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The politics of social protection: social expenditure vs market regulation

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  • Debora Di Gioacchino
  • Laura Sabani

Abstract

It has been argued that the notion of a European social model is misleading and that there are in fact different European social models with different features and different performances in terms of efficiency and equity. In this paper, we look at the welfare state from a political economy point of view and interpret the different regimes as possible outcomes of a political process through which heterogeneous preferences of voters are aggregated. In our model, agents differ in two respects: income and socio-economic vulnerability. Policy-makers have to decide on two policies: a proportional income tax to finance a social transfer, providing equal benefits to all citizens, and a market regulation policy which benefits only vulnerable workers, providing them with additional protection against unemployment risk. Market regulation is inefficient because it decreases aggregate resources. Individuals' heterogeneity generates a conflict over policies. We feature the political process as a two-party electoral competition in a citizen-candidate model with probabilistic voting. We show that an inefficient equilibrium exists and that this outcome is more likely as income inequality and the proportion of vulnerable workers become greater. Intuitively, greater inequality raises the level of redistributive spending desired by the poor, making, at the same time, the rich more adverse to the welfare state. In this framework, both the rich and the poor, in order to win the election and realise the fiscal gain, have an incentive to support market restrictions, in the attempt to capture the votes of the vulnerable minority, who benefit from these policies.

Suggested Citation

  • Debora Di Gioacchino & Laura Sabani, 2009. "The politics of social protection: social expenditure vs market regulation," International Review of Applied Economics, Taylor & Francis Journals, vol. 23(3), pages 387-404.
  • Handle: RePEc:taf:irapec:v:23:y:2009:i:3:p:387-404
    DOI: 10.1080/02692170902811843
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    References listed on IDEAS

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    1. Paul Conway & Véronique Janod & Giuseppe Nicoletti, 2005. "Product Market Regulation in OECD Countries: 1998 to 2003," OECD Economics Department Working Papers 419, OECD Publishing.
    2. Andrew Clark & Fabien Postel-Vinay, 2009. "Job security and job protection," Oxford Economic Papers, Oxford University Press, vol. 61(2), pages 207-239, April.
    3. Aghion, Philippe & Askenazy, Philippe & Bourlès, Renaud & Cette, Gilbert & Dromel, Nicolas, 2009. "Education, market rigidities and growth," Economics Letters, Elsevier, vol. 102(1), pages 62-65, January.
    4. Cusack, Thomas R. & Iversen, Torben & Rehm, Philipp, 2005. "Risks at work: the demand and supply sides of government redistribution," Discussion Papers, Research Unit: Institutions, States, Markets SP II 2005-15, Social Science Research Center Berlin (WZB).
    5. Giuseppe Fiori & Giuseppe Nicoletti & Stefano Scarpetta & Fabio Schiantarelli, 2007. "Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?," Boston College Working Papers in Economics 663, Boston College Department of Economics, revised 08 Aug 2008.
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    Cited by:

    1. Maria Ines Barbosa Camargo, 2015. "Efectos de los mecanismos de financiación en el acceso a la educación superior en Colombia," Investigaciones de Economía de la Educación volume 10,in: Marta Rahona López & Jennifer Graves (ed.), Investigaciones de Economía de la Educación 10, edition 1, volume 10, chapter 5, pages 115-134 Asociación de Economía de la Educación.

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