3 - Financial Shortfalls and the Role of Welfare States

Summary

This chapter documents how structural changes in labor markets, life course trajectories, and welfare states have increased income volatility and financial shortfalls over time and across countries. It begins by offering a new measure of financial shortfalls, comparing households’ annual gross and net income volatility based on panel data from Denmark, the United States, and Germany, revealing considerable variation in income volatility across and within countries. It shows that the Danish welfare state absorbs much larger amounts of gross income volatility that the flexible labor market produces compared with the United States. In Germany, the welfare state also addresses a sizable share of gross income volatility. But unlike in Denmark, gross income volatility has declined slightly since the mid-2000s, while net income volatility increased during the Hartz reform period of the early 2000s. This chapter further shows that in Denmark and the United States income volatility due to life course events such as taking time off work to raise families or to get training and education is much more prevalent than income volatility due to unemployment or sickness. In Germany, by contrast, employment disruptions still drive more income volatility than life course choices.