The Dependency Culture: A Good or a Bad Thing?

on Wednesday, 30 July 2003. Posted in Issue 32 The 'Dependency Culture': A Good or a Bad Thing?, 1998

Bill Toner, SJ

July 1998

Introduction

The other day I listened to a middle-class woman sounding off about the \'dependency culture\'. She complained in particular about people who "did not need to go out to work" because they were surviving very well on unemployment assistance or lone parent allowance, rent allowance, back-to-school allowances, medical card and so on. She resented the fact that these benefits were partly funded from her own income tax payments

 

There is no doubt that in Ireland there has been a big rise in financial dependence on the state in the last twenty five years. In 1973, 10.4% of average household income in the state came from \'transfers\' (the name given to social welfare and other state payments). By 1995, transfers made up 16.8% of average household income (Note 1).

But to what extent do state benefits act as a disincentive towards taking up employment? The issue is a difficult one for social policy makers. Given that it is public policy to try to ensure that low-paid workers do not suffer great financial loss when they become unemployed, it follows that these workers will often not be substantially better off when they became employed again. In an important study carried out in Tallaght some years ago, unemployed people who were surveyed stated that, on average, they would need about £60 more a week than they were getting on the dole to take up work (Note 2).

But what people say, and what they do, are not always the same. Research studies have found that \'disincentive effects\', as they are called, are not as clear-cut as many people think. Not surprisingly, there does appear to be some connection between the duration, and the generosity, of payments, and the average length of spells of unemployment. But the effects are small overall, though they are somewhat greater in lower socio-economic groups. Most researchers are agreed that the level of benefit payments cannot by itself account for high levels of unemployment (Note 3). The main reason why people do not work is lack of jobs they consider reasonably well-paid. Of course, what people consider to be \'good pay\' is partly subjective, and groups like I.S.M.E. frequently express irritation at the failure of unemployed people to seek jobs in their member firms.

The reason why unemployment benefits are only a partial disincentive towards taking up employment is that there are other aspects to a job besides money, and when the jobs are there, most people prefer to work. Few people enjoy drawing the dole and being periodically questioned by civil servants about their job prospects. A job provides people with a framework for living, a sense of purpose, and an opportunity for social contact. Also, for people with some skills, a period of unemployment can mean that the skills become lost or out-of-date. Middle-class people would certainly apply these reasons for taking up a job to themselves, but are reluctant to believe they are a major consideration for people lower down the social scale. Some middle-class people seem to suggest that there is some kind of \'moral failure\' among working-class people which makes them work-shy.

In fact, there are more rational and obvious explanations as to why the \'disincentive\' effect of benefits is stronger among lower working class people. For one thing, people who are in the \'unskilled\' category may find it hard to get jobs that pay much above social welfare levels. They also have fewer skills to lose through unemployment. Again, many of the jobs to which they have access are \'dead-end\', and supervision is often harsh. Finally most unemployed people operate within very tight budgets, and a move into employment has an element of risk attached to it. Many jobs available to unskilled people are likely to be temporary, and, if they are laid off again, delays involved in reclaiming benefits and allowances can be considerable. The possible loss of the medical card is arguably the biggest disincentive for people in the lowest socio-economic group, because they often have bigger families, are more affected by illness, and are unlikely to earn wages high enough to pay medical bills without hardship. This is why it has been so important to allow people returning to work to retain secondary benefits for a limited period.

So undoubtedly there is some disincentive effect associated with welfare payments, particularly for the least skilled workers. However, as we shall see, social welfare has had the effect of \'keeping people in the frame\' as far as the labour market is concerned.

Trend in Income Shares

It is often said that in capitalist society \'the poor get poorer and the rich get richer\'. In Ireland this has been borne out in recent times, but not as much as in some other countries, notably Great Britain. In Britain:

Between 1971 and 1992 the proportion of people receiving below half the average national income increased from 11% to 21%.

From 1979 to 1992 the proportion of the national income going to the poorest 20% of the population dropped from 10% to 7%. (Note 4).

