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Acta Sociologica
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Does Social Assistance Recipiency Influence Unemployment?: Macro-level

Findings from Sweden in a Period of Turbulence
Lars Brnnstrm and Sten-ke Stenberg
Acta Sociologica 2007; 50; 347
DOI: 10.1177/0001699307083977
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ACTA SOCIOLOGICA 2007
Does Social Assistance Recipiency Influence

Unemployment?
Macro-level Findings from Sweden in a Period of Turbulence
Lars Brnnstrm
National Board of Health and Welfare, Sweden
Sten-ke Stenberg
Swedish Institute for Social Research, Stockholm University, Sweden
abstract: Has the frequency of unemployment a tendency to increase the number
of social assistance recipients, or does the relationship work the other way round?
This article utilizes Swedish monthly data on aggregated open unemployment and
means-tested social assistance recipiency in the period 19912004 and proposes a
multiple time-series approach based on vector error-correction modelling in order
to distinguish between theories about the direction of influence. First, we show that
rates of unemployment and receipt of social assistance are co-integrated. Second,
we demonstrate that adjustments to the long-run equilibrium are made through
adjustments to the receipt of means-tested social assistance. This indicates that the
frequency of social assistance recipiency reacts to changes in unemployment rather
than vice versa. It is also shown that lagged changes in the number of social assistance recipients do not predict changes in rates of unemployment in the short term.
Together, these findings demonstrate that the number of social assistance recipients
does not increase the number of unemployed.
keywords: multiple time-series analysis social assistance spillover effects
Sweden unemployment
Introduction
The issue of the relationship between unemployment and economic hardship (principally
defined and measured as means-tested social assistance recipiency) has a long tradition in the
social sciences. With the return and establishment of mass unemployment in Sweden and many
other European Union countries in the 1990s, the consequences of unemployment have again
become a topic of crucial interest in studies of social stratification processes and social policy.
A number of earlier studies have concluded that a high frequency of unemployment has a
tendency to increase the number of social assistance recipients (e.g. Korpi, 1971; Gustafsson,
1984; Stenberg, 1998; Giertz, 2004). Since the vast majority of people earn their living from paid
work, the availability of paid work would appear to be an important factor influencing the
frequency of social assistance recipiency. Because people without income can claim social
assistance, it makes sense that the number of social assistance recipients, to some extent, is
determined by the availability of paid work. Parallel to this research, however, there is a
Acta Sociologica December 2007 Vol 50(4): 347362 DOI: 10.1177/0001699307083977
Copyright 2007 Nordic Sociological Association and SAGE (Los Angeles, London, New Delhi and Singapore)
www.sagepublications.com
Acta Sociologica 50(4)

