Being unemployed in the US after the Obama presidency

Obama was elected in 2008 during the height of the crisis with much expectations that he would improve the conditions of the least well-off in American society. As his term nears its end, I use the latest OECD data to assess how unemployed individuals fare now compared to both other developed countries and to when he started his term.

In a nutshell, I show that in all plausible scenarios, individuals in the initial phase of unemployment are worse off in the US than in a median OECD or EU country and their relative situation has gotten worse since 2007, especially if they are in the middle class.

OECD data

The OECD has data on the net replacement rates for six family types in the initial phase of unemployment. The latest data available is 2014 so it is in principle plausible – though unlikely – that the situation has improved massively in the last two years and that this is not captured by my data. Note further the emphasis on the initial phase of unemployment: after a certain time in unemployment – which varies by country – unemployed lose eligibility to certain benefits (or experience falls in the replacement rate).

The OECD tax-benefit Model allows you to specify the marital situation of the family (single, one earner married couple, and two earners married couple) and whether they have children (in this case no children versus two children) for different levels of the average wage.

For simplicity I show the replacement rate for a case when the family does not qualify for cash housing assistance or social assistance in either the in-work or out-of-work situation. I also do not consider the case of earners with 150% of average wage.

The situation in 2014

Figure 1 shows the difference between the US and the EU/OECD average replacement rates in 2014. As an example consider the case of a single person with no children earning 67% of the average wage prior to becoming unemployed. In the US, the person would get 61% out of work income as a percentage of previous earnings equal to 67% of the average wage. The equivalent OECD median is 65% while the EU median is 68% so the gap between the US and the OECD median is 4 percentage points while it is 7 percentage points between the US and the EU.

Comparing different family and income situations reveals that the US is least generous compared to the OECD and EU median for ‘middle class’ (100% of average wages) families that are composed of lone parents with 2 children. The next biggest gap between the US and the OECD/EU median is for low income families with either one earner couple or a lone parent.

By contrast, low income families (67% of average wage) with two earners with or without two children would fare almost exactly the same in terms of replacement rate in the median OECD and EU country as in the US.

Figure 1: The difference between the US and the EU/OECD average replacement rates in 2014

EU US gap in 2014

Cross-national variation

In Figure 2, I show the 2014 cross-national variation in the replacement rate for a single earner with no children that does not qualify for cash housing assistance or social assistance and had previous earnings of 67% of average wage. This reveals that the US is not the worse country among developed countries (the worse is not surprisingly the UK – though note that the situation does not quite look as dire for the UK if the family qualifies for cash housing assistance). But it is located in the bottom half of the ranking.

Figure 2: 2014 replacement rate for a single earner with no children that does not qualify for cash housing assistance or social assistance and had previous earnings of 67% AW

Figure 3

Changes since 2007

In 2014, the average across all family types and both income situations for the US is 59% compared to 70% for the OECD median and 71% for the EU median. This represents a fall from 2007 where the average was 62% for the US, 60% for the OECD and 71% for the EU median.

Figure 3 shows how the gap between the US and the EU has evolved between 2007 and 2014 for different family-income scenarios. Positive values indicate that there has been an increase in the gap between what a person would get in a median EU country and what they would get in the US. Thus for instance, we see that the biggest increases in the gap has been for one  earner married couple with no children that earned 100% of the average wage prior to becoming unemployed and a single person with no children also earning 100% of the average wage prior to becoming unemployed. The next biggest increase has occurred for a lone parent with two children.

Thus, over the Obama presidency, the welfare of vulnerable middle class families in the US relative to their counterpart in the Europe has gotten worse. This is a striking result given the significant retrenchment of European welfare states that has taken place in Europe between 2008 and 2014 (the period under consideration here).

Figure 3: The difference between the EU-US gap in 2007 and in 2014

Change between 2014 and 2007.jpgDisappointing but not surprising

While disappointing, the falling welfare of the unemployed in the US is not entirely surprising from a theoretical perspective. The welfare state literature makes clear that liberal welfare regimes’ structure (e.g. targeted means tested benefits) limit the popular support for generous welfare state benefits for the unemployed that are seen as particularly undeserving.