Precise comparisons with Ireland are hard to come by. However, taking the first of these statistics, we know that between 1973 and 1987, the proportion of people receiving below half the average national income increased from 17.8% to 22.9%, a less dramatic increase than in Britain. Interestingly, the number of households living below the 50% line increased only slightly, from 18.2% to 18.9%, reflecting the increase in the size of poor households relative to the average size. (Note 5).

In relation to the second British statistic above, the same trend is not found in Ireland. However in Ireland the share of national income going to the lowest 20% in Ireland was very small to begin with. To appreciate the trend in Ireland, it is necessary to compare the richest 50% with the poorest 50%. But significantly, there is a difference in the figures for Ireland depending on whether direct income or disposable income is taken. Direct income excludes social welfare \'transfers\' and is income before tax.. Disposable income includes state transfers and is income after tax.

In Ireland in 1973:

the poorest 50% received 18.68% of direct income;

the richest 50% received 81.31% of direct income.

In 1995:

the poorest 50% received 11.5% of direct income;

the richest 50% received 88.5% of direct income.

However, when disposable income rather than direct income is taken, the picture changes:

In 1973:

the poorest 50% received 25.16% of disposable income;

the richest 50% received 74.85% of disposable income.

In 1995:

the poorest 50% received 24.26% of disposable income;

the richest 50% received 75.76% of disposable income.

The share of disposable income has thus fallen only slightly in percentage terms. The effect of Irish social policy has been to keep the relative shares of the two \'halves\' more or less equal, through improvements in social welfare and other state benefits, and by increases in income tax to pay for this (Note 6).

It should be pointed out that it is unlikely that the trend up to 1995 described above is being maintained. There has been an increase of at least 20% in GNP over the past three years. During the same period the short-term unemployment assistance rate has risen from £60.40 (1995 budget) to £68.40 (1998 budget), an increase of only 13%. More up-to-date data on income distribution is not available, however.

Dependency v. Polarisation

An inevitable effect of this policy has been to increase the level of dependency on social welfare benefits and to reinforce the \'dependency\' culture. Assuming for the moment, that it was not possible to create more jobs during this period, the choice for successive governments was between increasing polarisation or increasing dependence. In Ireland governments chose greater dependence; in Britain governments chose greater polarisation, especially since 1979. It is not too strong a statement to say that the British chose polarisation, for although they hoped that curbing social welfare payments would encourage more people to get jobs, it was clear that these were likely to be mostly low-paid jobs, paying little more than social welfare rates. As in America, public policy in Britain has a preference for people to be working in low-paid jobs rather than to be idle. Public policy in Ireland, which is more influenced by the trade unions and other lobby groups than in the U.K., does not see low-paid jobs as a means of solving unemployment. This difference is also borne out by the respective levels of the proposed minimum wage, which will be £4.50 in Ireland, as against £3.60 in Britain. It is not being argued here that social welfare payments in Ireland are adequate, merely that it has not been public policy in Ireland to cut them. In fact, Ireland\'s social protection expenditure is somewhat low by European standards (Note 7). But in general it can be said to be better targeted than in some other countries, and at least up to recent times has kept pace with increases in per capita income.

One may assume that the policies of both countries are heavily influenced by advice from economists and it is interesting therefore both to note not only the difference in the policies, but also their effect in practice. Typical of British establishment thinking is the British Economist magazine, which has consistently advocated cuts in social welfare benefits and low income taxes as indispensable ingredients in the recipe for a prosperous society. But recently the Economist devoted an issue (17-23 May, 1997) to \'Europe\'s Shining Light\', namely Ireland. While noting that \'generous\' social welfare benefits and high personal income taxes were part of the Irish economic landscape, it did not appear to draw any broader conclusions from this. Yet it is surely thought-provoking that the fastest-growing economy in Europe is one of the few that did not rein back social welfare payments during the past fifteen years or so, and has only recently begun to cut taxes. In fact some recent research has found a puzzling positive relationship between the level of benefits and the growth rate of an economy (Note 8) Much of this research was carried out in Third World countries, and in this context it is suggested that transfer payments are a means to buy social peace and reduce social unrest, which in turn may have positive effects on economic efficiency.