growing body of literature stressing that an individuals labour supply is influenced by
exposure to welfare use (e.g. Moffitt, 1983, 1992; Murray, 1984; Lindbeck et al., 1999; Bertrand
et al., 2000). Poverty is (among other things) assumed to be reinforced in a context where there
are many welfare recipients. The (negative) role modelling of welfare recipients weakens
peoples economic incentive to work and contributes to the development of a welfare culture
in which a norm of living off other peoples work prevails. The problem is also assumed to
increase with the generosity of the welfare system (e.g. Lindbeck, 1995).
In simple terms, influence may thus operate in two directions: either from unemployment
to receipt of social assistance, or from receipt of social assistance to unemployment. The issue
of causal order and existence of potential spillover effects is not only important when we try
to distinguish between the two competing theoretical approaches, but also for policy and
public debate. If, in particular, it can be demonstrated that higher numbers of social assistance
recipients do indeed increase the numbers of unemployed, this will call for political reflection.
The overall purpose of this article is to analyse the hypothesized relationship between unemployment and receipt of social assistance in Sweden. More specifically, the aim is to offer
a way to distinguish between the competing theoretical predictions about the direction of
influence between the two variables. As is typically recognized, the Swedish welfare state
model generally implies a high degree of decommodification and universal and generous
social policy arrangements. The latter especially holds for means-tested benefits such as social
assistance (see, e.g., Nelson, 2003). Thus, particularly in a period when unemployment has
been very high in a historical perspective, Sweden provides an interesting setting in which to
analyse this long-running and controversial issue.
Most previous studies concerning the relationship between unemployment and receipt of
social assistance are based on micro-level data (see, among others, Szulkin, 1981; Gustafsson
and Tasiran, 1993; Gustafsson, 1998; Gustafsson and Voges, 1998; Hallerd, 2003; Hansen and
Lofstrom, 2003; Saarela, 2004). Only a few earlier studies have been concerned with macrolevel relationships between unemployment and receipt of social assistance (e.g. Stenberg, 1998;
Giertz, 2004), largely because of limited access to a sufficiently long sequence of observations.
Although micro-level studies often have problems related to selectivity and endogeneity, these
problems are recognized by most scholars and such studies have been, and will continue to
be, a useful source of knowledge. In order to reduce some of the standard problems related
to the selection bias of micro-level studies, and difficulties related to spurious regression when
analysing aggregated time-series data, this study utilizes macro-level data and multiple timeseries analysis based on vector error-correction modelling (Johansen, 1988, 1991, 1995) to
analyse the existence (if any) and direction of spillover effects between unemployment and
social assistance recipiency.
At the national level, rates of unemployment and receipt of social assistance are usually
reported on an annual basis. In order to adequately capture and model the time dependency
in macro-level variables measured repeatedly across time, it is usually recommended that at
least 3040 observations should be analysed (see, e.g., McCleary and Hay, 1980). The period
addressed in this study covers the years 1991 to 2004 and allows for only 14 annual observations. One way to circumvent this problem is to analyse monthly data. Unfortunately, monthly
data for rates of social assistance recipiency are not available at national level. Such data,
however, are often available at municipal level. By delimiting the study to the municipality of
Stockholm, the capital city of Sweden, we increase the number of observations to 168. This
strategy also has other advantages. Since the frequency of unemployment and receipt of
means-tested social assistance generally vary across regions, municipalities and residential
districts (see, among others, Giertz, 2004 and Minas, 2005), this approach not only reduces
problems related to spatial variations in frequency and levels of generosity, but also indirectly
controls for local labour market characteristics and regional opportunity structure.
348
Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

The remainder of this article is organized in the following way. To set the stage, we first
present a more detailed outline of the competing theoretical approaches. This section also
gives examples of previous empirical research. Together with a sketch of the study area, the
following section provides a short description of the Swedish institutional setting. This is
followed by a section describing the empirical model and offering a more formal definition of
how to distinguish between the two broadly defined theoretical models. Thereafter comes a
description of the data, with the empirical analyses presented in the subsequent sections. The
article finishes with a concluding discussion and suggestions for future research.
Theoretical and empirical framework of reference

Of the various theories about the direction of influence between unemployment and receipt
of social assistance, the one that hypothesizes unemployment to be one of the chief determinants of social assistance recipiency seems convincing. The argument runs as follows. Since
the vast majority of people earn their livelihood through paid work, the availability of paid
work is an evident factor influencing the number of social assistance recipients. Since people
without paid work can typically claim social assistance, the number of social assistance recipients is largely generated by the availability of paid work. Thus, high rates of social assistance
recipiency are generated by weak labour demand (see Gustafsson and Voges, 1998).
Given the fact that social assistance is typically a means-tested monetary transfer to individuals/households with a low level of income, it is clear why unemployment affects individual receipt of social assistance. As argued by Gustafsson (1984), among others, when an
individual becomes unemployed, his or her income and private savings are likely to be eroded
the longer the period of unemployment lasts. Furthermore, empirical research suggests that
unemployment not only influences the likelihood of having received social assistance (e.g.
Hallerd, 2003), but also the duration of recipiency (e.g. Saarela, 2004).
Among the different benefits offered by the welfare state, means-tested social assistance
appears to be the system in which a welfare culture among recipients seems likely to develop.
The means test focuses on needs often caused by individual shortcomings such as weak health,
drug abuse and/or relational problems. Qualifications for benefits like old-age pensions and
sickness benefits are typically connected to more general problems in life, like old age and
disease. As a wide range of causes to the means qualifying for social assistance is possible,
this could stimulate a change of behaviour in line with the welfare culture argument (for a
similar discussion, see Murray, 1984).
As noted above, there is a body of literature, principally emanating from the field of labour
economics and the North American experience, which emphasizes the importance of social
norms and economic incentives when analysing the determinants of labour supply and social
assistance recipiency. Authors of a number of studies typically adopt a structural approach
and assume that rational individuals maximize a utility function that is contingent upon
income and leisure subject to a budget constraint which incorporates labour and non-labour
income as well as potential monetary benefits from social assistance (see, e.g., Blank, 1985;
Bingley and Walker, 1997; Christofides, 2000).
The decision to apply for social assistance is also influenced by a contextual factor which
includes the recipiency of others, primarily through its effects on the social and personal costs
of receiving social assistance (e.g. Moffitt, 1983; Lindbeck et al., 1999). Thus, a key hypothesis
is that an increase in the frequency of recipiency is likely to reduce the stigma associated with
it, and thereby increase the likelihood of other people also applying for the benefit. This
problem holds particularly in a welfare system where the difference between work income
and the replacement rate is small (e.g. Lindbeck, 1995). Murray (1984) argues that a far too
generous social programme creates nothing but incentives to fail, since it makes it profitable
349

