Prosperity and the Welfare State: The Effect of Benefit Generosity and Wage Coordination on Absolute Poverty and Prosperity in Cross-National Perspective

The goal of the welfare state is the redistribution of income in order to reduce poverty and reduce inequality. Income inequality and relative poverty are often cited as major policy concerns, and are tracked by economists. Economists and policy makers also value measures of absolute poverty as it more closely tracks the actual well being of the poor. Some studies have found a link between generous social benefits or transfers and reduced absolute poverty, based on the difference between post-transfer poverty and pretransfer poverty. But models suggest that benefits may have an endogenous effect and increase pre-transfer poverty. This paper expands on absolute poverty research by using two measures of post-tax-transfer poverty and two measures of prosperity. The paper explores the correlation between generous benefits and these standard of living measures across 14 countries using the Luxembourg Income Study, keeping GDP per capita constant. Poverty and prosperity are defined using the median income and quintiles of the US in a given year and converting currencies from the other countries using purchasing power parity and consumer price index. The paper also considers wage bargaining and minimum wage policy.