Lecture #2: The Welfare StateTheories and Implications for Inequality

Goals of the lecture

Introduction- Discussion Questions- Think about capitalism- Define the Welfare State

Theory-To understand how and why different welfare states have developed.

Implications for inequality-How do modern welfare states shape income inequality between different classes?

Why welfare states persist- The role of public opinion?

Discussion questions

Who benefits most from the Welfare state?

Do we actually need social policy?

Can a society function without it, and if so how?

If you work hard, is mobility possible (and likely)?

Inequality trends in Canada

Interpreting the figure

1) Market inequality has risen drastically since 1980.

2) From 85-90 there was a huge spike, but social policy counter balanced this shift (green line).

3) From 1995-2000 government taxes and transfers did not keep up with rising inequality.

4) However, from 2000-2010 there was a plateau

5) Begs the questions, though, if market inequality increases will the government be able to counter balance these trends?

6) Inflation has outpaced wage gains (more debt).

Income Gains by Social Class

Class Differences:

The top 20 percent increase in their average income by $49,400 between 1980 and 2009 (from $128,500 to $177,900).

The bottom 80 percent saw an average increase of only $5,450.

The bottom 20 percent gained only $1700.

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The Welfare State: a response to market failure

1.Can private insurance solve the problem of negative income shocks due to unemployment and sick-leave?

2.Will private savings for old age be sufficient?

3 .Why is redistribution not left to private charities?

1.Adverse selection would create a situation of incomplete coverage. 2.Time-inconsistent preferences will generate innsufficient private pension saving.

3.Conditional altruism and co-ordination problems.

Questions Answers

The point about policy:

A capitalist economy simply cannot be maintained without social policy.

A functioning economy depends on broader social institutions to help out.

Cannot be maintained by isolated pure market relationships of supply and demand.

The Welfare State

A definition…

The Welfare State: Defined

What is the welfare state?

“A social system in which the government (or state) undertakes the responsibility of providing for the social and economic security of its citizens”

This is done though the execution of different types of social policies and public provisions which include:

Pensions, health care, unemployment benefits, child care, job training, educational programs, university/college subsidies.

A Definition (2)

“A capitalist society in which the state has intervened in the form of social policies, programs, standards, and regulations, in order to mitigate class conflict and accommodate certain social needs”

Welfarism is an institutionalized response to the negative effects of capitalism and the needs of the new working class

What gave rise to the Welfare State?

Creation of a capitalist labour market and working class, and the freeing of this class from the means of production

A need to defend the working class against the exploitative nature of the capitalist class

Rise of industrial capitalism

Protecting the working class against unemployment and suffering from the business cycle’s economic ups and downs

The Decline in Canada

Trade union decline

Withdrawal of federal funding in social programs (decline in federal transfers to provinces)

An attempt to get workers back into the labour force by diminishing rights of unions (inability to strike)

Toughening the qualifying criteria for social programs

Change in political ideologies of the state

Erosion of social rights, national identity, and democracy

To summarize: Why we should care

Why study the welfare state? Implications for inequality and stratification:

1. Shapes individuals’ life chances.

2. Influences the overall level of income inequality.

Shaping life chances:

Implications for inequality and stratification:

1. Shapes individuals’ life chances:

In part, though the process of decommodification.

Background: Connection to Marx

Marx’s and class development:

- independent producers to wage-earners.

- commodification of labour implied alienation.

Mainspring of modern social policy lie in the process by which both human need and labour power became commodities and our wellbeing came to depend on our relation to the cash nexus alone.

In the middle ages it was not a labour contract, but the family, the church, or the lord that decided a persons capacity for survival. The blossoming of capitalism eroded ‘pre-commodified’ social protection

Background…

In pre-capitalist societies, few workers were proper commodities in the sense that their survival was contingent on the sale of labour.

As markets became universal and hegemonic, the welfare of individuals came to depend entirely on the ‘cash nexus’.

Stripping society of the institutional layers that guaranteed social reproduction outside of labour contracts meant that people were themselves commodified.

To summarize:

The class structure changed.

- labour was now the predominant commodity.

Capitalism shifted human needs from institutionally provided, to market driven.

