APPENDIX A: Example Benefit Schedules
The following example benefit schedules are intended only to show how the benefit level might be structured and to provide some idea of the size of relative benefits between the two tracks, between households of different sizes, and between adults, older children and younger children. The figures shown do not correspond to any particular poverty index or value. 1/
In the A track, a basic benefit is paid to the claimant plus an allowance for the number of dependent adults, an allowance for dependent older children and an allowance for dependent younger children. In the B track, a benefit is paid for the number of adults in the household, plus an allowance for older children and one for younger children.
The table below shows the A and B track benefits.
|1 adult/no dependents||1,700||2,000|
|1 dependent adult||2,700|
|2 or more dependent adults||2,700 + (γ-2) 800||3,200 + (γ-2) 1,000|
|3 or more adults|
|2 or more older children||700 + (δ-1) 500||800 + (δ-1) 600|
|2 or more younger children||600 + (δ-1) 450||700 + (δ-1) 500|
|1 adult/no dependents||1,700||2,000|
|1 dependent adult||2,700|
|2 or more dependent adults||2,700 + (γ-2) 800||3,200 + (γ-2) 1,000|
|3 or more adults|
|2 or more older children||700 + (δ-1) 500||800 + (δ-1) 600|
|2 or more younger children||600 + (δ-1) 450||700 + (δ-1) 500|
APPENDIX B: Policy Options
To modify the social safety net scheme, a number of policy options are available. The options provide for varying degrees of generosity to claimants and varying amounts of assistance to improve overall labor market efficiency. The options appear below.
APPENDIX C: The Polish Social Safety Net
The Employment Law in Poland established a Labor Fund to assist workers rendered redundant by providing them with unemployment and retraining benefits, with the emphasis of the program being placed upon retraining and improving labor mobility. It also finances job creation through credits to enterprises and small businesses. The Fund is financed by a levy on enterprise payrolls and by budgetary transfers.
Unemployment benefit is not paid for the first seven days of unemployment and there is a thirty day penalty for leaving a job without good reason. It is paid at a level of 70 percent of the individual’s previous wage for the first three months, at 50 percent for a further six months, and then at 40 percent without any time limit. The benefit is not indexed and in times of high inflation, may rapidly fall in real terms to the level of the minimum benefit. For new entrants to the labor market, the level of benefit depends upon the individual’s education and the duration of unemployment. The maximum level of benefit equals the average wage and the minimum level is 35 percent of the projected average monthly wage.
An individual will be accepted for unemployment benefit only if there are no suitable jobs or training places available. The level of benefit for those in training is 100 percent of the previous wage for those who were part of “group redundancies” and for others, at 80 percent of the previous wage. The minimum level of training benefit is about 40 percent of the average wage and there is no upper limit.
Benefits, other than for unemployment and training, are paid by a number of other sources. Pensions are paid from the Social Insurance Fund mainly for old age, invalidity, accident and survivors and are calculated as a percentage of previous earnings. Family allowance is paid to public sector employees by their employers at centrally determined flat rates, the money coming from the Social Insurance Fund. Sickness benefit is paid to public sector employees by their employers out of the revenue of the firm. Finally, social welfare comprises benefits of last resort and are administered at the local level in a largely discretionary manner.
A draft Social Welfare Law seeks to consolidate means-tested cash benefits, institutional care and other benefits in kind, and aims to provide relief for those whose income still leaves them in poverty. Under the scheme, the benefits paid will be largely determined on a discretionary basis by social workers.
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The author was a summer intern in the Research Department when this paper was written. The views expressed herein are those of the author and do not necessarily reflect those of the International Monetary Fund. She would like to thank Steve Coate, Dimitrios Demekas, Jean-Jacques Dethier, Timothy Lane, Xavier Maret and Peter Wickham for providing useful information and helpful comments and gratefully acknowledges the assistance of other IMF and World Bank Staff. The conclusions and remaining errors are the sole responsibility of the author.
Strictly speaking, the term social safety net may apply to income support measures, employment services, proactive employment and income generation activities and the funding and provision of adequate health services. In the context of this paper, the term will be used to mean income support measures and employment services when they are used in conjunction with the objective of poverty alleviation.
