1. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. Chapter 8: Insurance: Unemployment, sickness, and disability Barr: Economics of the Welfare State: 4e

2. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. Organization of the chapter 1.Introduction and institutions 2.Theoretical arguments for state intervention 3.Assessment of insurance benefits

3. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 1. Introduction and institutions

4. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 1.1. The issues Objectives Poverty relief Insurance Consumption smoothing Questions Why is it national (i.e. publicly organised)? Is it insurance?

5. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 1.2. Institutions Contributions by Employed people Self-employed people Benefits for Unemployment Health-related absence from work Coping with disability Bereavement Caring for others Note: students should not confuse learning about institutions with understanding the underlying economic theory

6. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 2. Theoretical arguments for state intervention

7. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 2.1 Why is membership compulsory? In many cases the decision to insure is left to individual choice, since the costs of non-insurance fall on the individual However, if someone chooses not to insure against income loss due to unemployment, ill-health or old age, the costs will fall on the taxpayer, or more broadly, e.g. through rising crime

8. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 2.2 Why is insurance publicly organised? Unemployment benefit Sick pay Old age pensions

9. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. Conditions under which actuarial insurance is efficient 1 Probabilities must be independent; 2 Probability must be less than one 3 Probability must be known or estimable 4 No adverse selection 5 No moral hazard Endogenous probability Third-party payment problem

10. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 2.3. A view to the future: Long- term care insurance There are potentially large welfare gains if people can insure against the costs of long-term care However, actuarial insurance faces major problems Thus there is a strong case for extending social insurance to cover long-term care

11. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 2.4. Social justice Horizontal equity concerns minimum standards for certain commodities or equal access to them Vertical equity concerns redistribution from rich to poor

12. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 3. Assessment of insurance benefits

13. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 3.1. Efficiency and incentives Is it insurance? Contributions are not related to individual risk Entitlement to benefit does not depend only on the occurrence of the insured event The scheme is not financed on actuarial lines The contract is not fully specified, in that the risks covered can change over time Social insurance, not actuarial insurance Incentive issues Are unemployment benefits a contributory cause of unemployment? Disability benefits and labour supply

14. 2 H i g h e r E d u c a t i o n © Oxford University Press, 2005. All rights reserved. 3.2. Equity issues Horizontal equity Not all groups receive equal coverage, e.g. widows are treated generously relative to families separated by divorce The relative treatment of men and women (e.g. retirement age) raises questions Vertical equity How redistributive is national insurance? The combined effect of all cash benefits in the early 2000s was to reduce the Gini coefficient by 14 per cent