The unsung stimulus in pro-family benefit programsAnalyzing a government's social benefits policies can be trickier than meets the eye. Contrary to popular opinion, the effects on labor participation are often positive.
December 21, 2015
As global sovereign debt investors, we consider a wide variety of macro and microeconomic factors in our research process, and these can ultimately inform our investment decisions (as well as our portfolio management tactics). Governments’ fiscal policies are of course among those factors, and when we have the opportunity to speak with government policymakers, their approaches to social benefit programs are factors we like to investigate.
We believe that countries that invest in pro-family social programs may see real economic benefits in the long term.
With moves toward labor reforms in Europe making headlines in recent years, one easy and broad-brush misconception is that all social benefit programs naturally provide a steady financial headwind to economic growth. But the truth is much more nuanced, and we often find ourselves assessing the environment for pro-family benefits within an economy, acknowledging the potential for such policies to spur growth, not hinder it.
When we look at major economies around the world, we observe that there are notable differences in how they approach social benefit policies. Each government’s degree of support for social benefit programs — sometimes referred to as pro-family social benefits — can be a useful input as we collect and analyze country-level data.
What do we mean by pro-family benefits? In simple terms, they include measures like extended parental leave, inexpensive childcare, and subsidized education that begins at preschool and runs all the way through college. Programs to assist with other societal responsibilities, such as taking care of elderly family members, can also fall into this category.
At their most effective, programs should be seen as much more than highly localized assistance or welfare that creates a society of dependents. We believe they can yield higher-order economic benefits in the long run, by helping a country’s labor force work more efficiently and thereby maximize its contributions to economic growth. In other words, we believe that countries that invest in pro-family social programs may see real economic benefits in the long term by (1) increasing the efficiency of microeconomic activities (that is, labor productivity), and (2) transmitting those gains to the macro economy.
The ability of social programs to promote a healthy labor participation rate is one example. From our perspective as international investors, an improving rate of labor participation is viewed as a particularly important measure, with potential to produce very real, tangible economic benefits (compared to, say, an aim to accelerate birth rates, as with China’s recent abandonment of its one-child policy).
Notable examples: Sweden, Canada, Japan
Labor participation rates cited below are based on analyses published by the Organization for Economic Co-operation and Development.
Sweden provides one obvious case of an economy reaping strong favorable effects from its pro-family programs. It is among the countries that operate the most ingrained social benefit systems, providing services that include:
- a standard parental leave of 480 days
- government-supported childcare
- government funding for education (from preschool through college)
Looking at Sweden’s 2014 labor participation rate, we see readings of 83.6% for men and 79.3% for women, versus 78.5% and 67.1%, respectively, within the United States. As shown, not only are labor participation rates higher in Sweden, but the difference between male and female participation rates is much smaller. It would be hard to argue that benefit policies are not among the factors supporting Sweden’s high labor participation rates.
Another noteworthy case is Japan, where reform programs included in the prime minister’s “Abenomics” packages have had a number of interesting effects. One of the program’s so-called “three arrows” has been designed to support child rearing, with government-supported services that include no-cost daycare and preschool for all children, education system reform, and additional funding for higher education.
Interestingly, the labor participation rate in Japan is 84.9% for men and 66.0% for women — a gap of 18.9 percentage points, among the highest in developed countries. But this reading reflects a recent climb in female labor participation, an improvement that may be attributed to Abenomics as well as a labor reform program enacted in 2012 that allows flexible working schedules and unconstrained employment contracts (unlike the lifetime employment system that prevailed prior to the reforms).
Final details about the child-rearing support system remain unavailable at this writing, but we believe Japan is pointed in the right direction on this issue. While the fiscal constraint emblematic of the Japanese government may limit the scale of the program, we believe legislators will be compelled by the potential for positive long-term economic outcomes.
Canada is yet another developed country that has implemented quite extensive pro-family policies, doing so since 1998. As of 2014, the male and female labor participation rates in Canada are 81.3% and 74.2%, respectively. The country’s overall labor participation rate increased 2.9 percentage points during the last 20 years (reaching 77.8%, despite an aging population), primarily driven by a female participation rate that climbed 6.5 percentage points.
In order to steadily increase the female participation rate, federal and provincial governments have continued to fine-tune childcare policies, subject to budgetary realities and perceived cost-effectiveness. (The investment necessary to support pro-family policies can be significant.) The resulting economic gains have been quite real in recent years, helping the net federal government debt level stay at 34% of gross domestic product (GDP), the gross debt level remain at 52% of GDP, and the budget deficit stay anchored at less than 2%. (A country’s GDP is the total market value of the goods and services produced by its economy.)
It's about commitment
To be sure, the policies and pro-family benefits described above can only materialize if governments and agencies have the will and resolve to push through significant policy change. It is a big mountain to climb, but we believe the efforts are often worth the rewards, and we think the overall effects on economic growth are more significant than the perceived liabilities.
As global investors, our view is that governments that commit to taking a first step — no matter how small — increase the odds of maintaining a more productive and competitive economy in the long run.
Our investment process relies on rigorous, fundamental analysis on a country-by-country basis. As part of that research, we aim to identify political and fiscal behavior that can improve a country’s economic environment over time. In certain cases, this focus on fundamentals includes an analysis of social benefit programs like those described above. The efficacy of such programs is not always easy to forecast, but we fold them into our broader analysis, as an additional set of data that enhances our understanding of a country’s investment potential.
Note: Somewhat conspicuously, this commentary does not mention labor participation rates within the European Union. This is because European participation rates are distorted by workers’ ability to migrate freely within 22 countries in the bloc.
The views expressed represent the Manager's assessment of the market environment as of December 2015 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
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