As Rehm brillantly discusses in his latest book “Risk inequality and Welfare state“, countries with concentrated risks of unemployment among low income workers are less likely to exhibit pro-welfare state cross-class coalitions. At the same time, the US type of capitalism limits the power of the unions while making it unlikely that employers will consent – in the words of Korpi – to more generous social policies (see Varieties of Capitalism literature).

As a result, where there is no clear efficiency imperative (e.g. Obamacare in the context of objective inefficiencies in the health care sector in the US), it is therefore difficult even for a left leaning government to undertake an expansion of welfare state policies.

The conservative victory and the welfare state: Here comes the pain

The Conservatives have won an unexpected majority. Now must come the cuts. Even Ian Duncan Smith is worried about the scale of the cuts promised. In this post I review the good, the bad, the ugly and unknown proposals that the conservatives have in stock for the welfare state. It’s an open question which ones they end up implementing and more crucially where they impose the pain of the non-specified cuts they promised in their manifesto.

The good

There may be some attempts to raise the purchasing power of low income workers. They want to raise the threshold beyond which workers start paying income tax to 12,500£. But whether this will on the net make low income workers better off depends crucially on where they cut welfare state spending further (see below). A downside is of course that this further erodes the government’s tax raising capacity. On minimum wages, they declared they would follow the recommendations from the Low Pay Commission to raise minimum wage to over $8 by the end of 2020. Again whether this will actually represent an improvement depends on the inflation rate over the next five years.

In addition to these uncertain improvements to the conditions of low income workers are two big spending promises. The first one concerns giving working parents 30 hours of free childcare for 3 and 4 years old, which they estimate will cost about £350 million. The second one is to protect the NHS by keeping it free at the point of use and increasing the NHS funding by an additional £8 billion by 2020. For the latter increase in spending to make the NHS sustainable will require additional ‘efficiency savings’ of 2% to 3% a year which are likely to be very difficult to achieve. So in all likelihood, the Conservatives will have to choose between a deterioration of quality or allocating extra spending.

Finally, two ambiguously positive proposals. First, they have promised that they would introduce a national postgraduate loan system for taught masters and PhD courses. This will not resolve much of the issues of university funding and access to undergraduate degrees, but fills a gap for postgraduate studies where access was hampered. Second, the benefit cap, which I discuss below in more detail, will not include the Disability Living Allowance.

The bad

In a context of austerity, the Conservatives are wasting tax revenues on the better off while cutting benefits on the worst off. This makes no economic sense and will likely depress the economy given the different marginal propensity to consume of different income groups: the poor will reduce their spending in response to lower benefits more than the rich will increase their spending in reactions to lower taxes. The net effect on aggregate demand, even in the absence of additional consolidation, will be negative.

Regarding benefits, they will freeze working age benefits for two years from April 2016 (except for maternity allowance, statutory maternity pay, statutory paternity pay, statutory adoption pay and statutory sick pay). Two groups are specifically targeted. First, EU immigrants: they plan to further restrict benefits (housing, JSA, etc) to EU jobseekers in the first four years. This may be consistent with EU law as long as the restriction applies to non-contributory benefits. However, studies have shown that immigrants bring more revenues than they cost so there seems to be little reasons to limit benefits on economic grounds. Second, 18-21 years old will be eligible to a less generous ‘Youth Allowance’ limited to six months and will also have less access to housing benefits.

The ugly

The three most problematicc proposals are the benefit cap, the undercutting of strikes and promotion of precarious contracts and sanctions for addicts. With respect to the first, they will lower the current benefit cap on the benefits that households can receive to £23,000 (from £26,000). In practice this will only hurt families that need it the most such as those with many children or those paying high rents.

Next, they want to rely on precarious contracts to break strikes by repealing the “nonsensical restrictions banning employers from hiring agency staff to provide essential cover during strikes”. This fundamentally undermines the right to strike as precarious contracts are likely less costly than the workers that are striking. Since those who strike are not being paid by their employers, strikes will no longer have any impact on employers.

