Incentives in the Welfare State

This paper deals with economic incentives and welfare-state arrangements in OECD countries; it also offers some lessons for would-be welfare states. These arrangements differ, of course, among OECD countries. In particular, there is wide variation in the extent to which countries rely on four basic institutions - the state, the firm, the family and the market. Countries also differ in their reliance on (i) a common safety net, often in the form of flat-rate benefits tied to specific contingencies; (ii) means-tested benefits for low-income groups; and (iii) income protection, i.e., benefits that are tied to previous income. Another distinction is between corporatist welfare states, where benefits are tied to labor contracts, and universal welfare states in which benefits are conditional on residence or citizenship. This distinction is blurred, however, by recent tendencies in corporatist welfare states to extend coverage to individuals who have very weak attachment to the labor market, and in universal welfare states to tie benefits to previous or contemporary work under the slogan “workfare” rather than “welfare”.