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5 Effects of Welfare Reforms

The social accounting model itself does not of course explicitly deal with behavioural responses to changes either in the benefit rates, income thresholds or abatement rates, or indeed in the regulations regarding eligibility or those designed to deal with moral hazard aspects. The transition rates are not based on econometric models in which various rates are estimated as functions of a range of relevant variables, including features of the tax and benefit system: they are based simply on observed flows over a period of time. Indeed, econometric models are seldom capable of handling the precise administrative details of many benefit structures, and to the extent that reforms involve various innovations, empirical evidence regarding behavioural responses are not available anyway.

The counterfactuals reported in the previous section involve simulations. They answer the question, 'what if the inflows and transitions among benefit categories change in well-specified particular ways?' Hence the model provides a useful tool for looking at the broad implications of changes in inflows or transitions which are thought likely to occur. The advantage, as stressed above, is that implications can be examined for benefit types other than those for which reforms are being debated. Furthermore, the dynamics of a system, which is out of equilibrium when a change arises, can be investigated. Given a specified change to one or more features of the benefit system, the potential impact on inflows to selected benefit categories and associated exit rates may be considered, drawing on a range of extraneous information.

Suppose a change in circumstances is expected to arise in May 2013 which influences only the quarterly rate of entrants to the range of unemployment benefits, while all other flows and transition rates remain at the observed post-GFC levels. The details - whether of a change in market circumstances or a change in the eligibility conditions - need not be specified here. Figure 14 illustrates the subsequent time profile of the stock of unemployment benefit recipients over all UB categories, for a range of percentage reductions in the inflows: policies 1a, 1b and 1c respectively involve 2.5, 4 and 6 per cent reductions 'across the board' in UB entrants.

Figure 14 - Projected Unemployment Benefit Stocks over Time
Figure 14 - Projected Unemployment Benefit Stocks over Time.

It has been seen earlier that unemployment stocks move relatively more quickly than other benefit types towards new steady-state values, and this is also observed for this simple change. Changes in other broadly defined benefit types are relatively small in this case.[13]

At the stage when the change is expected to take place, the stock of UB recipients is not in equilibrium even though the various rates were constant, because of the build-up in stocks resulting from the lower post-GFC exit rates (compared with those before the GFC), along with the fact that some movements into UB categories arise from other benefit types within the system, and the stocks in those 'source' categories are not in equilibrium. It is clear from the diagram that the reduction in the stock over time (for each percentage change in the inflow rate), when compared with the stock when the change arises, is smaller than the reduction when measured against the counterfactual of no change in inflows. The contrast between such comparisons would be much greater if the assumed change in the inflow rate were to occur while the counterfactual profile is rising much more steeply. A key point is that the effectiveness of a policy reform needs to be based on a sound counterfactual. In other words, simple ex post comparisons of changing stocks of benefit recipients may therefore not provide an accurate measure of the effectiveness of a policy reform.

Notes

  • [13]However, more substantial changes can be observed for particular types of UB claimant, where there are larger movements to other categories.
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