Finally, those who refuse the “medical help they need” will see their benefits reduced. This concern both those addicted to drugs and the clinically obese. Assuming that at least some of these recipients would change their behaviour in response to the change, this still implies that some very vulnerable recipients that are not able to change their behaviour will lose benefits.

The known unknowns

Given that they have promised to protect Schools and international development, and that they will be spending more on the NHS and childcare, unspecified cuts are going to be large. In total the IFS estimates that they will have to cut £22.5 billion from departmental spending in ‘unprotected’ areas including defence, law and order, social care, and others. How much of this will be frontloaded in the first couple of years remains to be seen, but this will no doubt necessitate very drastic cuts.

In a post-crisis context where there is a heightened need for the welfare state there are very few policy domains that be cut without imposing significant hardships. As I’ve argued elsewhere, the many new challenges related to ageing and changing labour market structures would also require more rather than less welfare state spending.

Does the UK really spends too much on labour market policies?

Consistent with previous trends in reforms of labour market policies, the UK government has announced yet another restriction on unemployment benefit claimants. The striking thing about these reforms is not that they are unlikely to be effective, nor that even if they were effective they probably wouldn’t make much of a difference in reducing the unemployment rate. Instead, the main issue is that they completely misrepresent the nature and extent of the problem.

Two sets of claims generally underpin the rhetoric of these reforms. The first is that benefit recipients fraud and that one must therefore restrict their access to prevent them from doing so. As official statistics (see page 13) themselves reveal, the amount of fraud is in fact very low: fraud cost only about 2.6% of expenditure on income support and 2.9% of spending on Job seeker allowance (see table below).

fraud

The second claim is that these policies simply cost too much and that the system is too generous in the UK. To assess the validity of this perception, I look at 2009 spending data on various labour market policies (from the OECD statistics website). One should distinguish between so called active labour market policies that include training schemes, employment incentives, rehabilitation programs, etc, and passive labour market policies that are mainly composed of traditional unemployment benefits.

Starting with the former, the table below shows that the UK ranks 21st among developed countries in terms of spending on active labour market policies expressed as a percentage of GDP. Scandinavian countries and continental European countries spend important amounts on these policies, while the US, Australia and Canada, along with some eastern European countries spend much less. With respect to passive labour market policies (again expressed as a percentage of GDP), the UK ranks 31st among developed countries… If one divides the spending on these policies by the unemployment rate to get a measure of relative ‘effort’ given the ‘need’, the picture still looks bleak for the UK’s unemployed.

spending on ALMPs as of GDP

PLMPs as  GDP

ALMP % GDP by UR

PLMPs as  GDP by UR

Of course there is significant evidence that the design of unemployment benefits (and other social policies) has important effects on recipients’ incentives to return to work. But the paradox is that as one reduces the amount that unemployed can claim, their incentive to actively seek work to avoid losing benefits actually falls (i.e. the cost of non-compliance with benefit schemes’ requirements decreases as the amount of the benefit is reduced).

In addition, for active labour market programs to be effective they need to be well-funded. In other words, improving incentives can only achieve so much if unemployed are not properly trained, there are no funds to promote their mobility, and the net gains of employment are low because an insufficient number of full time jobs . Given that the level of fraud is low and that spending on labour market policies is comparatively small, it makes no sense for the government to try to further restrict eligibility and add sanctions (on a benefit system that has already been significantly ‘activated’). Instead, there is a need to improve training and access to education, and to support aggregate demand (instead of tightening budgets) to increase the number of vacancies that have no yet recovered:

New Picture (1)

Public and private European Debt in 2001 and 2012

Thanks to the really good Big Picture Blog, I’ve just discovered this really cool tool developed by the Wall Street Journal to visualise the evolution of private and public debt.

Restricting the sample to Western European countries (with Canada and the US included as reference point) and comparing the debt situation in 2001 to that in 2012, reveals some interesting patterns. The Y axis displays the level of public debt as % of GDP, the X axis private debt as % of GDP, and the size of the circles indicates the level of aggregate GDP.

First in 2001, one observes the well-documented trade-off between public and private debt: southern European countries fared worse with respect to public debt but much better in terms of private debt. Thus, among European countries the main difference is more about the distribution of debt among public and private actors than the level.

