Welfare State’s Redistributive Effect Is Exaggerated

Abstract

This article questions traditional analysis of the redistributive effect of the welfare state and investigates how large the effect would be with a realistic alternative for comparison. The most commonly used reference point is the zero-government counterfactual that measures redistributive effect of social policy against distribution of pre-tax and pre-transfer income. But it is impossible to ignore the fact that some form of transfer is necessary. The elderly and sick, for example, must have their means of support organised in a way other than via the public transfers under investigation. This article shows that when using an adequate alternative for comparison, social policy impact on income distribution is significantly smaller.