Questions for Review with Answers
Chapter 20. Markets and the Government IV. Labour and Social Policy
I. Preliminary Remark
Chapter 20 – Question 1
Which people are in a country's labour force?
* The people 16 years of age and older who are either employed or unemployed.
II. Labour Policy and Working Conditions
Chapter 20 – Question 2
What is covered by labour law?
* Labour law covers working conditions, regulations of dismissal procedures, trade union rights, social security and sometimes minimum wages.
Chapter 20 – Question 3
Why are most economists opposed to the trade unions?
* Economists say that the trade unions are monopolies that prevent competition, and that their wage claims fuel inflation.
III. Social Policy and Social Conditions
Chapter 20 – Question 4
Explain the difference between social security and welfare schemes.
* Social security is a kind of insurance. It is a compulsory contributory scheme; benefits are linked to former earnings and contributions. Welfare is non-contributory, tax-financed and means tested.
Chapter 20 – Question 5
Explain the two methods available to define the poverty line.
* The government can define an absolute poverty line on the basis of prices for necessities. Alternatively, it can define a relative poverty line. A family is categorised as poor when its spending on food, clothing and housing is less than 50 percent of the median family's spending on these items.
IV. US Particularities
Chapter 20 – Question 6
What does FICA cover?
* Old-age pensions, disability and survivor benefits plus Medicare for people above 65.
Chapter 20 – Question 7
What change in welfare was introduced by the Clinton Administration?
* The Clinton Administration ended the previous welfare system enacted in 1935 by President Roosevelt. It replaced the automatic entitlement to federal benefits for people meeting certain requirements by state block grants for time-limited, work-enforcing welfare benefits.
V. A Look Back. From the Pre-Capitalist Welfare System to the Modern Welfare State
Chapter 20 – Question 8
What does Speenhamland stand for? Do you know any modern equivalent of Speenhamland?
* Speenhamland stands for the 1795 erosion of wages through wage subsidies. The Speenhamland Law set a minimum income; wages that fell short of it were supplemented by family allowances. Before 1795, wages had been set by public officials on the basis of living costs. In modern terminology, Speenhamland was the replacement of a sufficient statutory minimum wage by a scheme like the US Earned Income Tax Credit.
Chapter 20 – Question 9
What role do the 19th-century British Factory Acts play in today's political debates?
* Though enacted by the government - and enacted belatedly - , they are frequently cited as the classic example to illustrate that capitalism is a good thing because it automatically and rapidly creates a repair mechanism to remedy its own inherent abuses and excesses.
Chapter 20 – Question 10
Modern welfare states normally comprise three elements. Please name them.
* The welfare state normally comprises welfare proper and social security which usually includes health insurance. After the Second World War, it was supplemented by a full-employment pledge.
Chapter 20 – Question 11
Why is the welfare state a misnomer?
* Because its major component, social security, forces the labour force to make provision for contingencies and usually also for health care. This ingenious insurance scheme prevents employees from falling onto the public purse.
Chapter 20 – Question 12
What developments do you consider responsible for the erosion or the welfare state?
* The erosion of the welfare state is primarily due to a lack of government funds to finance it, which in turn is due to rising unemployment and the concomitant rise in the number of people entitled to benefits. Another reason is the zeitgeist change that has taken place since the early 1980s.
VI. A Look Ahead. A Negative Income Tax
Chapter 20 – Question 13
Explain how the NIT works.
* Everybody is given the NIT. Taxes owed are calculated by the following formula: Tax owed = tax on earned income minus NIT. The most essential feature of the NIT is that it is deducted from the tax burden, not from taxable income.
Chapter 20 – Question 14
Decide whether you espouse or oppose it and explain why.
* Well, you have seen that I have strongly espoused the NIT. The problem is the size of the tax rate that must be levied to finance it. How high it would actually have to be can only be calculated on the basis of a country's current tax revenues. In Germany, there are proposals to finance it by a very high consumption tax that would replace all direct taxes. A VAT rate of 40 percent (at present 19 percent) would, however, lower aggregate demand and would be very unfair as indirect taxes are always regressive. The size of the proposed NIT is €800 a month.
VII. An Excursus on the Standard Arguments against Welfare
Chapter 20 – Question 15
Why do people who oppose welfare and statutory minimum wages almost always espouse free trade?
* Because free trade enables cheap imports and therefore keeps wages, welfare benefits and inflation rates low.
Chapter 20 – Question 16
What are the major watchwords in today's anti-welfare debate?
* Self-reliance and disincentives. Self-reliance is depicted as a sort of minimum moral value to which every decent person must subscribe. Welfare is depicted as a disincentive to work.
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