Labor market insurance and social safety nets
Lal, Deepak
This paper makes a distinction between social safety nets and welfare states and argues that while the former are needed because of the ubiquitousness of risk in human life, the case for the latter is more controversial. It emphasizes that "social" refers to cooperation, and does not prejudge whether this should be provided through private or public action. It provides a typology by stage of development of the type of labor market risks faced by workers in different types of developing countries. It then goes on to examine the relative efficacy of private versus public transfers in dealing with these risks. The importance of private inter-household transfers in alleviating destitution, conjunctural poverty and providing the merit goods of education and health are emphasized. While the empirical evidence based largely on World Bank sources is used to show that because of reasons concerned both with problems of information and political economy, the private transfer route may be preferable to the public. Various principles for the design of social safety nets which are financially and politically viable are then derived and used to provide broad guidelines for the provision and financing of various components of the social safety net: merit goods, direct transfers to deal with destitution and conjunctural poverty, unemployment insurance, severance payments and pensions.
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