Recently, I asked Lane Kenworthy, professor of sociology at the University of California, San Diego, and author of Progress for the Poor (2011) and Social Democratic America (2013), to answer a few quick questions about what the United States can learn from poverty-fighting efforts in other market democracies, and he was kind enough to agree. Kenworthy is an advocate of a larger, more generous U.S. social safety net, hence his recent call for a “social democratic America.” Yet he is also deeply interested in making U.S. public sector institutions more efficient and responsive, and I’ve long believed that conservatives can profit from his work. I reached out to Kenworthy in part because I believe that the Nordic model, and its reliance on “supports+incentives+pressures,” is misunderstood by at least some of its American admirers.
Reihan Salam: Much of your work is based on the notion that the United States can learn from the efforts of other affluent market democracies to better the lives of the poor. Across these countries, have rising wages been the chief vehicle for raising incomes at the bottom or has it been rising transfers?
Lane Kenworthy: Since the late 1970s, it has been mainly rising transfers. In most of the rich countries for which there are comparable data, the earnings of low-end households increased little, if at all, during this period. (Ireland and the Netherlands are exceptions.) When incomes rose, it was because of increases in net government transfers — transfers received minus taxes paid.
This owes partly to the characteristics of individuals and households at the low end. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Some are elderly. Many of these households have just one adult, and family circumstances can impose a significant constraint.
It’s also a function of the economy, which is less conducive to wage increases for low-end workers than it was during the 1950s and 1960s. It’s more difficult to increase productivity in low-end service positions than in manufacturing. Firms now face more intense competition from more sources (foreign and domestic). Companies have more options for replacing workers, whether with machines or with low-cost laborers abroad. In nations like the US, shareholders now pressure management for constant cost-cutting and buoyant quarterly earnings growth rather than steady long-run improvement, and labor unions have weakened.
How do countries increase government transfers? For some programs,benefit levels rise automatically as the economy grows. This happens when, for instance, pensions or unemployment compensation are indexed to average wages. For other programs, such as social assistance, an increase in benefit generosity may require an explicit policy update by a government agency or by the legislature.
In the United States, only one of our main government transfer programs, Social Security, is structured in such a way that benefit levels automatically increase when the economy grows. Social Security retirement benefits are indexed to average wages, so they have tended to rise more or less in concert with GDP. Unemployment benefit levels are determined by state governments. In many instances, the benefit level is a “replacement rate,” which means the payment is a certain fraction of the unemployed person’s former wage or salary. Because real wages in the bottom half of the distribution have not increased in the past several decades, unemployment benefits for Americans in low-wage jobs have failed to keep up with growth in the economy. Other programs, such as the Earned Income Tax Credit, the Supplemental Nutritional Assistance Program (food stamps), Social Security Disability Insurance, and Supplemental Security Income, are indexed to prices. This means they keep up with inflation, but not with economic growth. Temporary Assistance for Needy Families payments are determined by state policymakers; there is no automatic increase, not even for prices. AFDC-TANF benefit levels have fallen steadily in inflation-adjusted terms over the past several decades. As a result, government transfers for low-end households have increased less in the US than in many other affluent countries.
RS: You often reference the distinction between employment-conditional earnings subsidies and unconditional transfers. Given the large numbers of low-income households with low or no earnings, why haven’t governments simply increased unconditional transfers to all low-income households, whether they include working adults or not?
LK: One reason is that most affluent countries face demographic pressure on the public budget. The generation entering retirement is large, so existing commitments to pensions and health care for retirees are going to increase government expenditures in coming decades. Increasing tax rates is a tough sell politically. A more attractive strategy is to increase taxable earnings, and one way to do that is by getting more people into employment. Providing generous unconditional transfers to able working-age adults reduces the incentive for such people to be employed.
A second reason has to do with perceptions of fairness. Many people — not just here in the US but in all rich nations — believe that everyone should pull their own weight to the extent they are able. So they want unconditional benefits to be reserved for the truly needy.
RS: Denmark and Sweden have employment rates that are among the world’s highest, and Sweden recently surpassed the United States in the number of hours worked per working-age adult. Americans tend to think of the Danish and Swedish welfare states as very generous. How do they manage to combine generosity to low-income households with high levels of labor force participation?
LK: The Danish and Swedish welfare states provide strong supports for employment. Most important, good-quality childcare and preschool (“early education”) is widely available at an affordable price. Here in the US, childcare is available, but care that’s affordable often is mediocre in quality. Among mothers whose youngest child is six to sixteen years old, and thus in K-12 schooling, the employment rate in Sweden is similar to that in the US, whereas among mothers with a child under six, it’s 15 percentage points higher in Sweden.
Another helpful support is “active labor market policy,” which is a bundle of programs that aid young people who are struggling to get into the labor market, mid-career or elderly workers who lose their job, and people with various types of constraints and disabilities. The supports include training and retraining, lifelong learning, job placement assistance, and more.
Though government benefits for non-employed Swedes do tend to be fairly generous, the de facto minimum wage (it’s set via collective bargaining rather than by government) is high, so people on the margins of the labor market don’t face strong work disincentives. In the past decade, two new policies have aimed to make the incentives even more favorable for employment. One is an employment-conditional earnings subsidy, similar to our Earned Income Tax Credit. The other is a payroll tax reduction for people employed in certain low-paying service positions.
Along with supports and incentives, Sweden and Denmark often pressure benefit recipients into employment. Because individual circumstances vary so much, this is best done by giving caseworkers considerable discretion to decide which people can be effectively pushed into paid work, when, and with what kind of help. Doing this well requires an investment — in well-trained caseworkers who remain in their jobs and thereby build expertise, in having a sufficient number of caseworkers so that they aren’t overwhelmed with clients, and in ensuring that caseworkers have access to sufficient resources to help their clients enter and remain in the paid workforce (retraining, transportation, temporary housing, treatment for addiction, etc).
I’m not suggesting these two countries have fully solved the problem of how to couple generous government benefits with high employment. I worry, for instance, that their high wage floors and (in Sweden) payroll taxes reduce employment somewhat among immigrants and the young. But overall I think their supports+incentives+pressures approach has proven comparatively effective.