British Welfare State Cushions About 36 Percent of Income Losses in Economic Crises

In the event of a sharp rise in unemployment in the United Kingdom, the welfare state cushions between 36 and 37 percent of all income losses. This is the result of an EconPol study that examines social security systems in the EU. “The social security systems in Scandinavia and Western Europe buffer their citizens’ income losses most comprehensively. In countries in Southern and Eastern Europe, however, crises lead to significantly higher income losses, and the same is true in the United Kingdom and Ireland,” says Mathias Dolls, Deputy Director of the ifo Center for Macroeconomics and Surveys. In Ireland, the cushioning of income losses ranges from 30 to 32 percent.

In the UK, around 15 percent of the losses are cushioned by lower income tax payments and 10 percent by lower social security contributions. Minimum income support compensates for 5 to 7 percent of income losses in the UK. Unemployment benefits play a minor part, absorbing only 1 percent of the losses.

For Germany, the cushioning of income losses ranges from 53 to 63 percent. In France, the figure is between 38 and 73 percent. In Belgium, the welfare state compensates for 52 to73 percent of income losses. In Italy, the figure is around 43 percent. Poland is the country with the lowest buffer in the EU, compensating for just 29 percent.

“The stabilizing effect of social security systems depends heavily on how many people are covered by unemployment insurance, at least temporarily, when they become unemployed. Unemployment insurance coverage is relatively weak in some European welfare states,” says Max Lay, coauthor of the study. “Well-designed social security systems manage to protect people from economic hardship while providing strong incentives to work,” Dolls adds.

The study calculates the impact of various economic crises on disposable household incomes in the member states of the European Union and in the United Kingdom. An increase of 5 percentage points in the unemployment rate within two years is simulated for each country under consideration. In the simulations, one version has the increase in the unemployment rate occur evenly over the two years, while a second sees it jump at the beginning of the economic crisis. This results in two values for each country.

Questions can be directed to: Max Lay, 0049 / 89 / 9224 1247, Lay@ifo.de