Poverty, inequality, and redistribution: An analysis of the equalizing effects of social investment policy

Abstract

Social investment (SI) policies have been implemented by governments of affluent countries in hopes of safeguarding against new social risks and mitigating social exclusion by encouraging employment and making it easier for parents to balance work and family. Governments hope that human capital investment (education and job training) will better prepare workers for jobs, promote their employment and social inclusion, and reduce poverty. This article investigates whether SI policies contribute to lower poverty and inequality by analyzing data from 18 Organization for Economic Cooperation and Development countries between 1980 and 2013. The analysis finds, first, that SI policies (education and active labor market policy (ALMP)) alone may be less effective in generating lower poverty and inequality without redistribution, but when accompanied and supported by redistribution, SI policies are more effective in creating lower poverty and inequality. I propose the explanation that SI policies create lower-income poverty and inequality by creating individuals and households that can be salvaged and lifted out of poverty with redistribution, because SI policies help improve their skills and knowledge and employability, although they may be not quite able to escape poverty or low income without redistribution. As partial evidence, I present the result that education is associated with a lower poverty gap in market income. The analysis also finds that education and ALMP produce lower poverty and/or inequality in interaction with social market economies that redistribute more, and that augments the equalizing effects of education and ALMP. The results, thus, suggest the complementary roles of SI policies and redistribution.