- family, church, etc.

Decommodification of labour (1)

Esping-Andersen in ‘Three Worlds…”

Defined decommodification as the extent to which individuals and families can afford an acceptable standard of living independently of market participation (1990: 47).

Decommodification of labour (2)

Decommodification defined (again):

-- In a market economy, citizens (and their labor) are commodified. Given that labor is a citizen's primary commodity in the market, de-commodification refers to activities and efforts (generally by the government) that reduces citizen's reliance on the market (and their labor) for their well-being

-- It is the process of viewing utilities as an entitlement, rather than as a commodity that must be paid or traded for. In effect, a decommodified product removes itself from the market

Decommodification of labour (3)

Decommodification occurs when a service is rendered as a matter of right, and when a person can maintain a livelihood without reliance on the market.

How policies differCross national differences

All welfare states are different.

This is because they approach policy in a different way.

Cross national differences (1)

‘Piggy bank’ versus ‘Robin Hood’

P.B – Collective assurance against social risks.

‘horizontal redistribution’

Social insurance has the goal of reallocating income across the life course.

-no attempt to redistribution between the ‘rich’ and ‘poor’.

-smooth lifetime income and guarantee well being (illness and old age).

Cross national differences (2)

Robin Hood model:

-- Vertical Redistribution

equalization will depend on the progressivity of the tax system and on the degree to which social benefits go disproportionately to the least well-off

Means tested versus Entitlement

Social welfare policies provide benefits to individuals, either through entitlements or means-testing.

Entitlement programs: Government benefits that certain qualified individuals are entitled to by law, regardless of need.

Means-tested programs: Government programs only available to individuals below a poverty line.

Theories of the Welfare State

Why have welfare states developed?

(1) Industrialization

(2) Power resources Theory

(3) Regime Theory

Industrialization (1)

(1) Industrialization

-Erosion of kinship and patrimonial traditions.

- Growing dependence on wage labour created vulnerability.

Goal of the welfare state: a new and expanded role for the state to maintain the labor force.

Main Cause: Economic growth mediate by demographic change.

Industrialization (2)

These theories argue against the importance of social class.

the growing complexity of industrialization and the increasing specialization of the education and labour force “dissolve[d] the class structure of early industrial society”

the end of ideology and the “embourgeoisement” of the working class

Power Resources Theory (1)

Power Resources Theory (1970s)

-Marxist roots. “class matters” for political and economic outcomes in advanced democracies

“Politics matters” in explaining Welfare State diversity.

For workers, their only ‘power resource’ is their numbers.

The Mechanism: Unionization and the Left parties.

Power Resources Theory (2)

“[p]ower resources are characteristics which provide actors – individuals or collectives – with the ability to punish or reward actors… [and can]…vary with regard to domain, which refers to the number of people that are receptive to the particular type of rewards and penalties” (1983: 15).

Power Resources Theory (3)

Main arguments:

1) The welfare state is a product of the historical legacies of working-class power and left party influence of government.

2) Inequality divides people (and social classes).

3) Unequal economic relationships facilitate the formation of social groups with distinct and competing interests.

4) Elections provide classes and unions with the opportunity to influence government and politics

Famous quote: “Politics is the democratic class struggle”

Power Resources Theory (4)

Emphasizes the role of class and income inequality in society

inequalities generated by the class structure drove political activism.

begins with the premise that workers are oppressed by capitalism, thereby transforming labour power into a commodity.

Power Resources Theory (5)

Why are there differences?

Core class (industrial owners, farmers, manual workers) vary by nation.

Sweden: highly organized working class was allied with farmers.

Universal social security programs were implements in conjunction with price subsidies with farmers.

The USA: high levels of regional and racial/ethnic fragmentation that inhibited class alliances. Thus, the interest of employers became more central.

Regime Theory

“What is the explanatory power of industrialization, economic growth, capitalism, or working class political power in accounting for regime differences?: very little”.

The hope of finding one single powerful force must be abandoned.

History is important: Welfare states are a product of historical legacies.

Regime Theory

Where does Canada’s welfare state sit relative to other countries?

