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Rethinking Social Support How household factors influence the effectiveness of safety nets

When layoffs sweep through industries, millions confront an unsettling reality: depleted savings, limited job prospects, and a pressing need for financial support. In an economy where many households lack a financial cushion, losing a job places entire families at risk of financial freefall. With fewer savings to fall back on, people increasingly rely on programs like unemployment insurance and welfare assistance. But do these systems provide the right kind of support for households with different needs, and who benefits most from them?

Economists Peter Haan of FU Berlin and DIW Berlin and Victoria Prowse of Purdue University examine these questions in their paper, “The Heterogeneous Effects of Social Assistance and Unemployment Insurance: Evidence from a Life-Cycle Model of Family Labor Supply and Savings,” published in American Economic Journal: Macroeconomics. Their study explores how factors like family structure, savings, and age shape the effectiveness of these programs, revealing unexpected insights into who truly gains stability from them. Understanding these patterns is essential for building a more resilient safety net that can support people across varied financial situations and life stages.

“The big picture idea is to better understand how the social safety net impacts families,” says Prowse, the Daniels School of Business’ Marge Magner Chair and a Professor of Economics. The research centers on two key forms of assistance: unemployment insurance, providing temporary income for job loss, and welfare assistance, ensuring that families below a certain income have enough to meet basic needs.

The life-cycle model: A new lens for social programs

To better understand how different households experience social support, Prowse’s research employs a life-cycle model — a framework that captures changes in financial needs over time. This model considers shifts in income, family structure, and assets as individuals move through life stages.

“The life-cycle framework really allows us to distinguish between people in these different circumstances,” Prowse says. The framework can reveal how the impact of unemployment insurance and welfare assistance can vary with age, savings, and family dynamics.

These nuances are especially clear in how social support interacts with family and financial stability. A young single worker without substantial savings might depend more on welfare benefits, which provide essential support for low-income workers. In contrast, a married mid-career individual with a spouse’s income may find unemployment insurance a more suitable safety net. “As the title of the paper suggests, there’s heterogeneity,” Prowse says. “Different households have different circumstances, and that’s really relevant to all these programs and their effectiveness.”

Balancing security and incentive

The study finds that social support programs impact households differently based on family structure. “Single households are the most sensitive to these policies,” Prowse notes, with findings showing that single individuals and married women often find welfare assistance more useful, while married men benefit more from unemployment insurance. This distinction highlights the need for tailored programs that address diverse household needs.

Based on these findings, Prowse suggests that policymakers balance economic support with incentives for independence. “There’s always a trade-off between providing an acceptable standard of living and getting people in this kind of poverty trap,” she explains. While a minimum level of long-term support is essential, overly generous benefits can lead to dependency and a decline in work skills, which she describes as “human capital” degradation. Prowse recommends steady, basic support, with more generous benefits phased out over time to encourage workforce re-entry and independence.

Implications for a resilient safety net

Although based on German data, Haan and Prowse’s findings resonate globally, especially during economic downturns when job losses increase and re-employment is challenging. Prowse notes that unemployment insurance and welfare benefits serve different purposes depending on economic conditions. “Unemployment insurance kicks in when you lose your job,” she says, emphasizing its critical role during recessions. Meanwhile, “social assistance provides steady support,” helping the most vulnerable maintain basic stability regardless of employment trends.

Ultimately, this research encourages a rethinking of social support systems, ensuring they are not just reactive but resilient. By tailoring programs to varied life situations, policymakers have an opportunity to build a safety net that fosters both immediate security and long-term independence, providing a foundation for stability in an unpredictable world.