for poor people to behave in the short term in ways that are destructive in the long term.
Instead of removing the barriers to escaping from poverty, certain social programmes, such as
social assistance, have produced a poverty trap. Social assistance not only reduces recipients
incentive to work but also affects their future labour market opportunities. It is argued that
when disadvantaged people principally interact with other disadvantaged people, a welfare
culture develops in which social and economic deprivation reinforces itself in a downward
spiral, especially through social networks which may supply more information about welfare
eligibility rather than job availability (e.g. Bertrand et al., 2000).
Of course, each perspective can be seen to have its strengths and weaknesses. In addition,
the perspectives are not mutually exclusive. However, a fundamental difference lies in their
ideological currents. As always, the distinction is not precise, but it can be argued that the
former perspective (more or less explicitly) implies that participation in social assistance is not
a matter of choice, but rather an indicator of last resort, primarily arising from labour market
rationing. The latter perspective, in stressing the importance of individual choice, to some extent
reduces social assistance recipiency to a matter of preference, which implicitly suggests that
economically disadvantaged people are to blame for their own circumstances.
To date, reported micro-level findings about the direction of influence between social assistance recipiency and unemployment are inconclusive, which may create problems when we wish
to draw conclusions for policy and public debate. A major limitation of micro-level findings
is the risk that they are driven by an underlying trend or selectivity (see, e.g., Lieberson, 1985).
One way to substantially reduce problems related to selectivity is to analyse aggregated data.
As argued by Norstrm (1988a), the key advantage of an aggregate time-series effect estimate
is that it is expected to specify the exogenous influence of the risk factor, net of potential
selection effects. The main argument for this assertion is that temporal variations of the risk
factor should be due to changes in exposure and not to changes in self-selection. This can
be shown analytically by considering the following simple micro-level model (this follows
Norstrm, 1995):
Yit = Ci + Xit + it ,
(1)
where Yit is the outcome of individual i at time t, Ci is the sum of those time-invariant characteristics that are correlated with the outcome, and it is the random (residual) error term. The
potential bias due to selectivity that may arise in the estimation of is due to the correlation
between Ci and Xit. However, when considering Equation 1 in aggregate form
Yt = C + Xt + t ,
(2)
it becomes clear that the aggregation turns Ci into a constant which (by definition) is uncorrelated with Xt. For the purposes of this study, let Y represent social assistance recipiency, C
personality disorders and X unemployment. To the extent that personality disorders increase
the individuals likelihood of receiving social assistance as well as the likelihood of being
unemployed, the estimate of in Equation 1 will be biased upwards due to the selection effect.
Since it is reasonable to assume that variations in the prevalence of personality disorders at
the macro level do not exert any substantive influence on the aggregated unemployment rate,
the estimate of in Equation 2 is void of selection effects. If this assumption is invalid,
however, the estimate of will be plagued by omitted variable bias. Thus, both micro- and
macro-level studies have their pros and cons.
Regardless of the direction of influence, a micro-level finding that can be replicated with
macro-level data gains credibility (see Norstrm, 1989; Norstrm and Skog, 2001). Thus, a key
rationale for a macro-level approach is (among other things) to ensure that micro-data based
findings are not method-bound. For example, if the case for social assistance recipiency having
a disincentive effect on individual labour supply holds, it is reasonable to suggest that a
350