There has been much debate about how to define ‘poverty’ and the ‘poor’, as will be discussed below. In the context of this section, poverty is used to describe the situation where income is below the level of the minimum income guarantee as defined in the safety net scheme’s objective.
In addition, the question of the appropriate policy if there are insufficient funds to bridge the poverty gap is not addressed. It can be hypothesized that the answer will depend upon the relative value of raising income above the poverty line to levels which still leave the individual below the sufficient level. If the poverty line marks some discontinuity in the value of income, then priority may be given to the former aim, in which case, the discussion in this paper would provide little guidance. If there is no discontinuity, but the marginal utility of income for the very poor is higher than that for the poor, the discussion of this paper is relevant with the poverty line and benefit levels set at the appropriate lower level.
The insurance motive is not the only possible rationale for safety net schemes. The existence of poverty may generate negative externalities (e.g., crime) which affect the more affluent members of society. Another justification would be some appeal to non-welfarist notions of inalienable rights or morals. For the purpose of this paper, we assume only that the objective is to reduce poverty without specifying the reason.
Given that the policy tool available is the redistribution of income, it would be difficult to influence utility if it were not directly related to income. For example, it is not immediately obvious how a government might increase the utility of an extremely affluent, but very unhappy, individual.
For example, there may be a stronger case for providing benefits in kind rather than in cash in developing countries.
Difficulties arise from the fact that the standard of living, and hence any definition of the poverty line based upon the standard of living, is a multidimensional concept, including the commodities an individual consumes and the activities he engages in. However, as mentioned in the Introduction, this paper will consider only the income dimension. For further discussion of the poverty line and the measurement of poverty, see, for example, Kanbur (1987).
For example, single-parent families are entitled to AFDC payments in the United States and all families with children are entitled to Child Benefit in the United Kingdom.
The poverty incidence of a particular group is the number of people in that group with an original income below Z divided by the total number in the group. Targeting the group with the highest incidence of poverty need not necessarily be the most efficient method for alleviating poverty if consideration is given to how much income falls short of the poverty line. For example, if a social welfare function values more highly the alleviation of poverty among the very poor than among those just below the poverty line, it may be optimal to target aid not toward the group with the highest proportion in poverty but toward the group which has a high proportion of very poor or a large poverty gap.
For example, in the United Kingdom, contingent benefits form over 70 percent of the transfers and it has been estimated that little more than half of all expenditure on transfer payments goes to bringing the poor up to the poverty line.
Distortions in household structure and the incentives to work may occur under other schemes and are discussed below.
It may be argued that the distortion in work incentives under means-testing creates a loss in efficiency which would not arise under a social dividend scheme and that the latter therefore generates additional resources for a poverty alleviation program. However, although revenue implications are not considered in this paper, it should be mentioned in this context that the efficiency disadvantage of the social dividend scheme is that it requires a larger budget, a larger tax burden on the working population and a correspondingly larger distortion in work Incentives. Therefore, the choice is between a distribution of high marginal tax rates skewed in the direction of the poor or a more even spread of marginal tax rates. Kesselman and Garfinkel (1978) and Sadka, Garfinkel and Moreland (1982) find that a social dividend type scheme is preferable, but Betson, Greenberg and Kasten (1982) argue that neither has substantial efficiency costs because taxpayers partially compensate for an increase in the tax burden by increasing their work hours and earnings.
In Figure 4, any individual whose indifference curves form a tangent with the budget line below an income level of Z, will always attain higher utility at the income level Z with zero labor supply.
To some extent individuals are able to alter their income-generating ability, by the amount of human capital they choose to invest. This issue will be discussed below.
Kesselman (1973) advocates a system based on this distinction, but his ‘SWIFT’ proposal offers wage subsidies for those deemed able to work and income subsidies for those categorized as unable to work.
As was described above and in Figure 4, an individual may be better off by accepting a lower income for higher leisure hours.
The term employment will be used in a very general sense to describe any private sector employment, workfare, training or job search course.