Preserving Human Capital

But there are also grounds for expecting that a reasonable social welfare system could have beneficial effects in more developed economies. Whatever about the theory that social welfare cuts improve the \'supply side\' of the labour market by forcing people into employment, their immediate effect is often to increase poverty and alienation. There is no magic formula whereby long-term unemployed people, particularly if unskilled, can quickly adapt themselves to the kind of employment opportunities that happen to present themselves in any particular time and place. In the meantime a drop in income can be catastrophic in an already poor family. Even though it may be desirable to get people out to work, the over-riding priority must be to keep households from suffering the kind of \'degradation\', in the sense of a loss of human capital, that comes with protracted poverty. Human capital refers to the various \'marketable\' attributes that people accumulate during their life, such things as education, skills and aptitudes, interpersonal skills, attitudes to work and authority, and so on. By and large, Irish governments and civil servants have had the sense to see how important it is to prevent this human capital draining away through poverty. If unemployed people have enough income to preserve the family\'s self-respect, and are in a position to encourage their children to complete their education, there is some hope that the problems of one generation do not become the problems of the next generation as well. Moreover, should there be a pick-up in the economy, people who have not been completely marginalised by poverty will be in a much better position to make the transition from unemployment to work.

This is the point missed by The Economist. Although there are many factors contributing to the current success of the Irish economy, at least we can say that it is not held back by the existence of a large \'underclass\' which might have been created by a less generous policy towards social welfare recipients in the late 70s and 80s. That is not to deny that there are a large number of people in our country who are unskilled and unemployed. But people familiar with large urban local authority estates will have noted that, perhaps contrary to expectations, these estates have not been so marginalised by the bad experiences of the past twenty years as to derive no benefit at all from the \'Celtic Tiger\'. Such degradation of the communities as might have occurred, as did in fact occur in the \'projects\' of American cities, did not take place in Ireland.

The ability of the long-term unemployed to rejoin the labour force is part of the reason why inflationary pressure has not built up in the economy until recently. Given annual growth rates of around 7%, one might have expected labour shortages, and thus wage demands, to have developed more quickly than they did. In fact there was considerable productive potential among the ranks of the unemployed, who may have been \'down\', but were not \'out\'. This was not the only factor of course, as returning immigrants, school leavers, and additional women also entered the labour force. But between April 1994 and April 1997, the number of long-term unemployed fell from 128,200 to 86,300. Even since April 1997, applicants for unemployment assistance have fallen by 27,000, of whom about 70%, or about 19,000, are likely to have been long-term unemployed. This would indicate a fall of about 60,000 in the long-term unemployed in four years. In April 1988 10.7% of the Labour Force were long-term unemployed. By April 1997 this percentage had fallen to 5.5%, and it has clearly fallen further since then (Note 9).

It is important to note, in passing, the contribution made by the \'black economy\' to the stability of working class communities during a period of recession. Part of the \'human capital\' that can drain away during a long period of unemployment is the habit of work, and the self-confidence that useful activity gives rise to. Unemployment benefits do not compensate for this. During times of recession it is important for unskilled workers to \'keep their hands in\' by doing informal work such as painting and decorating, gardening, security and so on. Thus as the Irish economy took off during the last few years, there have been many long-term unemployed who were not so removed from the world of work that they were unable to join the regular labour market again. Incidentally, this is an important aspect of the argument put forward by CORI in support of the concept of Basic Income. CORI have consistently argued that the current policy of paying people not to work does not make sense, since, among other things it leads to a loss of skill and initiative.

Clearly, where it involves serious and persistent fraud, the \'black economy\' cannot be tolerated. Nevertheless, in a period of recession, it would be desirable if some mechanism other than enforced idleness could be found to qualify people for benefit. The Part-time Job Incentive Scheme and Community Employment Schemes are both important initiatives, but they are too structured to suit all needs and opportunities.

