Can Households and Welfare States Mitigate Rising Earnings Instability?

Abstract

We compare the evolution of earnings instability in Germany and the United Kingdom, two countries which stand for different types of welfare states. Deploying data from the German Socio-Economic Panel (SOEP) and the British Household Panel Survey (BHPS), we estimate permanent and transitory variances of male income over the period 1984-2009 and 1991-2006, respectively. Studies in this literature generally use individual labor earnings. To uncover the role of welfare state and households in smoothening earnings shocks, we compute different income concepts ranging from gross earnings to net equivalent household income. We find evidence that the overall inequality of earnings in Germany and the United Kingdom has been rising throughout the period due to both higher permanent earnings inequality and higher earnings volatility. However, taking institutions of the welfare state and risk-sharing households into account, we find that the volatility of net household income has remained fairly stable. Furthermore, redistribution and risk insurance provided by the welfare state is more pronounced in Germany than in the United Kingdom. JEL Codes: D31, D63, I38, J31Note: We thank two anonymous referees and the editor for valuable suggestions. Furthermore, we are grateful to Giacomo Corneo and Stephen Jenkins for their most helpful advice and support throughout the research, to Joshua Holm for his assistance, and to participants of ECINEQ 2009 and IIPF 2010 conferences for useful comments. All remaining deficiencies are our own responsibility.

Using flow data to understand housing insecurity: an exploratory analysis

“…The sparser literature in the UK is inconclusive-with some panel data studies finding income instability increasing (Bartels and Bönke 2013;Daly and Valletta 2008) while others discern a flat or declining trend (Avram, Brewer et al 2018;Jenkins and Cappellari 2014).…”

Redistribution and Insurance in Welfare States Around the World

“…However, research on long-run redistribution in a cross-country perspective, contrasting different types of welfare states, is scarce as the data requirement is large: Income smoothing can empirically only be separated from redistribution if comparable longitudinal data on pre-and post-government income streams can be observed over long time spans. Examples also using CNEF data are Chen (2009) comparing Canada, Germany, the United Kingdom, and the United States as well as Bartels and Bönke (2013) comparing Germany and the United Kingdom. This paper attempts to fill this gap by extending the analysis to six welfare states covered in CNEF and, for the first time, also investigating explanatory factors for observed cross-country differences.…”

Redistribution and Insurance in Welfare States around the World

“…However, research on long-run redistribution from a cross-country perspective contrasting different types of welfare states is scarce as the data requirement is large: income smoothing can empirically only be separated from redistribution if comparable longitudinal data on pre-and post-government income streams can be observed for long time spans. Examples using CNEF data are Chen (2009) comparing Canada, Germany, the UK and the US as well as Bartels and Bönke (2013) comparing Germany and the UK. This paper attempts to fill this gap extending the analysis to six welfare states and investigating explanatory factors for cross-country differences.…”