spillover effect between receipt of social assistance and unemployment should also be
obtained at an aggregated level. Hence, this theory will gain credibility if it can be shown that
the frequency of unemployment at the macro level is determined by the number of social
assistance recipients. However, if it can be demonstrated that the frequency of unemployment
is not contingent upon the number of social assistance recipients, there is reason to question
the hypothesis about the disincentive effects of social assistance recipiency on labour supply.
At the very least, there are reasons to question micro-data based studies which demonstrate
that social assistance recipiency predicts unemployment.
A brief note on the institutional setting and the study area

Before we specify our empirical model and provide a more formal definition of how to distinguish between the broadly defined theoretical predictions outlined above, it is important to
describe the Swedish institutional setting and provide some background information about
the study area that may influence the present results.
All residents in Sweden who are incapable of supporting themselves are potentially eligible
for means-tested social assistance, a monetary benefit which is intended to be a temporary
support. Municipalities are obliged by law to secure an adequate standard of living for their
inhabitants. Although the benefit is given on a household basis, an applicant must typically
make monthly visits to her local social insurance office to claim the benefit. The only major
change in the social assistance system during our period of study is the introduction of a
national minimum benefit rate in 1998. This change, however, was of minor importance in
Stockholm because the municipal administration had already introduced a local norm which
corresponded to the new national norm. It should at the same time be pointed out that changes
in the regular social insurance system, mainly due to the economic crisis at the beginning of the
1990s, may have affected recipiency of means-tested social assistance. Examples of such changes
are the introduction of an initial day without compensation in the sickness benefit insurance in
1993, stricter regulation of the rights to receive early retirement in 1995, and the overall reduction
of compensation levels in 1996. However, when the economy recovered at the end of the 1990s,
a number of improvements in the insurance system took place (for a more thorough discussion
about the institutional aspects of means-tested social assistance in Sweden, see Nelson, 2003).
The Swedish unemployment insurance system, in turn, is voluntary and state-subsidized and
comprises two parts: an optional loss-of-income insurance and a less favourable basic insurance.
Entitlement to the earnings-related compensation is dependent on a minimum of 12 months
membership in a union-related unemployment insurance fund and 6 months employment
during a 12-month period. In 1998, an independent unemployment insurance fund (ALFA) was
introduced as a complement to the union-related funds.1 Unemployed people not satisfying the
membership condition of 12 months membership of an unemployment fund receive a flat-rate
basic amount. A work requirement of being gainfully employed for at least 70 hours per month
for at least 6 calendar months in the previous 12-month period is a precondition for both lossof-income and basic compensation (for a more thorough discussion about the institutional
aspects of the Swedish unemployment insurance programme, see Carroll, 1999).
Naturally, the potential causal relationship between unemployment and social assistance
recipiency is far from simple and straightforward. As rightly observed by Giertz (2004), only
some of the social assistance recipients are unemployed and not all of them are officially registered at the local public employment service office. Certain categories of social assistance
recipients, such as parents with small children, newly arrived immigrants/refugees and
persons who are sick and/or disabled, are typically not included in the labour force statistics,
for example. Recipients who are exempted from the work demand are thus non-employed
rather than unemployed.
351

