The impact of welfare on household debt

Abstract

This article aims to advance the theoretical understanding of how welfare affects household needs and willingness to take on debt across OECD countries. Previous sociological literature has attempted to explain indebtedness through the quantity of welfare spending, by searching for a tradeoff between the lack of welfare and the increase of household debt. Based on the "life cycle" hypothesis, according to which people take on debt when they are younger and pay it off as they age, this paper argues that divergence in household debt across countries is a function of the welfare state's orientation toward old-age provisions and the insider/outsider cleavage in the labor market. A welfare state that is generous toward the youth, facilitates the possibility for people to plan ahead in life and, by stabilizing financial expectations, makes people less risk averse. Higher debt ratios are more common in Northern countries as social protection is more extensive; while in continental countries, where welfare benefits are narrower and tend to target the already employed and the elderly, people are more riskaverse toward debt. The proposed theory is supported by an illustrative empirical analysis using data from the OECD SOCX, the Comparative Welfare Entitlements Dataset (CWED2) and the ECRI statistical package. Introduction: from a private trouble to a public issue Over the last 20 years, household debt relative to income has increased significantly in all Organization for Economic Cooperation and Development (OECD) countries, peaking around the 2007-2008 economic crisis. Since then, deleverage has been limited and, in many countries, household debt has continued to accumulate. Despite some common trends, the differences between countries remain significant. Before the crisis of 2008, household debt was considered a private trouble and received little sociological attention (Ritzer 2011). The crisis in the United States shifted the perception of household debt in the eyes of scholars and public institutions from a private to a public issue (Turner 2017). Personal debt has been seen as one of the leading causes of the crisis, not only because people were unable to repay their debts, but also because economic activity was absorbed in repaying any existing debts, thereby slashing growth (Jord a, Schularick, and Taylor 2015; Mian and Sufi 2015). Sociologists and political economists have begun investigating the relationship between credit and welfare spending. Many authors, especially Anglo-American scholars, argued that the rise of debt was the effect of welfare retrenchment or the lack of welfare protection (

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