3 - EXPLAINING INDIVIDUAL SOCIAL POLICY PREFERENCES

Summary

As noted in Chapter 1, human capital rivals physical capital as a source of personal and national wealth, and it is the single most important determinant of personal income in advanced industrialized countries. Viewing human capital as an investment or asset, this chapter asks how the character of that investment affects workers' preferences for social protection. The fundamental idea is that investment in skills that are specific to a particular firm, industry, or occupation exposes their owners to risks for which they will seek nonmarket protection, whereas skills that are portable, by contrast, do not require extensive nonmarket protection.

The asset theory of preferences does not necessarily contradict a long tradition in the study of the welfare state that emphasizes redistribution as a key political motive behind the welfare state (e.g., Korpi 1983; Esping-Andersen 1990). Indeed, Meltzer and Richard's (1981) influential median voter result for government spending, which focuses on the redistributive aspect of social protection, emerges as a special case in the model. Given a particular composition of skills, workers with higher incomes are likely to demand less social protection than workers with lower incomes. The asset model parts ways with the Meltzer-Richard model, however, because it explicitly recognizes that social protection also has an insurance aspect (Sinn 1995; Moene and Wallerstein 2001) and that demand for insurance varies between workers according to their degree of exposure to labor market risks (Baldwin 1990).