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The Welfare State

Module by: Miguel Centellas. E-mail the author

Summary: This module provides a definition and overview of the concept "welfare state" and comparative data from the US and six other advanced industrial democracies. Turning to a focus on the Scandinavian model, the exercise asks students to listen to two short audio podcasts a about the Danish welfare state from NPR's Planet Money. The exercise tests students conceptual and critical thinking abilities, as well as their ability to use data to conduct their own analysis.

The Welfare State

The term welfare state refers to states that play a significant role in the promotion of social welfare of their citizens. Social “welfare” provisions include the kind of public goods (such as public education and roads) most modern states provide, but extend to direct transfers to citizens (such as childcare benefits), social safety nets (such as unemployment benefits), and policies aimed at reducing inequalities or improving quality of life (such as paternity leave, universal health care, or housing subsidies).

In the United States, we often think of “welfare” pejoratively. Nevertheless, public welfare expenditures account for a significant portion of government spending. In 2010, Medicare and Medicaid ($793 billion) accounted for 23 percent of the federal budget, with Social Security ($701 billion) accounting for an additional 20 percent. Many Americans—including college students—benefit from one or more of the various public subsidies and tax credits that qualify as social “welfare” expenditures, programs, or subsidies (e.g. subsidized student loans and work-study programs).

Still, the scope of the US welfare state is relatively small compared to other advanced industrial democracies. One way to see this is to compare the US with other members of the OECD (Organization of Economic Cooperation and Development), a group of advanced industrial democracies. All OECD countries offer some basic universal (that is, available to all) public welfare programs, such as public education and old age benefits. Where we see differences are in other kinds of social programs meant to improve citizens’ “quality of life” through various payment benefits or other policies. Two interesting examples are family and employment programs.

This assignment asks you to listen to two podcast from National Public Radio’s Planet Money (each is about 20 minutes long). Planet Money airs bi-weekly episodes that explore some economic issue. In their January 13, 2010, episode (“The Awesomest Economy?”), the Planet Money team explored the Scandinavian welfare state, with a particular focus on Denmark. On January 15, 2010, they aired a follow-up episode (“Tax Me Please”). Although many European countries have significant welfare benefits, the Scandinavian countries (Sweden, Norway, Finland, Denmark, and Iceland) are known as the largest; they are often described as “cradle to grave” welfare states, since government subsidies cover almost all facets of life, starting from birth and infant childcare to generous old age pensions. Although Sweden is the typical example of the Scandinavian welfare state, Denmark’s has higher benefits—and taxes. Before listening to the podcast, look at the following data tables.

Data Tables

How do family policies vary across countries? Table 1 shows national family policies, which include maternity leave, early childcare (for children under 3 years of age), and preschool. Total public spending on family programs varies across the selected countries, as do policies and benefits. German parents (mothers and fathers) are given almost a year of paid parental leave, while American parents do not (although some employers provide parental leave as part of individual employee benefit package). Public spending for childcare is highest in Denmark, where the government pays $6,376 per year for infant childcare. Only 17.8% of German infants and toddlers are enrolled in childcare, perhaps a function of the generous parental leave, compared to nearly two thirds of all Danish infants and toddlers. In all countries (other than US), more than 90% of children (ages 3-6) are enrolled in preschool.

Table 1: Family Spending & Policies Across Selected OECD Countries
Data from OECD (http://www.oecd.org/els/social/family/database)
Country Public Family Spending (% of GDP) Full Rate Paid Parental Leave (weeks) Public Spending on Childcare ($PPP/child) Enrollment of Children under 3 in Childcare (%) Enrollment of Children under 6 in Preschool (%)
Britain 3.58 13.0 3,563 40.8 92.7
Denmark 3.28 23.2 6,376 65.7 91.5
France 3.71 27.8 2,858 42.0 99.9
Germany 2.71 40.6 860 17.8 92.7
Japan 1.30 31.2 2,683 28.3 90.0
Sweden 3.35 30.9 5,928 46.7 91.1
USA 1.19 0.0 794 31.4 55.7
Table 2: Employment Spending & Policies Across Selected OECD Countries
Data from OECD (www.oecd.org/employment/keystatistics; http://www.oecd.org/employment/database)
Country Public Employment Spending (% of GDP) Employment Protection (Scale 0-6) Unemployment Benefits (% of previous earnings) Average Annual Work Time (hours) Mandated Paid Vacation (weeks)
Britain 0.5 1.1 12.1 1,646 3
Denmark 2.6 1.9 41.2 1,563 6
France 2.0 2.9 39.0 1,554 7
Germany 1.9 2.4 23.7 1,390 4
Japan 0.6 1.5 7.6 1,714 3
Sweden 1.5 2.2 32.4 1,610 5
USA 1.0 0.7 13.6 1,768 0

The impact of the welfare state can be measured in two ways. One way is to look at the impact on individuals and their households. Another way is to look at tax burdens and broader social outcomes along various social and economic indicators (e.g. economic growth, unemployment, and health statistics).

How does the welfare state affect an average household? Although the OECD does not make household income income and expenses data readily available, the organization World Salaries does (although it does not have data for Denmark), using government reported data. Table 3 shows the average annual disposable income (after taxes) in six of our selected countries, as well as average annual household expenses and cash transfers (subsidies provided by the government), using $PPP (or “purchasing power parity,” which controls for differences in costs of living across countries). Americans have the highest personal disposable income ($19,776), but spend the most on three of four basic categories: health, housing, and education. Britons spend the least on health expenses ($168 per year), the Japanese spend the least on housing ($1,707 per year), and Swedes spend the least on food ($2,081 per year) and education ($49). Germans receive the largest cash transfer benefits from the government ($7,447 per year).

