Income Mobility and the Welfare State: An International Comparison with Panel Data

Abstract

This article examines gross and net equivalent income mobility in the western and eastern states of Germany, in Great Britain and in the United States, using panel data of these countries from the period 1989–95. By comparing the differences between the mobility of gross and net equivalent income internationally, it analyses to what extent the welfare state reduces income mobility, thereby testing hypotheses concerning international differences in the mobility-reducing effect of the welfare state. The results show that the largest mobility-reducing effect is observed in eastern states of Germany, followed by western Germany. While the reduction of gross equivalent income mobility by the tax and transfer system is much smaller in Great Britain, this reduction cannot be observed in the USA at all. These results support the hypothesis that the mobility-reducing effect of the tax and transfer system is much stronger in conservative welfare states like Germany than in liberal welfare states like Great Britain and the USA.