Liberal Welfare StatesCanada, U.S.A, and Australia

Welfare State Characteristics:- Means tested assistance- Tax financed public basic pension, supplemented by private coverage - Modest Universal transfers, modest social insurance plans.- Cater to lower income groups.- Entitlement rules are strict, and usually highly stigmatized.- The State encourages the market.- Emphasis on targeting.

Assumption: the majority of citizens can obtain adequate welfare from the market.

Role of Government: To nurture rather than replace the market.Consequences: - Minimal decommodificaiton- Constrained social rights- Encourages inequality, and increase the likelihood of stratification.

Liberal Welfare States

Liberal regimes favor un-regulated markets under the assumption that this bolsters employment growth.

But it also promotes greater labor turnover, which heightens social insecurity, and greater wage inequality, which, in turn, increases the risks of poverty.

Conservative Welfare StatesGermany, Italy, France, and Austria

Welfare State Characteristics:

- Goal: To cater to the new ‘post-industrial‘ society.- Liberal obsession with market efficiency was never

prominent.- Social rights were never a contested issue.- Built on mandatory social insurance, but revolve around

narrowly defined occupational distinctions – depends on life long employment thus favouring men.

Consequences:- However, strongly concerned with the preservation of status

differentials.- Shaped by the church, strongly comitted to family.

Socially Democratic Welfare StatesSweden, Denmark, Norway, Finland

high tax volume, based on infrastructure

characterized by extensive, generous and social spending programs

characterized by universalism and decommodificaiton

Eradicated dualism (state versus market; working versus middle) towards a welfare state that true equality.

Crowds out the market: all benefit, all are dependent, and all will (presumably) feel obligated to pay.

Study: U.S.A versus Sweden

Income V. Wealth inequality

Implications for Inequality

Korpi, Walter and Joakime Palme. 1998. “The Paradox of Redistribution and Strategies of Equality: Welfare State Institutions, Inequality, and Poverty in the Western Countries.” American Sociological Review, 63 (5) 661-687.

Targeted versus Universalism- Organized around the poor or for all citizens? Flat-rate versus earnings-related benefit levels- Equal for all or based on pervious earnings and income?

The goal of social policy is to reduce inequality

Why is policy controversial?

Social welfare policies provide benefits to individuals, either through entitlements or means-testing.

Entitlement programs: Government benefits that certain qualified individuals are entitled to by law, regardless of need.

Means-tested programs: Government programs only available to individuals below a poverty line.

Discussion Question

What do you think the poverty line sits at?

In 2009, half of Canadians were living on less than $25,400

In 2009, the poverty line – for after tax incomes were as follows:  

1 person: $18,421

2 persons: $22,420

3 persons: $27,918

4 persons: $34,829

Income, Poverty, and Public Policy

Who’s Poor in America?

Poverty Line: considers what a family must spend for an “basic” standard of living.

In 2003 the poverty line for a family of three was $14,824.

Many people move in and out of poverty in a year’s time.

It isn’t just about ‘spending’

Targeting

Dates back to ‘poor laws’

War on poverty was explicitly directed at the poor

Focus on the ‘poverty line’

Foundation for the ‘means tested model’

The Debate: Targeting versus Universal

Targeting social policy:

1. We can eradicated inequality if we focus on certain groups in need.

- Cheaper (resources aren’t ‘wasted’).

- Lower expenditures mean lower taxes.

- Greater economic growth

Targeted welfare states are biased in favor of vertical redistribution.

Critique of targeting

1) High administrative costs.

- Monitoring trends and needs

2) Subject to higher ‘non-take up’

- Stigmatization

3) Give rise to ‘poverty traps’

- Recipients have little incentive to change, because benefits would be lost.

Critique of targeting (2)

4) In societies that target, taxation is lower and there are less resources to go around

- i.e., the impact tends to be smaller.

5) A selective system creates class conflict between the least well off and the middle.

- Misguided conflict.

The Benefit of Universal Policy

The ‘paradox of redistribution’ thesis argues that narrowly targeted policies are typically ungenerous and potentially stigmatizing due to lack of broad electoral support.

In contrast, universal benefits marshal broad citizen support and will, hence, offer more generous benefits that will reach all the needy with greater certainty (Korpi and Palme, 1998).

