Greater targeting of benefits on low-income groups does not lead to a smaller reduction in poverty and inequality, contrary to one influential theory, according to a new paper from the Institute for the Study of Labor in Bonn. The authors tested the theory, originally advanced by two Swedish academics (Walter Korpi and Joakim Palme) in 1998, using the latest available data.

Key findings

• The relationship between targeting (means-tested benefits) and redistributive impact is found to be a 'very weak' one across countries. If anything, targeting tends to be associated with higher levels of redistributive impact, especially when overall effort in terms of spending is high.
• Some countries, notably Denmark, have transfer systems strongly targeted at those in poverty, which nonetheless have strong redistributive impacts. In some countries, weak targeting is also clearly associated with relatively weak redistributive impacts.
• The best performing countries in terms of redistributive impact employ 'targeting within universalism'. But this in itself is no guarantee of strong redistribution: quite a number of countries that target in equal measure, but not necessarily with the same level of spending effort, have poorly performing systems in terms of redistributive impact.
• The reasons for variations between different countries are not well understood. However, it should be noted that different types of targeted transfer provisions, for example child benefits as compared with pensions, show potentially dissimilar impacts.
• The authors also point out that strongly targeted benefits are no longer exclusively aimed at people not in work, but are also aimed at those in low-paid jobs. Whereas targeted systems used to be the focus of harsh critiques, especially from the political right, the 'new' targeted systems (for example, working tax credit in the UK) are seen as helping work incentives and therefore tend to enjoy broader political support.

Source: Ive Marx, Lina Salanauskaite and Gerlinde Verbist, The Paradox of Redistribution Revisited: And that it May Rest in Peace?, Discussion Paper 7414, Institute for the Study of Labor (Bonn)
Link: Paper