It should be noted that this need not result in zero claimants participating in A track because although individuals may have a preference for private employment, they will only be working if such employment is available. Thus, those in A track may prefer to work at the going wage rate, but are unable to because of a lack of available jobs.
There may also be other costs associated with such part-time employment in the form of the psychological disruption of undertaking two different forms of employment, although some, of course, might prefer the variety.
Besley and Coate (1990a) have shown that for a model of two individuals, one of high ability and one of low, the optimal work requirement is set at a level which would make the high wage individual indifferent between masquerading and claiming no benefit at all. When coupled with a transfer sufficient to get the poor to the poverty line, and if this requirement is above the level, the low ability individual would normally work. If it is below that level, as shown in Figure 6 where H’’ is above H, the optimal requirement is higher but indeterminant. Besley and Coate also show that because the demand for work requirements is less acute when it is possible to monitor individual incomes, whenever workfare is optimal when income is observable, it will be optimal when income is unobservable.
Supplementary Benefit was renamed Income Support and restructured in April 1988.
For example, welfare recipients may, on average, have a higher disutility of labor than nonrecipients and hence be regarded as ‘lazy’.
It will increase the number of undeserving claimants, but, at the same time, the new individuals attracted to welfare will have, on average, lower negative qualities.
See page 29.
Strictly speaking, if the measure of interest is income and not utility, the nonmonetary costs of claiming are not relevant to the objective of poverty alleviation.
In both of these cases, there is an additional cost to maintaining two households, but this would be covered by the benefit payment. This is in addition to the benefit providing support for the expenses of the poor that would otherwise have been paid for by the earning co-habitant.
This may also be a reason for paying benefits in-kind, as will be discussed below.
See also, for example, Hutchens (1979), who finds that an increase in AFDC guarantee leads to a small decline in remarriage by female heads with children.
In particular, unions may be more willing to accept a reduction in the size of the labor force and workers may put up less resistance to the termination of employment if they know that their members will be protected against poverty.
In the case of mothers, traditionalists and many child development experts might feel that young children are better off cared for by their mothers. Others might argue that mothers have as much right as any other individual to undertake paid work and that the benefit system should not distort their work choice. In the absence of a consensus, evidence on labor force participation could be used to reach a social norm.
The B level is defined specifically below, but it roughly corresponds to a level of income considered adequate for the long term.
It is also to avoid any incentive for an unemployed individual to leave a non-poor household.
The time schedules given in this section are intended only as guides and may be varied according to economic circumstances. It is, however, important to minimize the claimant’s free time in order to create the correct incentives. Therefore as little time as possible should be given to the independent job search. In any case and at any stage, priority would be given to the attainment of employment over the program requirements.
Forty hours a week is assumed to be the maximum number of hours that individuals are expected to work and therefore is the maximum amount of time that an individual might be expected to fulfill with course, work or training requirements. This could be varied according to an economy’s norms.
It would be important to ensure that course participants are actively involved in job search and do not use the time as leisure.
Checks could be made to ensure that the workfare participant is spending the time genuinely attempting to attain work, for example, a phone call could be made to an interviewer to verify the interview.
There is a narrow dividing line between that which might be called workfare and state employment. The difference may lie in the motivation for employment. In the case of state employment, it may be essential for the fulfillment of the state’s functions, but the primary aim in the case of workfare is to reduce unemployment and for the workers to return eventually to the private sector. In reality, it may be impossible to distinguish between the two.
This is not to say that they are unable to work if they so choose, but that they will never be expected to have to work.
This is to minimize leakage. For example, in the U.K., the means-tested benefits of Family Income Supplement and Housing Benefit have been paid to those above the poverty line, as they are assessed on an income over a short period but the benefits continue to be paid out over a much longer time.
There is also an argument that support should be scaled inversely to the age of the child because older children require less parental input and hence allow parents greater earnings opportunities. However, under this scheme, the work disincentives for parents of older children have already been minimized.
There may be some question of whether such threats of punishment are credible because the sanctions would violate the objective of poverty alleviation. However, the implicit social contract underlying the scheme is that support will be provided only to those who make every effort to support themselves and are truly willing to work. If this reciprocal requirement is not fulfilled, the obligation to provide poverty alleviation may no longer be binding.
