Redistribution has a utilitarian motive and seeks to reduce the poverty gap in the society. That the poor in the society need help is an indication that the society admits that these people’s situation is caused by circumstances outside their control, and that they themselves cannot change the situation. This is the case that most welfare policies and literature on welfare discuss (Blackorby and Donaldson (1988), and many more). An important issue raised in these papers is how to reduce the deadweight loss caused by over consumption of welfare goods and services. This over consumption is caused by individuals consuming goods and services that they do not qualify for. Recent development in welfare policies and literature has also turned its focus to the dynamic aspect of the issue, where through poverty alleviation programs, individuals (if possible) are in the long run helped to get over the poverty line. Most of this literature focuses on helping these individuals to get into the labour market or to be able to earn their own incomes through businesses. These discussions focus on how efforts made by individuals in one period, may affect their probability of getting into the labour market in another period. In such cases, as Besley and Coate (1992) put it, poverty is not only caused by bad luck, but also by individual decisions. The long-run dependence on social welfare in Norway is a problem that affects individuals who for certain reasons either cannot get into the labour market for the first time, or return to it after a fall out. The inability to work is mainly caused by health conditions and/or lack of relevant qualifications. However, when discussing immigrant employment in Norway, Bratsberg, Raaum and Røed (2006) argue that besides lack of relevant skills, discrimination and disutility of labour in the form of cultural preferences, may also explain the low participation of immigrants in the labour market. The long-run dependence on welfare assistance has especially been a topic of discussion on issues concerning immigrants and integration. Statistics show that on average immigrants, especially those with non-western background, depend on welfare assistance more frequently and over longer periods than the population in general. Generally, integration into the labour market has been extended to address integration into the social system, where when addressing immigrant issues and politics, labour exclusion, poverty and social exclusion have been addressed by similar policy instruments. The latest development has been the bringing together of the welfare offices (trygdekontor og sosialkontor) and labour office (Aetat) in an attempt to improve the services offered to the users.
Many arguments have been brought up in order to reduce the deadweight loss that is caused by this over consumption. Literature on welfare points out that when the policy makers do not have the information necessary to target the deserving recipients, then it should devise “self-targeting” mechanisms that induce only the intended recipients to participate with the others opting out (Gahvari and de Mattos (2004)). This is in line with John Mill (1848)’s characterization of poverty alleviation problem as how to give help to those who need it without unduly encouraging their reliance on it. One way to achieve this is by imposing certain restrictions on the participants, so that those who are not targeted do not find it beneficial to participate in these programs. See, among others, Nichols and Zeckhauser (1982), Blackorby and Donaldson (1988), and Besley and Coate (1991, 1992). These restrictions make the welfare gains less attractive and are used to screen or deter individuals from applying for transfers that they do not deserve. The screening argument is motivated by the desire to discourage the potential impostors from applying for welfare transfers, and thereby only the truly needy benefiting from the welfare assistance. The deterrent argument is according to Besley and Coate (1992) and is motivated by the idea that individual choices in the present period affect their state in a future state. The goal therefore is to induce all agents to exert their correct level of effort in all periods, so that those who can get and keep out of poverty. I will in this thesis discuss some of these arguments and compare them to the welfare system in Oslo.
Individuals consume some amounts of consumption goods and leisure, and they have different preferences over different bundles of these goods. They have a labour income which they use to purchase some consumption goods. This labour income is earned by working a number of hours. This implies that there is a trade-off between the consumption good and the amount of leisure an individual can have. For a given numbers of hours worked, there are individuals with high income generating ability who earn higher than those with low income generating ability. There may also be individuals who have higher consumption costs than their income, so that although they have high income generating ability, they may still need economic transfers to cover their consumption costs. The government’s objective then is to provide some transfers to those with low income and those with high consumption costs, so that they can afford consumption goods enough to sustain themselves. These transfers are in the form of cash- and in-kind-transfers.
An entry point to my discussion is to use a discrete choice model, where each individual chooses whether to apply for transfers, or not. The use of taxes to redistribute wealth and income is the most discussed instrument both in the society and in the economic literature. Many studies show that when there is a discrete choice between some goods then transfers may lead to redistribution. Besley and Coate (1991) do this when discussing public provision of private goods. In this thesis I will discuss a situation where the government taxes those with high income generating ability and those who do not have higher consumption costs than their income, and provides transfers to those with low income generating ability and those with higher consumption costs than their income, besides providing other welfare services.
I will in the next chapter discuss individual’s labour-leisure choice given preferences and endowments, but without transfers. Then I will discuss the effect of transfers and specifically consider the non-distorting effects of lump-sum taxes. These discussions are held under the assumption that the government has full information about the individuals’ income generating ability (here given by their wage levels) and preferences.
In reality, however, the government makes its decisions in an environment of asymmetric information, and in addition, cannot use lump-sum taxes to redistribute income. This causes a deadweight loss which the government must try to reduce in order to achieve its redistributive goal. I will in chapters 3, 4 and 5 discuss how restrictions on the recipients can be used to reduce this deadweight loss caused by imperfect information, and argue that as long as the loss that these restrictions cause is less than their total gain, then their use can help reach the utilitarian objective of the government. The gains can be in the form of reduced poverty gap through redistribution of income, and/or an increase in labour skills, which may increase individuals’ chances of getting into the labour market, thus reducing the number of the poor. How exactly to measure these losses and gains will not, however, be discussed in this thesis. I have in chapter 3, discussed the use of restrictions such as work requirement and reduced cash-transfers, and in chapter 4, the use of in-kind transfers to target the recipients. These discussions are based on a static model, which I move from in chapter 5 and look at how work requirement can be used in a dynamic set up to deter individuals from depending on welfare programs over long periods. In chapter 6, I compare the welfare programs of Oslo municipality to some of the instruments discussed in this thesis. The conclusion shall be presented in chapter 7.