The Economics of Social Protection

The Economics of Social Protection

Lars Söderström

This book focuses on arrangements for redistributing consumption opportunities over the life cycle and for providing compensation for income losses or large expenditures due to reasons such as illness and unemployment. After extensive coverage of the nature of inequalities in income and wealth in a market economy, and various notions of social justice, the author discusses public and private transfers in cash or in kind related to old age, childhood, illness and the like. Importantly, the book takes into account both equity and efficiency aspects.

Chapter 2: Inequality

Lars Söderström

Subjects: economics and finance, public finance, public sector economics, welfare economics, social policy and sociology, economics of social policy


Market economies give rise to a great variety of economic positions with differences in wealth, income and consumption. Such differences are commonly called ‘inequality’. This chapter attempts to bring some of the controversies surrounding inequality into perspective by emphasizing three aspects. First, inequality reflects differences in choice as well as in opportunities. It is rarely the case that an individual has to have a particular wealth, income or consumption. Second, choices and opportunities are interrelated over an individual’s life cycle. Present opportunities are to some extent the result of choices made earlier in life, and choices today shape opportunities in the future. Third, there is an element of chance. The wealth, income or consumption an individual is observed to have may be different from what he or she was planning to have. Three sets of choices are crucial in determining an individual’s economic position. Over and over again the individual must decide what the portfolio of assets should look like, how time should be divided between different uses and what to consume. The first two choices determine the individual’s (expected) income from capital and labour, respectively. Consumption choices are not only important for the individual’s immediate well being, but also have an effect on the individual’s wealth and future productivity. All of these choices play an important role in shaping his or her economic position over the life cycle. STATISTICAL ASPECTS Inequality in income, wealth and consumption has received much attention during the...

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