Earnings Inequality and Welfare Spending: A Disaggregated Analysis

TLDR

The welfare state is often seen as either redistributive or as publicly financed insurance, but in reality policies combine both elements in varying degrees. The study investigates how income inequality affects spending on different welfare categories in advanced industrial societies from 1980 to 1995. The authors analyze the political consequences of the mix of redistribution and insurance on welfare expenditures. Spending on pensions, health care, family benefits, poverty alleviation, and housing subsidies is largely uncorrelated with income inequality, whereas spending on income‑replacement programs such as unemployment insurance, sickness pay, occupational illness, and disability is significantly higher in more egalitarian countries, confirming predictions of a theory of political support for redistributive social insurance.

Abstract

The welfare state is generally viewed as either providing redistribution from rich to poor or as providing publicly financed insurance. Both views are incomplete. Welfare policies provide both insurance and redistribution in varying amounts, depending on the design of the policy. The authors explore the political consequences of the mix of redistribution and insurance in the context of studying the impact of income inequality on expenditures in different categories of welfare spending in advanced industrial societies from 1980 to 1995. They find that spending on pensions, health care, family benefits, poverty alleviation and housing subsidies is largely uncorre-lated with income inequality, but that spending on income replacement programs such as unemployment insurance, sickness pay, occupational illness and disability are significantly higher i n countries with more egalitarian income distributions. They show that this pattern is exactly what a theory of political support for redistributive social insurance programs would predict.