The distinction between unemployed and non-employed is not clear cut. Among other
things, the categories are sensitive to changes in classification. It therefore needs to be remembered that some categories of people who may have a bearing on the results are typically
outside the labour market. Particularly at times of high unemployment, it is reasonable to
believe that many people have been forced out of the labour force towards activities such as
unpaid housework and education. Thus, during the Swedish economic crisis, with soaring
unemployment levels in the 1990s, the labour force decreased from around 85 per cent in 1990
to about 77 per cent in 1998, a level which has been fairly stable ever since (Statistics Sweden,
2004). It also appears that a larger share of the unemployed receive social assistance during
periods of low unemployment than when unemployment is high. Empirical research has
shown that when unemployment increases the newly unemployed are more likely to live off
unemployment insurance benefits (Stenberg, 1998).
This study is geographically delimited to the municipality of Stockholm. It is therefore of
interest to compare the Stockholm trend in unemployment and receipt of social assistance with
the national tendency. Albeit on a lower level, the left-hand graph displayed in Figure 1 shows
that the variation in the Stockholm unemployment rate more or less parallels the national
trend. The right-hand graph shows that the Stockholm social assistance recipiency rate is higher.
Although the Stockholm rate rose in 2002, the tendency in Stockholm is similar to the national
development. On the one hand, a higher concentration of recipiency suggests that it will become
easier to confirm the direction of influence predicted by theories about welfare cultures, i.e.
that our case can be regarded as a most likely case (see Eckstein, 1975). On the other hand, the
lower unemployment rate indicates a better labour market situation, which may weaken the
overall hypothesized relationship between unemployment and social assistance recipiency.
Data and methodology
8
6
4
2
Per cent of entire population
10
Per cent of population (1664 years)

6
10
4
8
Two data series representing the Stockholm labour market are utilized in the present study:
the number of open unemployed according to the Stockholm County Labour Board and the
number of households receiving social assistance. Data are monthly time series from January
1991 to December 2004, collected and made comparable through time by the Stockholm Office
1992
1994
1996
1998
2000
2002
2004
1992
1994
1996
Date
Open unemployment in Sweden
Open unemployment in the municipality of Stockholm
1998
2000
2002
2004
Date
Receipt of means-tested SA in Sweden
Recipt of means-tested SA in the municipality of Stockholm
Sources: The National Board of Health and Welfare (Socialstyrelsen), the National Labour Market Board
(Arbetsmarknadsstyrelsen) and the Stockholm Office of Research and Statistics (Stockholms stads utrednings- och
statistikkontor).
Figure 1 Open unemployment and receipt of means-tested social assistance (SA) in Sweden and the municipality
of Stockholm, annual data 19922004
352

of Research and Statistics (USK). The number of open unemployed refers to the number of
individuals in the municipality of Stockholm who are officially registered at any of the local
public employment service offices as being immediately available for work. The number of
households receiving social assistance refers to the officially registered number of households
in the municipality of Stockholm in receipt of means-tested social assistance. Since newly
arrived immigrants/refugees are usually assigned to an introductory language course, and
may thus receive introductory social assistance but are excused from the usual work demand,
households receiving such preliminary benefits have been removed from the data.
A major advantage of these data is that they cover a period characterized by economic decline
as well as improvement. More specifically, the data allow us to analyse the hypothesized
relationship between unemployment and social assistance recipiency in an era that includes
episodes of both rising and falling levels of unemployment and receipt of social assistance.
Apart from standard problems related to omitted variable bias when analysing a hypothesized
relationship between two aggregated variables, one drawback of the data is that they do not
allow for separate analyses for specific subgroups, e.g. young adults (age span 1825) and
people with a foreign background, who we know have a weaker degree of labour market
attachment and are overrepresented among social assistance recipients. Another drawback
is that we only have access to repeated measurement of open unemployment. Among other
things, the frequency of open unemployment is sensitive to classification and policy intervention. However, this may be a minor problem here so long as the number of openly unemployed
is positively correlated with the frequency of total unemployment.
In order to capture indicators of a welfare culture, one could argue that the total welfare
system, especially the most generous benefits like sickness insurance and parental leave, should
be considered. It should be the opportunity not to work rather than being unemployed that
is of importance. We claim, however, that among the different benefits offered by the welfare
state, means-tested social assistance appears to be the system in which a welfare culture
among recipients seems most likely to develop. The means test focuses on needs often caused
by individual shortcomings, such as weak health, drug abuse and/or relational problems.
Qualifications for benefits like old-age pensions and sickness benefits are typically connected
with more general problems in life, like old age and disease.
As a wide range of causes to the means qualifying for social assistance is possible, this could
stimulate a change of behaviour in line with the welfare culture argument. It is also important
to note that in most cases a prerequisite for entitlement to social assistance is the registration as
unemployed at the public employment service office. This can be regarded as the ultimate manifestation of the poor individuals will to work, which is part of the means test. It is reasonable
to expect, especially in times of soaring unemployment, that most new applicants of social assistance are already registered as unemployed. But, of course, it can also be the other way round.
Owing to the means test, people applying for social assistance are forced to register as unemployed. According to Murrays (1984) reasoning about social assistance as an incentive to fail,
the means test also opens possibilities for prolonging the unemployment by adopting a lifestyle
making it difficult to get a job and easier to receive social assistance. In more general social benefit
systems, where rules about entitlement are more rigorous, this is trickier. It is also important to
note that monthly time-series data about, for example, sickness benefits for the period addressed
in this study which are comparable through time are (to our knowledge) not available at
municipal level. Under all circumstances, such data would suffer from a huge contamination
of individuals receiving benefits simply because of illness, parental leave and so on.
A plot of the original series of unemployment and social assistance recipiency (not reported
here) reveals a clear seasonal pattern. This is not surprising, since it is well known that the
frequency of unemployment and social assistance recipiency rates peak in the summer. Since
we are not interested in analysing seasonal variations, the two series are detrended by utilizing
353