Turning to 2012, a lot of countries have seen their levels of public debt rise (note that Greece prior to the bailout reached roughly 120% of public debt in 2011 – it’s now gone down to French levels). Except for Sweden and Norway that fare much better than the rest, one continues to see an possible trade-off between public and private debt. Spain as is known faces particularly problematic levels of private debt (but note also the Netherlands and Denmark).

New Journal of European Social Policy Issue

This recent issue covers the introduction of patient choice in Sweden. Two articles discuss the effect of macroeconomic conditions and pre-existing welfare state institutions on demands for redistribution and preferences for welfare state policies, respectively. The effect of credit markets on homelessness and the temporarily of poverty are also investigated. Last but not least, the article by Marx and Picot looks at the preferences of precarious workers as compared to those in permanent employment, while Schmitt, C. and H. Obinger investigate the process of policy diffusion and interpendence for three welfare state policies.

Fredriksson, M., P. Blomqvist, et al. (2013). “The trade-off between choice and equity: Swedish policymakers’ arguments when introducing patient choice.” Journal of European Social Policy 23(2): 192-209.

How do policymakers deal with the tension between choice and equity in healthcare? An analysis and critical examination of Swedish policymakers’ arguments when introducing legislated choice of primary care provider in 2010 shows that even when deciding on a reform with a potentially great impact on distribution of health resources, implications for equity were not systematically addressed. Effects with regards to current patterns of healthcare consumption in the population as well as existing inequalities in health outcomes were not adequately addressed. Neither was the primary are choice reform, which is based on the values of consumerism and individual choice, problematized in relation to current healthcare legislation such as the Health and Medical Services Act. Given that the values of equity and social solidarity have had such a prominent place in Swedish health policy and discourse in past decades, this is a surprising finding. In conclusion, we argue that because inequalities in health constitute one of the main challenges for public health today, the impact of healthcare reforms on equity should receive more attention in policymaking.

Jæger, M. M. (2013). “The effect of macroeconomic and social conditions on the demand for redistribution: A pseudo panel approach.” Journal of European Social Policy 23(2): 149-163.

This paper analyses the effect of macroeconomic and social conditions on the demand for redistribution. Using a synthetic cohort design to generate panel data at the level of socio-demographic groups, analysis of fives waves of data from the European Social Survey (2002–2010) shows that differences across countries in macroeconomic and social conditions have an effect on the demand for redistribution. Consistent with theoretical expectations, economic growth generates a lower demand for redistribution, while higher income inequality generates a higher demand. By contrast, differences across countries in unemployment levels and social expenditure are unrelated to the demand for redistribution. The analysis also suggests that empirical results depend to a considerable extent on the assumptions underlying different methodological approaches.

Jordan, J. (2013). “Policy feedback and support for the welfare state.” Journal of European Social Policy 23(2): 134-148.

How does the structure of social policy institutions shape the level of public support for the welfare state? The policy feedback literature predicts that highly inclusive welfare institutions generate larger bases of public support by shifting the focus away from redistribution and toward common market insecurities felt across classes, while more selective strategies erode support by highlighting the conflicts of interest imbedded in clearly redistributive social programs. This paper expands on existing research by adopting a disaggregated approach to measuring both welfare state structure and public support, uncovering important cross-program variations in public attitudes and welfare state design masked by traditional measures of universality and public support. This project applies this method to public opinion data in 17 advanced capitalist democracies across three policy areas: healthcare, pensions, and unemployment. The findings offer evidence of policy feedback effects.

Lux, M. and M. Mikeszova (2013). “The role of a credit trap on paths to homelessness in the Czech Republic.” Journal of European Social Policy 23(2): 210-223.

This briefing paper aims to show the most common paths to homelessness in a post-socialist state: the Czech Republic. Homelessness in the Czech Republic is worthy of examination because the generous provision of social assistance and tenure security in this country has provided a more secure safety net against homelessness than many other EU member states: yet homelessness has still arisen. The theoretical approach applied in this paper attempts to move beyond the structure–agency debate in the homelessness literature by focusing on the characteristics that most homeless people share on their paths to homelessness. Simple associations among factors associated with homelessness cannot provide a definitive account of the causes of homeless; such data can, however, provide invaluable insights into the constellation of factors that are associated with the phenomenon of homelessness. This briefing paper reveals that the pervasiveness of consumer credit has often been a critical juncture on the pathway to homelessness in the Czech Republic, despite the assistance available from a strong welfare state.

