Social protection, employment and poverty dynamics in the EU: re‐assessment from a social investment perspective (RE-InVEST Working Paper Series D5.3)

This report examines effects of social protection in the EU. Part I analyses (trends in) the impact of social benefits on poverty: What differences in social protection can we observe between countries? How has social protection changed in the wake of the crisis in Europe? Our analysis emphasises some economic conditions of welfare states’ fight against poverty which are too often neglected in the public and the scien­tific discussion. We assert that poverty rates have been rising in Europe since before the ‘Great Recession’, but argue that this is not exclusively caused by welfare state change. While it is true that the evolution of social protection was negative on average across European countries, there was a number of countries (13) where the effectiveness of social benefits against poverty improved. Yet, it did not always improve suffi­ciently to counter growing primary income inequalities. We see a detrimental legacy of the ‘Great Recession’ at least as much in terms of poverty challenges as in terms of welfare state institutions in Europe.

Social benefits strongly modify the income distribution and the poverty rate in some European countries, but less in others. Scandinavian social security systems generally offer the strongest social protection in Europe, though the Dutch and the Irish social security systems seem to come ahead of the Swedish most recently in terms of impact of social benefits (maybe not services in-kind). Households’ poverty gaps in Northern Europe being particularly wide, the poverty-alleviating impacts of Scandinavian social benefits appear even more impressive as soon as one controls for the poverty challenge. Richer countries generally feature greater inequality before redistribution, but the poverty-alleviating impacts of their social security systems are also higher.

Countries assist the poorest households to different degrees. In all countries, households escape poverty risks through social benefits more rarely if their poverty gap is bigger. In some countries, however, the households with the lowest primary incomes are hardly ever lifted above the poverty threshold (e.g. Roma­nia, Latvia). In contrast, social benefits are a comparatively big success against poverty also for the poorest households especially in the Netherlands, Iceland, Norway and the United Kingdom.

Part II zooms in on the effectiveness of social benefits in supporting the most vulnerable households (those faced with ‘pre-transfer poverty’ and those with very low work intensity) in leaving the state of pov­erty and/or quasi-joblessness. We examine the dynamic effects, i.e. shifts in socio-economic position fol­lowing one and two years after benefit receipt. A central finding is that ‘more generous’ social benefits have a negative impact on households’ leaving the state of dependency or of increasing work intensity. However, even though statistically significant, effects are extremely small: we estimate that if the amount of social benefits doubles, the poverty gap shrinks between one and two percentage points less within one year. Households that receive fewer benefits are thus a little faster in gaining financial independence from the social security system. The negative effect of social benefits is found to be stronger for households with a greater depth of poverty, respectively with lower work intensity.

Higher social benefits are also connected to a slower return to employment, but the estimated effect is even smaller. A doubling of social benefits would results in a less than one percentage point lower increase in work intensity between two consecutive years. This (negative) relationship is driven by households at high risk of poverty. This suggests that only households that find their income situation significantly improved by social benefits tend to use the additional financial leeway for staying at distance from the labour market (while an alleged ‘disincentive effect’ should in principle apply to all sorts of households).

An important finding is that households seek to escape the situation of benefit dependency and jobless­ness rather independently of whether social benefits are ‘generous’ or not; until they have successfully done so, benefits grant households social protection, and possibly also improve subsequent job matching. All in all, there seems to be no genuine trade-off between ‘generosity’ and efficiency of social security benefits.