a standard multiplicative seasonal decomposition filter. Examining the seasonally adjusted
data in Figure 2, we can see that both variables are potentially non-stationary, i.e. that neither
variable seems to have a constant mean, variance and autocorrelation through time.
In quantitatively oriented sociology, the ARIMA approach developed by Box and Jenkins
(1976) has hitherto been the prime technique when analysing aggregated time-series data (see,
e.g., Norstrm, 1988b, 1988c, 1989; Skog, 1988). Although the BoxJenkins technique has its
merits, its filtering procedures for dealing with non-stationary variables are not entirely satisfactory in a multivariate setting. As argued by Enders (1995), for example, it is possible for
there to be a linear combination of two non-stationary variables that is stationary, i.e. that the
variables are said to be co-integrated. It is reasonable to believe that many macro-sociological
models involve such a co-integrating relationship.
A key feature of co-integrated variables is that their time paths are influenced by the extent
of any deviation from their long-run equilibrium. After all, if the system is to return to longrun equilibrium, at least one of the variables must respond to the magnitude of disequilibrium.
If a relationship exists between the two potentially non-stationary variables utilized in this
article that is stationary, differencing the series such that standard BoxJenkins methodology
can be applied entails a misspecification error. The dynamic model implied by this discussion
is therefore one of so-called error correction. As a consequence, this study makes use of an
interesting development in time-series econometrics: the estimation of a structural equation
containing non-stationary variables, i.e. estimation of a vector error-correction model.2
An empirical model of the direction of spillover effects
N
5000 10000 15000 20000 25000 30000
As indicated above, the hypothesized relationship between the frequency of unemployment

and means-tested social assistance recipiency can be reformulated as an empirical vector errorcorrection (VEC) model which can be written symbolically as:
1990m1
1995m1
2000m1
2005m1
Date
No. of open unemployed (detrended)
No. of households receiving means-tested SA (detrended)
Sources: The Stockholm Office of Research and Statistics (Stockholms stads utrednings- och statistikkontor).
Figure 2 Number of open unemployed and number of households receiving means-tested social assistance (SA) in
the municipality of Stockholm, monthly data January 1991 to December 2004 (seasonally adjusted)
354

