Inequality and the welfare state

The future of the welfare state is being questioned. Challenges include the increased scope for political conflict, driven by recent increases in inequality and social cleavages in Western countries, immigration, falling labor supply and demographic chang es. Understanding the scope of long-run survival of the welfare state requires an understanding of how increased heterogeneity and political conflict interacts with the macro-economy and welfare policies. Two recent developments in macroeconomics and poli tical economy have provided tools to start analyzing these issues. First, household-level heterogeneity has been introduced into macro-models, explicitly modeling households’ economic environment and incorporating choice variables such as consumption, la bor supply, fertility and portfolio composition. The project will expand these models and address the following: *What explains the evolution of consumption inequality? *Why are labor supply and fertility rates falling across European countries? *Why is s ickness leave increasing so much faster in Norway than elsewhere? *How important is intergenerational risk-sharing? Second, political economy has made progress at analyzing political choice over time, allowing economic theory to take account not only of the effects of policies on economic performance, but also of how economic performance over time feeds back into the determination of policies. The project will expand this research to analyze the political forces shaping the dynamics of government policie s such as government employment, redistribution, health care, or social security, with a special focus on intergenerational conflicts. Application potential: Progress on these issues will deepen our understanding of the role of inequality and political c onflict in the macro-economy, and help governments design appropriate reforms for securing a good living standard for its citizens, robust against being scaled back in the future