Table 3: Income, Expenditures, and Benefits Across Selected OECD Countries
Data from World Salaries (http://worldsalaries.org; based on government reported data; all figures are in $PPP)
    Annual Per Capita Household Expenditures  
Country Average Personal Disposable Income Health Housing Food Education Cash Transfers
Britain 16,710 168 5,162 2,802 223 4,107
Denmark n/a n/a n/a n/a n/a n/a
France 14,490 542 2,758 2,901 55 4,535
Germany 17,069 579 5,632 2,752 136 7,447
Japan 11,842 400 1,707 2,188 328 453
Sweden 16,596 315 3,814 2,081 49 2,717
USA 19,776 1,068 6,072 2,543 372 2,830

How does the welfare state affect a country’s social and economic indicators? Table 4 shows both the tax costs to citizens and economic and social indicators across the seven selected countries. Using the average wage as the base, the total tax wedge (including individual and employer pension contributions) range from a low of 24.9% in the US to a high of 44.3% in France. Employment is highest in Denmark (75.7% of the total working age population is employed) and lowest in France. The US has the highest poverty rates and infant mortality rates, as well as the lowest healthy life expectancy. Poverty is lowest in Denmark (only 6.1% of Danes earn less than half the median income), infant mortality (the number of infants who die before their first birthday) is lowest in Sweden, and the Japanese have the longest healthy life expectancy (76 years). Despite the recent global recession, Sweden’s economy grew by 5.5%, compared to 1.3% for Britain.

Table 4: Taxes, Social Indicators, and Economic Growth Across Selected OECD Countries
Data from OECD (http://www.oecd.org/ctp/taxingwages; http://www.oecd.org/els/employment/data; http://www.oecd.org/els/social/indicators/SAG) 1Average tax wedge for two-earner family with two children 2Poverty rate is percentage of population living on less than half the median household income
    Social Indicators  
Country Average Tax Wedge1(%) Employment Rate(% working age pop) Poverty Rate2(%) Healthy Life Expectancy (years) Infant Mortality (per 1,000 live births) GDP Growth Rate
Britain 28.8 70.6 11.3 72 4.7 1.3
Denmark 34.4 75.7 6.1 72 4.0 2.1
France 44.3 63.9 7.2 73 3.8 1.5
Germany 41.4 70.4 8.9 73 3.5 3.5
Japan 25.2 70.0 15.7 76 2.6 4.0
Sweden 38.6 72.2 8.4 74 2.5 5.5
USA 24.9 70.9 17.3 70 6.7 2.8

Podcast

Now, listen to the NPR podcasts, “The Awesomest Economy?” and “Tax Me Please” before answering the relevant questions. Planet Money always starts with a brief overview of current economic conditions. The Denmark episodes begins about two minutes into the podcasts.

Reading Comprehension: Self-Assessment

Exercise 1: Questions about data tables

  1. Denmark spends $6,376 per year on infant (0-3 years old) childcare. How much more is that than the US?
  2. How many of the selected countries spend more than 3% of GDP on family policies?
  3. Americans have the highest average personal disposable income ($19,776). After subtracting health, housing, food, and education expenses, and adding government cash transfers, how much is left?
  4. On average, Germans earn about $2,500 less than Americans. After subtracting health, housing, food, and education expenses, and adding government cash transfers, how much is left?
  5. In how many of the selected countries can workers collect unemployment benefits equal to more than 30% of their previous salary?

Solution

  1. 8
  2. 4 (Britain, France, Denmark, Sweden)
  3. $12,651
  4. $15,417
  5. 3 (France, Denmark, Sweden)

Exercise 2: Questions about the Planet Money podcasts

  1. At its most recent low point, how low was official unemployment in Denmark, according to the Planet Money podcast?
  2. In Denmark, according to the Planet Money podcast, the system known as “flexicurity” makes it very difficult to fire workers.
  3. According to the Planet Money podcast, how long can Danish workers collect unemployment benefits?
  4. How often, on average, do Danish workers change jobs?
  5. Because of its large welfare system, Denmark no longer qualifies as a capitalist economy.
  6. The second Planet Money episode looks at taxes in Denmark. What share of the Danish GDP goes to taxes?
  7. The Planet Money team interviews a young Swede. Why does she think Denmark is better than Sweden?
  8. What is the tax rate for a new car in Denmark?
  9. Why do the top Danish soccer players play outside of Denmark?
Solution
  1. 2%
  2. False
  3. 4 years
  4. Every 4 years
  5. False
  6. About half
  7. Higher taxes
  8. 200%
  9. To pay lower taxes

Discussion Questions

  1. Most of the countries enroll more than 90% of their children in preschool. What advantages does this have for their societies?
  2. Why do Scandinavians seem so willing to pay high tax rates?
  3. If you could choose between high taxes and high personal benefits, or low taxes but limited benefits, which would you choose?
  4. If you had to only think about financial costs and benefits for you and your family, which of the seven countries would you choose to live in?

Writing Exercises

  1. Imagine you are advising your congressional representative on economic policy and have been asked to write a short (two-page) briefing memo on tax and social spending policy. Pick one of these two kinds of welfare policies—family or employment—and discuss the costs and benefits of providing the same level of funding as found in Denmark (or similar European country).
  2. Imagine you are advising a large corporation considering moving to Europe, and they have commissioned you to write a short (two-page) white paper outlining which country you recommend. Looking at the potential costs and benefits, which of the countries would you recommend they move to?

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