconditional income transfer paid to all citizens. A canonical UBI should be enough to live on without other earnings.
What are the distributional implications of UBI?
A canonical UBI relatively redistributes significantly from the elderly and disabled to younger, able-bodied, childless people. This is because under the current welfare system they receive far more in benefits, which a UBI does not achieve.
What effects would we expect a UBI to cause?
Canonical models of labour supply suggest employment will fall drastically. However, this effect is on a very different scale, and so may have unanticipated effects on labour supply.
Some studies suggest human capital investment, entrepreneurship and good job-matching will increase, as people feel they have a ‘safety net’ against which they can take risks.
Happiness, child development and personal freedom may improve.
Is a UBI affordable?
Without radical changes to the tax system, no. Hoynes and Rothstein estimate that it would require double the current US federal budget spent on Social Security, Medicare and Medicaid, and that these programmes could not be eliminated without significant social welfare harms. Other work suggests that an £11,000/year UBI is feasible in the UK with a 45% flat tax on all other income.