Marx, P. and G. Picot (2013). “The party preferences of atypical workers in Germany.” Journal of European Social Policy 23(2): 164-178.

Are party preferences of atypical workers distinct from those in stable employment? The welfare state literature debates this question, but very few empirical studies have been conducted. We examine the German case, being an example of a welfare state with strong social insurance traditions where the rise of atypical employment has been conspicuous. In particular, we test the argument that preferences of labour market outsiders may not differ because outsiders share households with insiders. We find that labour market status significantly affects party preferences. Compared with standard employees, atypical workers have stronger preferences for small left-wing parties. Living together with a labour market insider neutralizes these party preferences, but this type of household is not very common. Moreover, atypical workers differ from the unemployed by not participating less in elections than insiders. Therefore, it is expedient to distinguish between different types of labour market outsiders.

Schmitt, C. and H. Obinger (2013). “Spatial interdependencies and welfare state generosity in Western democracies, 1960–2000.” Journal of European Social Policy 23(2): 119-133.

For many years comparative welfare state research has been afflicted with a sort of methodological nationalism in the sense that countries were treated as independent units. In line with the recent ‘spatial turn’ in comparative public policy studies, this paper examines with regard to three welfare state programmes whether, in the post-war period, the provision of social rights in 18 Western democracies was shaped by benefit generosity in other countries. We show that diffusion is present but varies by programme and over time. Rather surprisingly, we find that policy diffusion was particularly relevant during the Golden Age.

Snel, E., F. Reelick, et al. (2013). “Time and poverty revisited: A replication of Leisering and Leibfried.” Journal of European Social Policy 23(2): 179-191.

In the late 1990s, the German sociologists Leisering and Leibfried (1999) argued that most poverty is of a temporary nature. In their poverty study in the German city of Bremen, Leisering and Leibfried found that more than half of all social assistance claimants were out of poverty within a year. Based on their work, individualization theorists such as Giddens and Beck argue that ‘for most people poverty is only a temporary experience’. This article replicates Leisering and Leibfried’s study using statistical data about social assistance claiming in Rotterdam, the Netherlands. In doing so we find significant numbers of short-term claimants (about 30 percent), as well as surprisingly large numbers of long-term claimants. One in four Rotterdam social assistance claimants is poor for at least 5 years – more than twice as many as Leisering and Leibfried found in their study. We also show that recurrent benefit spells, for Leisering and Leibfried another typical feature of contemporary poverty, is only the exception in Rotterdam. Leisering and Leibfried (and sociologists such as Giddens and Beck in their footsteps) are wrong in claiming that short poverty experiences are typical for poverty in late-modern society. Persistent poverty is still present in our age and in our cities.



Think developed countries have more women in Parliament than the rest of the word? Think again.

The data in the table below (extract taken from this table) has been compiled by the Inter-Parliamentary Union on the basis of information provided by National Parliaments by 1st April 2013.
Out of the top 30 countries, only a few – predominantly scandinavian countries – are present, namely: Sweden (4th), Finland (7th), Norway (11th) and Denmark (13th).
Iceland (10th), the Netherlands (14th) and Belgium (17th)  are other noteworhty exceptions. The US ranked 78th with 17.8% and 20% of women in the lower and upper houses, respectively. To put this position in perspective, that’s below Kazakhstan, Iraq, or Lesotho (which is ranked just below France).
The UK is ranked 58th in a tie with Pakistan. In the EU, Hungary (119th) ranks particularly poorly, being ranked just after the Democractic Republic of Congo.
Of course, presence in parliament is not everything and does not necessarily correlate highly with other measures of gender equality (for other measures such as share of women on boards, see this great website by the OECD). That being said, I think it’s hard not see it as an abysmal failure on the part of advanced economies to ensure gender equality in political representation.