Yt = + 0Yt1 + 1Yt1 + . . . + pYtp + t
(3)
where Yt = [YU,t YSA,t], and where YU,t and YSA,t denote the series of unemployment and receipt
of means-tested social assistance, respectively, is a (2 1) vector of potentially non-zero
constants, each is a (2 2) matrix of regression coefficients, and t is a (2 1) vector of
(Gaussian) white noise error terms.
As argued by Lindquist and Vilhemsson (2006), one of the strengths of this empirical setup is that it is possible to remain agnostic about the direction of influence. This formulation,
which is unabashedly empiricist, simply addresses the questions of the existence and direction
of spillover effects. Put simply, which of the variables in the system of equations is the leader
and which is the follower?3 Among other things, the VEC modelling strategy allows us to
test for the existence and direction of spillover effects in two ways. First, we can examine
whether one of the variables included in the model is weakly exogenous, i.e. whether one of
the variables does not respond to the discrepancy from the long-run equilibrium error. If the
series of unemployment and receipt of means-tested social assistance are co-integrated, and if
unemployment turns out to be weakly exogenous, and social assistance recipiency is not, then
we know that social assistance recipiency alone adjusts to changes in unemployment in order
to maintain the long-run equilibrium. When setting up the empirical model, social assistance
recipiency is deemed the leader and unemployment the follower. Second, the empirical setup allows us to construct a robust test of Granger causality (Granger, 1969) between changes
in social assistance recipiency and changes in unemployment in the short-run model, i.e. a test
which does not suffer from the exclusion of a very important variable, namely the long-run
co-integrating relationship between social assistance recipiency and unemployment.
By way of this background, we propose the following definitions:
Definition 1: Receipt of means-tested social assistance is the leader in the long-run model
represented by 0Yt1 in Equation 3 if the variables Yt1 are stationary, trend stationary or cointegrated and if social assistance recipiency (YSA,t1) is found to be weakly exogenous to the
system of equations, and unemployment (YU,t1) is shown to be endogenous to the system of
equations.
Definition 2: Receipt of means-tested social assistance is the leader in the short-run model represented by Yt= 1Yt1 + . . . + pYtp + t in Equation 3 if lagged values of changes in social
assistance recipiency can be used to predict current values of changes in unemployment and
lagged values of changes in unemployment cannot be used to predict current values of
changes in social assistance recipiency.
With these definitions, we can address the data to see whether and to what extent there is
empirical support for or against there being a spillover effect of social assistance recipiency
on unemployment.
Models and estimation

The empirical results of this article are based on estimation of a VEC model using the Johansen
maximum likelihood approach (for details, see, e.g., Johansen, 1995). In order to stabilize the
variance, the monthly data are analysed in logarithmic form. All analyses were performed
using STATA/SE version 9.1.
In a simplified and concise form, a first step in testing for co-integration and building a
VEC(p) model is to determine the number of lags, i.e. p that should be included in the model.
This is done by estimating an unrestricted vector autoregressive (VAR) model using the data
355

in levels (for details, see Lindquist, 2005). A number of tests not reported here indicate that the
appropriate lag length is 15. Since the residuals from the VAR(15) model did not suffer from
severe non-normality or any serial autocorrelation (tests not shown to save space), the VAR(15)
model is chosen as an appropriate representation of the data. The VAR(15) model we consider
as acceptably well specified can be re-written in error-correction form as a VEC(14) model
Yt = + 0Yt1 + 1Yt1 + . . . + 14 Yt14 + t .
(4)
Testing for co-integration between the series of unemployment and social assistance recipiency amounts to determining the rank of matrix . If the rank of is zero, we would be forced
to conclude that there is no linearly independent combination of the two variables that is
stationary. Stripped bare, this means that the variables in the long run are drifting in time independently of each other. If the rank of is two, we can conclude that the series of unemployment and social assistance recipiency are themselves stationary and the test for co-integration
becomes unnecessary. If the rank of is one, then we can conclude that there is a linearly independent combination of the non-stationary variables which is stationary. This means that the
non-stationary variables are co-integrated. Accordingly, we want to test the hypothesis that
the rank of equals one.4
As indicated by the trace statistic displayed in Table 1, the rank of is one, which suggests
that there is one linearly independent combination of the non-stationary, integrated of order
one, variables that is stationary. This means that the non-stationary variables are co-integrated
and that we can utilize the VEC(14) model described above to carry out a meaningful examination of the data. A number of diagnostic tests on the residuals from the VEC(14) model
indicate that they do not suffer from acute non-normality or serial autocorrelation (tests not
shown to save space). Thus, this model, the estimates of which are reported in Table 2 in the
subsequent section, is our preferred model.
Results
Having determined that a co-integrated equation between the two variables exists, our hypothesis about the existence and direction of spillover effects between unemployment and meanstested social assistance recipiency can be formulated as restrictions on the VEC(14) model
outlined above and then tested.
Testing for leadership in the long-run model