This explains why pro-targeting welfare states, like the American or Australian, produce less income equalization than universalistic ones.

Poverty and inequality are highest in countries with the targeted and basic security models and lowest in countries with the encompassing model.

By providing higher earners with earnings benefits, governments can reduce inequality and poverty more efficiently.

Why?

Traditional arguments for targeting have overlooked three areas:

1) Budget size is not fixed, but instead depends on the type of welfare state

2) Trade off between the extent of low-income targeting and budget size

3) Private earnings insurance is heavily stratified (available to the rich).

Public opinion and Social Spending

The Big Picture

Relationship between policy and public opinion

Two explanations:1. Elected officials maximize chance of re-election by responding to

public preferences (Stimson 1995, Wlezien 2004, Brooks and Manza 2007)

2. Economic and political factors influence public preferences (Andersen and Fetner 2008, Kenworthy and McCall 2008)

Regardless of causal interpretation one prefers, growing inequality within nations (Fisher and Hout 2006, Firebaugh 2000, Banting 2006, Myles 2010), and a general rightward shift in government policy underscore the importance of studying these relationships

Why do Welfare States Persist (1)?

Welfare state exist today because people want the government to spend (or not spend) on policy.

Social policy responsiveness

Elected officials have an incentive to incorporate policy preferences in order to reduce:

-- electoral losses for themselves (or members of their party generally).

-- reduce the possibility of public reprisals (public protest or disobedience).

Why do Welfare States Persist (2)?

Following this theory, public opinion should track closely to actual spending on social services.

Does this theory hold in Canada?

Canada, our Welfare State, and Public Opinion:

There has been a gradual move to the right in Canadian politics.

Canada is typically considered a liberal social welfare regime characterized by fairly limited social spending.

Following the theory of policy responsiveness, we should expect Canadians to be less supportive of government spending than citizens of countries with less liberal market economies

Policy Attitudes in Canada (1)Trends in public expenditures and public opinion

1980 1985 1990 1995 2000 2005

14

16

18

20

22

(a) Public expenditures

Pe

rce

nta

ge

of G

DP

1980 1985 1990 1995 2000 2005

1.5

2.0

2.5

3.0

(b) Support for public spending

Ave

rag

e r

esp

on

se

Welfare

Poverty

Child care

Explaining the trend (1)

Panel A:

A rising trend in spending from the early 1980s until 1994, with a following sharp decline until spending reaches approximately the same level as in the 1980s.

Panel B:

Rise: 1985-1990

Decline: 1990-1995

Rise again: 1995- present

Policy Attitudes in Canada (2)Trends in Economic Indicators

1980 1990 2000

30

35

40

45

(a) Median family income (after tax)

2005 c

onsta

nt dolla

rs (

1,0

00s)

1980 1990 2000

6.0

7.0

8.0

9.0

(b) Income inequality

Ratio

80th

perc

./oth

ers

1980 1990 2000

67

89

10

11

12

(c) Unemployment rate

Perc

enta

ge u

nem

plo

yed

Compare…

1980 1990 2000

30

35

40

45

(a) Median family income (after tax)

2005 c

onsta

nt dolla

rs (

1,0

00s)

1980 1990 2000

6.0

7.0

8.0

9.0

(b) Income inequality

Ratio 8

0th

perc

./oth

ers

1980 1990 2000

67

89

10

11

12

(c) Unemployment rate

Perc

enta

ge u

nem

plo

yed

1980 1985 1990 1995 2000 2005

14

16

18

20

22

(a) Public expenditures

Pe

rce

nta

ge

of G

DP

1980 1985 1990 1995 2000 2005

1.5

2.0

2.5

3.0

(b) Support for public spending

Ave

rag

e r

esp

on

se

Welfare

Poverty

Child care

Canadian Public Opinion: Conclusions

No evidence that the decline in spending in the 1990s had anything to do with public opinion

Public opinion tracked most closely to the business cycle (measured by the unemployment rate, but also levels of income inequality)

When economy is strong, public opinion favours spending

When income inequality rises, people want more help.

