Inequalities, Insurance, Incentives and Immigration: Challenges and Solutions for the Welfare State

With ongoing fiscal retrenchment, we need to understand the consequences of welfare reform for the most vulnerable members of society. In the first strand of our project, we will therefore look at how the welfare state protects households from adverse shocks, as well as how it affects the relationship between material circumstances and well-being. We will assess the role of past changes in policy and in the socio-demographic and labour market conditions in explaining recent changes in income inequality, and we will assess the ability of current welfare states to reduce inequalities in the future. We will consider not only income inequality measured at a point in time, but also income mobility through the lifetime and between generations. Strand 1 will thus examine existing income inequality as well as how the tax and benefit system succeeds in insuring individuals against negative income shocks. In Strand 2 we will instead focus on citizens’ preferences for redistribution and the mix and level of welfare services. Specifically, we will investigate how these preferences are formed, and how long-term income expectations, as well as increased ethnic diversity, affect these preferences. The latter question is motivated by the discussion about a potential (so-called) “in-group bias” (where people are more generous towards those within their own group, or people with whom they identify). The work will be conducted using both country-specific data and methods from experimental psychology. Strands 1 and 2 above investigate the determinants and patterns of inequality and how citizen’s preferences for redistribution and welfare services are formed. In order to tackle inequality through redistribution and to supply welfare services, governments need to raise sufficient amounts of tax revenue in ways that are equitable and that do not impose too high costs for taxpayers. Researchers can help decision makers by providing reliable information about the distributional and efficiency effects of tax-benefit systems. Interestingly, changes in inequality also have repercussions on the extent of tax incentives. Strand 3 of our project addresses these issues by examining novel topics or using new, broader, techniques for studying some more conventional questions.

Project Summary

The project investigates three different aspects of the welfare state: Inequality and well-being in the welfare state, preferences for the welfare state and the costs and effects of tax incentives. Below follows a list of the main findings so far:

  • During the recent economic crises, tax and benefit policies in the European countries reduced inequality mainly through policy changes to benefits, whereas policy changes to taxes and social insurance contributions raised inequality in some countries and lowered it in others.
  • The higher education expansion in Great Britain led to higher living standards mostly through higher wages.
  • The UK tax-benefit system play an important role in reducing both permanent and transitory income shocks, with taxes and means-tested benefits playing the most important role.
  • Mothers’ social class matter for vulnerability to poverty after divorce and child birth.
  • When conducting policy evaluation, the effect of potential reforms varies widely depending on the well-being concept, such as subjective life satisfaction and equivalent incomes, used in the evaluation.
  • Inheritances reduce wealth inequality, as measured by the Gini coefficient or top wealth shares, but that they increase absolute dispersion.
  • While women are still a minority of the top decile group, and make up a smaller share the higher up in the distribution we move, their presence has steadily increased in all top groups over the past four decades. Mobility is generally higher for top income women compared to top income men but the trend since the 1990s is toward increased gender equality in this respect too.
  • Individuals who experience a job loss become more supportive of redistribution.
  • Individuals that experience an increase in the share of foreign born in the neighbourhood become less likely to support universal access to National Health Service.
  • When the share of immigrants increase in a neighbourhood, there is no indication of native flight.
  • Individuals that have high predicted probability of finding a job respond to the threat of activation programs, whereas individuals in a weaker labour market position do not respond to the program.
  • The strength of employment responses of married women to changes in financial incentives are strongly heterogeneous with respect to skills.
  • Taxpayers show evidence of loss aversion.
  • Informing potential recipients of different welfare benefits can increase welfare benefits.

The findings of the project are a crucial input to governments’ decisions on how to finance the welfare system and redistribute income while maintaining incentives to work and avoiding poverty traps.