The difficulty with such a system of sanctions is that it depends upon the threat of punishment being credible and there are two possible points of equilibrium. First, if a large number of claimants break the rules but only a few are sanctioned, the punishments may seem unfair and there may be pressure not to enforce them. As a result, the threat would not be credible and fraud would be widespread. In the alternative case, if most claimants comply, there may be little objection to the harsh punishments for the few who break the rules and the threat would remain credible with little fraud occurring. Therefore, it is recommended that the credibility of the threat of sanctions be established quickly before cheating has had an opportunity to become widespread.
Although it is recognized that during individual job search in the A track, the claimant is not occupied full-time, the claimant does face the leisure constraints described in Section II for the vast majority of the time in A track.
For example, mothers with young children and high earning opportunities may not find it worthwhile to work.
For these reasons, the household definition excludes unemployed children and retired parents, who may claim benefit in their own right.
For simplicity, it may be desirable to set both the A and B track benefit levels at the poverty line and to exclude the premium on the B track benefit.
For example, non-working wives with no young children may form a substantial part of this group.
There is an asymmetry between steps 5 and 6 because all potential new poor labor force entrants have already been counted in step 3 and so may not be added again in step 5. In step 6, some of those counted as unemployed in step 3 will be removed as those unwilling to fulfill the requirements. In reality, these are individuals who are ‘able to work’ but not currently in the labor force and who will not register as unemployed under the new scheme because of the reciprocal requirements.
In 1987, the social minimum was 38.6 percent of the average wage (Milanovic 1990), but is a higher proportion of the average wage in 1990, partly as a result of the fall in real wages in the first quarter of the year.
Calculated from International Labor Organization: Year Book of Labor Statistics.
‘Working households’ are all households excluding pensioner households which mostly consist of two elderly adults.
The average household number of consumption units is 3.75. If 1.85 is deducted for a male and a female adult (1 + 0.85), the remaining number of consumption units is 1.9, which is approximately 1 per adult. This may underestimate the number of dependents because it assumes that all second adults in the household will be working, which will not always be the case and in some circumstances the number of dependents will be equivalent to 2.75. Thus, the estimate of dependent benefit costs should be treated as a lower bound.
These Labor Fund benefit costs assume that all those registered as unemployed receive benefit payments, although this has not been the case. It is estimated that only 75 to 80 percent of the unemployed were receiving benefit in June.
The claimant will receive 50 percent of the average wage multiplied by 70 percent, which is 35 percent of the average wage or the minimum benefit level.
Worker households are those whose primary income is from labor in the socialized sector. Mixed households are those whose income is derived from labor in the socialized sector and from individual agricultural labor. Farmer households are those whose primary income is from individual agricultural labor. Pensioner households are those whose income Is primarily from pensions and retirements and this group consists mostly of two elderly adults.
For estimates of the head count poverty figures for all households in the years 1978 to 1987, see Milanovic (1990).
The main category where unemployed individuals may reside in non-poor households would be young workers living with non-poor parents. If poverty estimates were being calculated for later in the year, it might be desirable to remove the number of unemployed school-leavers from the unemployment figures when calculating the number of poor households being supported in A track.
The education option in the proposed scheme is considered to be part of the ‘training’ option for the purpose of this section.
Another part of the reason is that the unemployment figures are smaller in the alternative scheme than under the current program, but this is not the major factor.
If a comparison was being drawn between a new scheme and no government intervention, the new scheme would reduce the labor supply and create an additional cost rather than a benefit.
The annual cost of paying zl 300,000 per month to 6 million members of pensioner households is zl 21,600 billion. Table 4 shows that zl 1,261.2 billion has already been allocated to poor pensioner households, so that the net additional benefit costs of extending the proposed scheme to cover those in retirement would be zl 20,339 billion. The total cost under the highest scenario would be zl 61,515 billion or 14.3 percent of GDP.
The long-term unemployed being defined as those who remain registered as unemployed for five or more months.