Economics of the welfare state
Economics of the welfare state
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
Economics of the welfare state
Authors: Róbert Gál, Márton Medgyesi Supervised by: Róbert Gál
June 2011
ELTE Faculty of Social Sciences, Department of Economics
Economics of the welfare state
Week 5
Cash benefits
Róbert Gál, Márton Medgyesi
General principles:
Social Insurance
Cash benefits other than Social Insurance Benefits with the aim of poverty alleviation
Advantages and disadvantages of targeting Methods of targeting
Unemployment benefits in Hungary
Topics
Social Insurance
The arguments for Social Insurance
Why does government make it obligatory?
If people themselves do not buy adequate insurance
external effects
• Poverty affects not only individuals, but also their families; drifts into crime; generates health
problems.
Why does government supply itself?
Market insurance is effective if:
• there is demand: risk averse individuals want to buy insurance
• there is supply: insurance companies can price the
insurance only if probability of the occurence (p) of the event:
- is known and it can be estimated - p<1
- the ps of individuals are independent,
- there is no asymmetric information (adverse selection, moral hazard: ex ante, ex post)
Social Insurance
Which conditions are not met in the following cases?
• Unemployment insurance: correlated risks and moral hazard
• Sick pay: no technical problems; government supplies sick pay for economies of scale; it is usually combined with
unemployment benefit.
• Child-care payment (GYED): adverse selection: only those would buy insurance who plan to have babies. Making
insurance mandatory can solve the problem.
• Insurance against workplace injury: there are no arguments for government supply; it should be mandatory
• Long-term care insurance: very long term; the advantage of social insurance is that exact specification of the services is not needed.
Social Insurance
Cash benefits other than Social Insurance
Types:
• based on income test
• income test + other criteria
• universal subsidy
Arguments for public provision:
• There are people who get SI but remain poor (low level of old age pensions).
• Do not get SI (not entitled).
• Poverty is caused by event not insured against by SI e.g.
having many children or high housing costs.
• If they are not subsidised: negative externalities.
Benefits with the aim of poverty alleviation
Criteria:
• The extent of subsidy
• Targeting: it should be targeted to the poor and all the poor should have an access to it
• Cost: subsidy + administrative costs
Targeting of transfers
Advantage:
stronger poverty reduction effect for a given budget.
Costs:
• Targeting errors: first and second order errors.
• Private costs, which reduce the benefit for the individual: travelling, waiting, filling in the income statement.
• Disincentive effects: lowers working motivation, productivity, private transfers.
• Stigmatization
• Political economy: lessens the social support of the program.
• Administrative costs: measurement problems. Costs of targeting are difficult to separate: registration, database-maintenance exists in case of universal programs too. Special targeting costs:
monitoring of reported income.
Targeting errors
Not entitled to subsidy Entitled to subsidy Total Not poor Not entitled, but not poor
(NSnt)
Not poor, who are entitled to subsidy (NSt) „inclusion error”
NS
Poor Poor who are not entitled to subsidy (Snt)
„exclusion error”
Poor, entitled to subsidy (St)
S
Total Nnt Nt N
Incentive effects
Source: Ehrenberg and Smith, 2000
Incentive effects
Source: Ehrenberg and Smith, 2000
Methods of targeting subsidies
Targeting:
• Income test
– advantage: precise targeting is possible
– disadvantages:
disincentive effect: poverty trap
the estimation of income can be stigmatizing
administrative costs
Methods of targeting subsidies
• Indicator targeting: the good indicator strongly correlates with poverty; it is exogenous and easily observable.
Advantage: lower administrative cost, no disincentive effect, no stigmatization
Disadvantage: less precise, higher chance for targeting errors
• Targeting based on geographic and demographic criteria
• Self-targeting: incentives are introduced that result in subsidizing according to the own decision of the poor, e.g.:
Price-subsidy: the subsidy of goods intensively consumed by the poor
Public housing: low quality housing
Conditional subsidy: e.g. the condition of benefits is participation in public work
Unemployment benefits in Hungary
Two basic benefits:
• ”job-search benefit” (previously called unemployment benefit)
• ”job-search allowance” (previously called regular social assistance, income subsidy of the permanently
unemployed)
• In the past there were smaller benefits such as a grant for new entrants of the labor market and people near to the retirement age – these were terminated
Benefits for the unemployed – ILO definition
62
54
36
27 24 25 22 22
17 18 18 19 16
0 7
16
21 22 23
23 21
17 18 17 16
16
38 37
45 49 52 52 55 57
66 64 65 65 68
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Unemployment benefit Benefit for new entrants Social assistance Not covered
Source: Galasi–Nagy, 2005
Changes in the regulation of UB
Stricter conditions:
• Required contribution period: did not get stricter;
during the four years preceding unmeployment, 365 days of paid work
• The time period of entitlement have decreased 1989–90: everyone for 2 years
1993–2000: minimum 90 days, max 1 year
Today: 1 day benefit after every 5 days spent in
work, min 73 days, max 270 days
• Amount of the benefit decreased:
– in 1992, the average replacement rate (ratio of benefit to pre-unemployment wage) was 72%, in 2000 only 52%
– today: during the first period (first half of payment
period): 60% of the previous average income (but at most 120% of minimum wage); second half: 60% of minimum wage
The aim of stricter regulations:
in the beginning of the 1990s: loss of Solidarity Fund after 2000 to boost labor supply.
Changes in the regulation of UB, cont.
Incentive effects
Probability of entering employment among men before and after the end of benefit entitlement
A:entitled to assistance with high probability B:entitled to assistance with low probability
Source: Galasi–Nagy, 2005
Incentive effect of regular social assistance (RSA)
Firle–Scharle–Szabó (Munkaerőpiaci Tükör 2007)
RSA 2000–2006
• Entitlement: below retirement age, disabled or not employed, basic living standards are not ensured
• + monthly income of ”candidate”< 70% of minimum pension
• + family income per capita < 80% of minimum pension
• RSB complements personal income up to 70% of the minimum pension
+ conditions:
– cooperation with the public employment service – integration plan
–30 days public work
Dependent variables:
Transition to employment of non-disabled non-employed:
Does s/he work 3 months later (19% among the total non- employed, 9,5% among those who get subsidies) ?
Control:
– the number working people in the household; age;
education; length of unemployment; unemployment rate in county; region
Men Women
RSA -0,0679 -0,0530
Public work -0,0932 -0,0631
Active labour market programme -0,0615 -0,0615 Pre-retirement unemp. Assistance -0,0865 -0,0957 Unemployment benefit -0,0326 -0,0231
Source: Firle, Scharle and Szabó, 2007
