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.