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The Economics Of The Welfare State, Barr Notes

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The Economics of the Welfare State, Nicholas Barr The welfare state and its objectives (pages 6-11) Individual welfare comes from other sources as well as from state activity;

• The labour market (most important?) through wage income. Full employment is a major component of welfare. 1950s-60s had high employment and productivity which were just as beneficial as redistribution. Firms also provide occupational welfare when workers face sickness, injury and retirement.

• Private provision e.g. insurance, personal savings.

• Voluntary welfare i.e. family members or others providing time for free or below market price, or make charitable donations.

• State provision e.g. benefits in kind (education (19% social spending), medical care, care for the handicapped), cash benefits (social insurance on the basis of previous contributions and specific contingency like being unemployed, and non-contributory benefits done on income), tax concessions to firms. A service may be funded by the state but maybe not publicly produced. The state can produce the service (NHS, 27% of social spending) and supply it for free, or can give individuals the money to make their own purchases or pay for goods produced in the private section - PRIVITISATION. The state through various government levels is the most important single agency involved in the UK and in most industrialized countries. Welfare state summarises government activity in four major areas - cash benefits, health care, education and food, housing and other welfare services. OBJECTIVES are efficiency, equity and administrative feasibility. Efficiency has at least 3 aspects of allocative efficiency.

1. Macro-efficiency the efficient fraction of GDP should be devoted to the totality of welfare-state institutions.

2. Micro-efficiency should ensure the efficient division of total welfare-state resources between the different cash benefits.

3. Incentives adverse effects on labour supply, employment and saving should be minimised. Supporting living standards (equity) also has at least 3 components, 5 and 6 aim for economic security so efficient and equitable.

4. Poverty relief no individual or household should fall below a minimum standard of living. The aim is to eliminate or alleviate it. Effectiveness can be measured by the number of people below the poverty line.

5. Insurance no one should have an unexpected and unacceptably large drop in their living standard - major objective of unemployment benefits and most health-related benefits. Measured by the replacement ratio.

6. Income-smoothing individuals should be enabled to reallocate consumption over their lifetime concerned with predictable falls in income. Reduction of inequality is just about equity.

7. Vertical equity the system should redistribute towards individuals or families of lower incomes. All income-tested benefits will do this to some extent. Success can be measured by inspection of aggregate inequality measures.

8. Horizontal equity differences in benefits should take account of age, family size etc. and differences in med treatment should only reflect relevant factors i.e. not ethnic backgrounds. Social integration is concerned with broader social goals.

9. Dignity cash benefits and health care should be delivered so as to preserve individual dignity and without unnecessary stigma.

10. Social solidarity benefits should depend on criteria unrelated to socioeconomic status. Benefits should be high enough and health care good enough to allow people to participate fully in the life of the society in which they live. Administrative feasibility has 2 aspects.

11. Intelligibility the system should be simple, easy to understand and as cheap as possible.

12. Absence of abuse benefits should be as little open to abuse as possible. There are PROBLEMS as it is hard to define and measure. 1-3 can be defined but are harder to measure e.g. tax incidence make it hard to assess how far they are achieved. How can poverty be defined in 4? How large is an acceptable drop in living standards in 5? Some objectives also conflict by definition e.g. income

smoothing suggests someone with higher earnings should receive higher benefits with clashes with redistribution. Changing world, challenges and responses (pages 12-14) A number of trends have implications for the design of the welfare state. DEMOGRAPHIC CHANGE. Life expectancy has increased in all industrial countries whilst birth rates have declined so number of older people have increased whilst the number of younger workers have reduced. So higher demand for welfare. GLOBALIZATION since 1970 trade has become increasingly more open and 'dematerialised' (i.e. through technology like emails). National boundaries have become irrelevant. Ability for countries to act independent in its welfare-state arrangements has reduced. Arguably countries with expensive welfarestates will be at a competitive disadvantage to those with smaller ones. CHANGES IN FAMILY STRUCTURE have become more fluid. More marriages end in divorce, more women are working and parenthood is less closely tied to marriage - effects welfare as demand for pensions (for women) and child support rises. CHANGES IN THE STRUCTURE OF JOBS, demand for lower skilled workers has reduced, their wages are low and their employment more precarious and often part time. Increasing polarization between a core of skilled workers and the peripheral workforce. There are 2 challenges to economic and social policy. The strategic design of the welfare state was based on two-parent families with high levels of employment where jobs were full-time and stable. The coexistence of economic growth and equality has become sharper. There have been three broad approaches to economic and social change since the first oil shock of the 1970s.

1. Attempt to increase demand for labour through labour-market policies and increased public-sector employment. Problems with COST. Response was move to wage flexibility and a reduction in benefits. (Scandinavian countries like Sweden)

2. Attempt to reduce the supply of labour e.g. through early retirement. Cost of public pensions so INCREASING FISCAL PRESSURE. (mainland Europe)

3. Attempt to increase the demand for labour by liberalizing labour markets e.g. through wage flexibility doesn't face the heavy fiscal cost and leads to increased employment growth. RISING INEQUALITY AND POVERTY mostly among unskilled workers and single parent households. (Anglo-Saxon model e.g. UK, USA and Australia) Political theory - social justice and the state (p44-67) LIBERTARIAN THEORIES
- Agree the primary aim of institutions is individual liberty, best way to achieve its economic dimension is through the operation of private markets. Natural-rights libertarians defend a minimal state on ethical grounds and empirical libertarians out of a belief the state will maximise total welfare.
- Natural-rights libertarians say the state has no distributional role at all. Empiricals would say distributional activities are strictly circumscribed.
- Pursuit of social justice is fruitless because there is no such thing and dangerous because it destroys the market order which is efficient and the only guarantee of personal freedom. According to Hayek once governments start intervening in market-determined distribution a process is set in motion with progressively approaches totalitarianism. LIBERAL THEORIES
- E.g. utilitarianism and Rawlsian thinking allow the state a greater distributional role and have a weaker presumption that the free market is necessarily the beat means of production and distribution. A mixed economy can be justified.
- Utilitarian aim is to distribute goods in a way to maximse the total utility of society's members. Where individuals have identical marginal utility of income functions occurring when income is shared equally. State has a legitimate redistributive role.
- Approach criticised by Rawls because harm to the least well-off individual or group can be justified if it will result in increased total utility.

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