Is the UK’s welfare state to blame?

The Uxbridge Graduate

‘Not contrarian. Just skeptical’

Posted on September 5, 2012 at 9:39 pm

I came across this graph whilst trawling the World Wide Web.

A hat tip to Daniel Sage from whose account the graph was sourced.

The commentary is mine.


Is it really necessary to cut UK social spending?

The graph indicates that high social spending is not an impediment to high employment levels.

This finding runs counter to the current popular consensus in the UK which is in support of the government’s agenda to dramatically reduce social spending.

The widespread  belief is that employment levels will increase as a consequence of reduced social spending.

Cuts to social spending will remove the disincentive to work that is believed to cause unemployment.

Or so the story goes. The graph does not support that thesis.

The R-squared figure cited on the graph  tells us that the correlation coefficient between the two variables is roughly +0.5.  This is high given that a correlation coefficient can not exceed unity (one) or fall below zero.

Visual inspection and the line of best fit shown on the graph tells us immediately that the two variables move in positive sympathy with each other.

Note particularly how Denmark, Sweden and Finland (Scandinavia) lead the pack.

Notice also how the UK’s profile is atypical in that its employment levels were high but its social spending low.

Are we being deceived?

Art Li 李嘉 (@Art_Li)
September 5, 2012 at 10:29 pm

Also interesting that (1) Danish unemployment benefits are time-limited, (2) has had a more stringent “workfare” type program and (3) for a decade or more, has had very tight immigration comtrols. IMHO all these contribute more to the low unemployment level than high social expenditure as portrayed in the graph above. Also the Danish economy now has low growth & much higher unemployment levels (than in 2006) as a result of the financial crisis; she faces quite similar problems as the rest of the western economies, they too have had to reduce spending. Just some quick thoughts.

September 6, 2012 at 12:48 am

Hi Art-li

Just for the sake of clarity I did not suggest that high social spending contributed to high employment levels (although it might do so in the Danish case).

The point of the graph was that is shows high social spending does not impede the achievement of high employment levels.

Put another way, social spending and employment levels may be independent of each other and so it is ideology or a prior (and spurious) logic that perceives them to be linked.

Usually it is politically advantageous to persuade we proles that a negative linkage exists,i.e., that an increase in the value of one variable must be accompanied by a decrease in the value of the other.

This way, the rich and powerful can justify the demolition of the welfare state and the infliction of suffering on needy citizens.

The graph shows the thesis of negative correlation to be untrue, at least in the EU in 2006 but which by induction renders the proposition to be false and without universal application.


The Uxbridge Graduate

Where does money come from?

The Uxbridge Graduate

3 thoughts on “Is the UK’s welfare state to blame?

  1. RTKatt says:

    Miliband’s speech at the Policy Network Conference was preceded by one by Larry Summers, formerly US Treasury Secretary under Clinton and economic adviser to Obama. The following is an excerpt from an entry on ‘Unemployment’ that he wrote for the Concise Encyclopedia of Economics, published by the right-wing Liberty Fund, a major promoter of neo-liberal thinking and policies in the States. Summers goes on to warn against taking this as the whole picture, emphasising that macro-economic factors are ultimately determinant, but acknowledges that many conservative economists fail to acknowledge this. While the article refers specifically to the situation in the States, I think it essentially reflects the viewpoint of our own present government.

    ‘What Causes Long-Term Unemployment?

    To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.

    First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work.

    In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.

    The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.

    Consider, for example, an unemployed person who is accustomed to making $15.00 an hour. On unemployment insurance this person receives about 55 percent of normal earnings, or $8.25 per lost work hour. If that person is in a 15 percent federal tax bracket and a 3 percent state tax bracket, he or she pays $1.49 in taxes per hour not worked and nets $6.76 per hour after taxes as compensation for not working. If that person took a job that paid $15.00 per hour, governments would take 18 percent for income taxes and 7.65 percent for Social Security taxes, netting him or her $11.15 per hour of work. Comparing the two payments, this person may decide that an hour of leisure is worth more than the extra $4.39 the job would pay. If so, this means that the unemployment insurance raises the person’s reservation wage to above $15.00 per hour.

    Unemployment, therefore, may not be as costly for the jobless person as previously imagined. But as Harvard economist Martin Feldstein pointed out in the 1970s, the costs of unemployment to taxpayers are very great indeed. Take the example above of the individual who could work for $15.00 an hour or collect unemployment insurance of $8.25 per hour. The cost of unemployment to this unemployed person was only $4.39 per hour, the difference between the net income from working and the net income from not working. And as compensation for this cost, the unemployed person gained leisure, whose value could well be above $4.39 per hour. But other taxpayers as a group paid $8.25 in unemployment benefits for every hour the person was unemployed, and got back in taxes only $1.49 on this benefit. Moreover, they gave up $3.85 in lost tax and Social Security revenue that this person would have paid per hour employed at a $15.00 wage. Net loss to other taxpayers: $10.61 ($8.25 − $1.49 + $3.85) per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of hours of work, and you get a cost to taxpayers in the billions.

    Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

    Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions. To put this in perspective, 1.2 percentage points is about 60 percent of the increase in normal unemployment between 1970 and 1985.’

  2. sad but true says:

    with wall to wall media coverage of the murder in france and the apparent concern about it by the media the fact that nobody gives a fuck about a disabled person in britain being murdered evryday b government highlights where priorities are for this country the welfare state has always been a parrhiah for the right wing and a good reason to get away with mudering people in its name

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