A recent study conducted by EconPol has examined social security systems in the European Union and found that the welfare state in Finland cushions approximately 38 percent of income losses during economic crises. The study also reveals that social security systems in Scandinavia and Western Europe provide the most comprehensive protection against income losses, while countries in Southern and Eastern Europe, as well as the United Kingdom and Ireland, experience higher income losses during crises.
Mathias Dolls, Deputy Director of the ifo Center for Macroeconomics and Surveys, highlights the importance of social security systems in mitigating income losses. He states, “The social security systems in Scandinavia and Western Europe buffer their citizens’ income losses most comprehensively.” However, countries in Southern and Eastern Europe, along with the United Kingdom and Ireland, face significant challenges in this regard.
In Ireland, the study shows that the cushioning of income losses ranges from 30 to 32 percent. In the United Kingdom, lower income tax payments contribute to cushioning around 15 percent of the losses, while lower social security contributions account for 10 percent. Minimum income support compensates for 5 to 7 percent of income losses, with unemployment benefits playing a minor role, absorbing only 1 percent of the losses.
Comparing the results across various EU countries, the study finds that Germany provides a cushioning effect of 53 to 63 percent, while France ranges from 38 to 73 percent. Belgium compensates for 52 to 73 percent of income losses, Italy around 43 percent, and Poland offers the lowest buffer at just 29 percent.
Max Lay, coauthor of the study, emphasizes the significance of unemployment insurance coverage in determining the stabilizing effect of social security systems. Lay states, “The stabilizing effect of social security systems depends heavily on how many people are covered by unemployment insurance, at least temporarily, when they become unemployed. Unemployment insurance coverage is relatively weak in some European welfare states.” Well-designed social security systems are crucial in protecting individuals from economic hardships while providing strong incentives for employment.
The study conducted simulations to calculate the impact of economic crises on disposable household incomes in the European Union member states and the United Kingdom. It simulated a 5 percentage point increase in the unemployment rate within two years for each country under consideration. The simulations presented two scenarios, with one evenly distributing the increase in the unemployment rate over the two years, while the other sees a sudden jump at the beginning of the economic crisis, resulting in two values for each country.
The findings of this study shed light on the varying levels of income protection provided by social security systems across Europe. It highlights the importance of well-designed welfare states in mitigating the negative effects of economic crises on individuals and emphasizes the need for effective unemployment insurance coverage to ensure a more stable and resilient economy.
HT