Canada versus the U.S. (1)Class Differences in Public Opinion

2 4 6 8 10

01

23

45

6

Canada

Income(deciles)

Op

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wa

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ove

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en

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sib

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2 4 6 8 10

01

23

45

6

USA

Income(deciles)

Op

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wa

rd g

ove

rnm

en

t re

sp

on

sib

ility

Canada Versus the U.S. (2)

Differences in income effect between Canada and US also suggests that politics matters too, however

NDP in Canada may play a role

1) In Canada, people with lower than median incomes tend to be supportive of government redistribution;

2) they become less so as income rises until it reaches the approximate median income, at which point income has no further effect.

3) In the US, on the other hand, income has far less influence on attitudes.

Economic conditions matter

A breadth of research on the role of changing economic conditions:

-economic development

-income inequality

Changes lead to significant class differences in public opinion.

Theory of self interest.

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Background (1)

Self-interest plays fundamental role in policy preferences related to government intervention

Individual economic position is negatively related to support (Blekesuane 2007, Durr 1993, Schneider and Jacoby 2007, Derks 2004, Fraile and Ferrer 2005, Svallfors 1995, 1997, 2008)

Near consensus that public support decreases with economic prosperity (Blekasuane 2007, Dion and Jaeger 2013, Jaeger 2013). Assumed mechanism: smaller proportion benefits when

society is affluent, thus average public opinion is less supportive

Other research suggests that public opinion is more supportive when inequality is high (Meltzer and Richard 1981, Finserass 2009, Joakim and Svallfors 2013, Kelly and Enns 2010, Lupu and Pontusson 2011, Shaw and Gaffef 2012).

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Background (2)

Aside from rising inequality and welfare state retrenchment, theoretical and methodological limitations to previous research suggest more research is needed

We agree that preferences tend to reflect self-interest, but the widely accepted negative relationship between economic development and public opinion is not consistent with this premise People should be most likely to favor government

intervention when it has little consequence for their own living conditions

Simpson’s paradox (Simpson 1951)

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Economic Development and Public Opinion

10000 20000 30000 40000

45

67

(a) Economic Development

GDP per capita (2004 US dollars)

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AUS

CHI

CZR FIN

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MEX

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NZ

NORPOL

SLOESP

SWESUI

USA

NEDCAN

FRA

SLV

UK

EST

ITA

JPN

KOR

TUR

All countries (lowess)Within country relationships

On economic development

If utility maximization is the mechanism driving the influence of economic context, people will be most likely to favor government intervention when it has little consequence for their own living conditions. We argue, then, the mechanisms of self-interest dictate that people will become more supportive of intervention as the economy strengthens because they will tend to have more resources of their own.

Income inequality

0.20 0.25 0.30 0.35 0.40 0.45 0.50

45

67

(b) Income Inequality

Gini Coefficient (for equivalived household incomes)

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CZR

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NOR POL

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SWE SUIUSA

NED CANFRA

SLV

UK

EST

ITA

JPN

KOR

TUR

All countries (lowess)Within country relationships

On income inequality

the self-interest argument that public opinion typically becomes more supportive of government intervention as inequality rises, a nuanced consideration of how public opinion is formed suggests that inequality does not affect the attitudes of people from all socio-economic positions equally.

This further implies that class differences in preferences will be highest at low levels of income inequality and converge as income inequality rises.

Other important work

Esping-Andersen. 1990. “Three Worlds of Welfare Capitalism”

Brooks, Clem and Jeff Manza. Why Welfare States Persist

Andersen, Robert and Josh Curtis. “Attitudes towards Government Responsibility: Simpson’s Paradox and the Role of Economic Context”.

Pierson, Paul “Dismantling the Welfare State”

Possible research topics

The relationship between public opinion and social spending.

-Whose interests are being responded to? Is it the aggregate? Or specific classes?

How has gender responsiveness changed (if at all)?

Compare and contrast different theories of the welfare state. Which holds the most explanatory power and why?

Why have governments not responded to Canadian public opinion?

Paper Bonus Marks

At least 1.5 pages double spaced.

At least 7 solid references all integrated into the text.

A strong argument (thesis statement).

A solid introduction. Where your going with the paper, and what you’re going to argue.