Market's SINS and the European Welfare State: theory and empirical evidences

We analyze the European Welfare State according to a theoretical framawork based on four main social goals – stability, inequality, need, safety (SINS) – which the market mechanism fail to achieve: they are the market’s SINS. We propose a theoretical framework which is based on the distinction between “private goods”, which are the domain of the market, and “common goods”, which are the the domain of the Welfare State and the other lower layers of social institutions. The main result is that a high level of social protection benefits, properly allocated to these goals, can be effective for achieving economic goals, because it allows to amend market’s shortcoming for SINS, while allowing the flexibility for complying with the public budget constraint, given the positive relationship between GDP per-capita and the share of social protection benefits. A cross-section analysis shows that the goals of SINS are better achieved when the social protection benefit focuses on the functions of family and children and sickness and health care, because they are the most poverty reduction: they allow to better achieve the goal of reducing inequality and providing families needs. We show that for the families with children the better working arrangement – which is associated with higher GDP per-capita and lower inequality – is one parent working full time and one parent part-time. We explain the cross-section variability for the functions of pensions, housing and social exclusions in relationship with the goals of stability and and safety. We analysis a sample of seven major European countries for the period 1995-2009, focusing on the goal of economic stability and the degree of procyciclical or countercyclical relationship between social protection expenditures and GDP per-capita. A number of econometric and numerical results are derived: countries with better economic performances can have both procyclical and countercyclical behavior, but they have in common higher value of social protection benefits on the onset of the cyclical downturn or recession: the flexibility for budget adjustment come from the political leeway of the high starting value of social protection and the higher share of in-kind benefits. The GDP per-capita in the year 2000 is a good predictor of the average primary balances for the European countries over the decade.