Labor Market Risks, Other-Regarding Concerns, and the Institutional Arrangement of the Welfare State

Abstract

Social insurance mediates individual exposure to labor market risks. This is the life-cycle component of the welfare state. If social insurance provision is governed by a flat-rate principle, marginal losses due to income shocks increases the higher up one moves on the income ladder. Institutional differences therefore define the relative impact of labor market risks on redistribution preferences. Against previous social insurance approaches, I assume that individuals are driven by both, material self-interest and other-regarding concerns. I argue that the material self-interest component dominates redistribution preferences in flat-rate systems due to both, the income-equalizing effect in an over-time perspective, and higher relative risk exposure. Earnings-related systems, in contrast, buffer labor market risks and maintain income differences over time. I employ simulated unemployment replacement rates to construct a measure for the governing principle of social insurance. Average support for redistribution is higher in earnings-related systems, and the risk effect is stronger in flat-rate systems.

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