Thus it is being argued here that dependency, as a by-product of the welfare state, is better than polarisation. But this is not to deny that creating dependency also carries a cost, both by reinforcing powerlessness, and by weakening social solidarity. Nevertheless it appears from the current decline in long-term unemployment that dependency may not be the incurable disease it was thought to be. People will only settle for dependency when there is nothing better on offer.

Conclusion

In their choice of social policy in Ireland, successive governments have opted to risk an increase in dependency, through maintaining social welfare levels, rather than bring about further polarisation between rich and poor. From the late 70s on, this policy was at variance with those in some other developed countries, particularly Britain and the U.S. With the most recent Irish budget giving minimal increases in many welfare benefits, while also introducing many tax cuts, there are indications that policy in Ireland may also be shifting in this area.

Dependency increased during the 70s and 80s, as an inevitable concomitant of maintaining or increasing welfare benefits. Nevertheless, the avoidance of extreme poverty meant that poor communities did not become completely \'degraded\' during a long period of recession, and many people in these communities are now in a position to take advantage of the current upturn in the economy. Participation in the \'black economy\' also played an important role. Although some contemporary economic theory would suggest that Ireland\'s social policy would lead to economic stagnation, this did not in fact happen.

It is still very important to point out that, even if the situation is not getting much worse, disposable income remains highly concentrated at the top of the income distribution. This is not surprising when one considers that, in 1995, the direct income of the richest 10% was one hundred and twelve times the direct income of the poorest 10%. (Note 10).

One of the biggest contributors to this polarity is education, and lack of it. The demand for high-level skills has risen, and poorly qualified school-leavers with limited \'human capital\' will remain at high risk of unemployment. As the OECD have suggested, education and training policies will have a crucial role to play in the fight against poverty and unemployment among poorly educated people (Note 11).

Education is not the only contributor to social polarisation, of course. Inherited wealth and privilege also play a major role, though these too make use of education as one way of reinforcing and perpetuating privilege.

NOTES

My thanks to Tom Giblin S.J. and Niamh Gaynor for helpful comments on earlier drafts of this article.

1. Collins, M. and Catherine Kavanagh, \'For Richer, For Poorer\', in Healy, Sean and Brigid Reynolds (eds), Social Policy in Ireland. Dublin: Oaktree Press. 1998, p.183.

2. Tallaght Centre for the Unemployed, Life on the Dole. Dublin. 1991, p.42.

3. For a useful discussion on the topic see: International Labour Office, World Employment 1995. Geneva. 1995, p.153.

4. Dochas, 75/25: Ireland in an Increasingly Divided World. Dublin. 1996, p.212.

5. Tim Callan and Brian Nolan, \'Income Poverty and Ireland\' in Tim Callan and Brian Nolan (eds), Poverty and Policy in Ireland. Dublin: Gill and Macmillan. 1994, p.35.

6. Collins and Kavanagh, Op.cit., p.173.

7. Bonoli, G., \'Classifying Welfare States: a Two-dimension Approach\', Journal of Social Policy, Vol.26, No.3, 1997, pp.351-372.

8. See Brendan Kennelly and Eamon O\'Shea, \'The Welfare State in Ireland: a European Perspective\', in Sean Healy and Brigid Reynolds (eds.), Social Policy in Ireland. Dublin: Oaktree Press. 1997. p.210. .

9. Sources: Quarterly National Household Survey, 28 May 1998; Central Statistics Office Live Register Statements, 16 December 1997 and 5 June 1998.

10. Collins and Kavanagh, op.cit. p.173. The direct income of the bottom decile was 0.29% of total earned income, and that of the top 32.61%. Presumably many of the people in the bottom decile were living on social welfare, and had no direct income. The disposable income of the bottom decile was 2.23%, and that of the top decile 24.67%.

11. See Collins and Kavanagh, Op.cit., p.185.