The co-integrated relationship () between unemployment and social assistance recipiency
consists of two vectors: and . The first vector () is of pair of weights concerning the importance of the long-run relationship in explaining changes in the rates of unemployment and
social assistance recipiency, where the coefficients U and SA measure the speed of adjustment to past equilibrium errors. The second vector () is the co-integrating vector itself, where
Table 1 Johansen tests for co-integration
Trend: none
Sample: 1992m42004m12
N = 153
Lags = 15
Max. rank
Parameters
Log likelihood
Eigenvalue
Trace statistic
5% critical value
0
1*
2
56
59
60
758.78036
764.74495
765.19949
0.07501
0.00592
12.8383
0.9091*
12.53
3.84
* Rank selected by a sequence of trace statistics.
356

Table 2 VEC(14) model estimates
Sample: 1992m42004m12
N = 153
Equation
Parameters
RMSE
R2
p > 2
ln(Ut )
ln(SA t )
Rank ()
29
29
1
0.033945
0.014366
0.5496
0.6042
151.2937
189.3164
42920.51
0.0000
0.0000
0.0000
Alpha ()
Coefficient
Std. err.
p > |z|
95% CI
U
SA
0.027
0.023
0.019
0.008
1.39
2.83
0.165
0.005
0.064; 0.011
0.007; 0.039
Beta ()*
Coefficient
Std. Err.
p > |z|
95% CI
U
SA
1
1.021
0.005
207.17
0.000
1.031; 1.012
* Johansen normalization restriction imposed.
the coefficients U and SA define the long-run relationship between unemployment and social
assistance recipiency.
Testing for leadership in the long-run model involves testing each variable for weak
exogeneity (recall Definition 1). The existence of only one co-integrating vector makes this test
easier. We only have to examine the z-values associated with the adjustment parameters for
unemployment and social assistance recipiency. These are 1.39 and 2.83, respectively. Since we
cannot reject the null hypothesis at all conventional levels that the adjustment parameter for
unemployment equals zero (p > |z| = 0.165), we may conclude that unemployment is weakly
exogenous to the system of equations. The adjustment parameter for social assistance recipiency, however, is endogenous to the system since, at the 1 per cent level, we can reject the null
hypothesis that the adjustment parameter equals zero (p > |z| = 0.005). This test of weak
exogeneity indicates that adjustments to the long-run equilibrium are made through adjustments to the receipt of means-tested social assistance, i.e. that social assistance recipiency reacts
to changes in unemployment. They alone uphold the long-run relationship between the two
variables. In fact, the coefficient for the adjustment parameter for social assistance recipiency
shows us that it corrects roughly 2 per cent (0.023) of the equilibrium error within one month.
At least for Sweden, the relatively low percentage correction is reasonable, since we are
analysing monthly data, and it has been shown that when unemployment increases new
recruits typically live off earnings-related benefits from unemployment insurance rather than
means-tested social assistance. Although the monthly percentage correction of past equilibrium errors is limited, these tests tell us that unemployment is the leader and receipt of meanstested social assistance is the follower in the long-run model.
The results from the VEC(14) model outlined above can also be graphically illustrated by a
forecast-error variance decomposition experiment. Briefly, the forecast-error variance decomposition tells us the proportion of the movements in a sequence due to its own shocks vis-vis shocks to the other variable in the system of equations (for details, see Enders, 1995). In
Figure 3, we can see that the variation in the numbers of unemployed is responsible for the
overwhelming part (around 80 per cent) of the variation in the number of households receiving
means-tested social assistance, while the reverse is not true.
Since the results from the simulation above indicated that shocks in unemployment accounted
for the vast majority of the movements in social assistance recipiency rather than vice versa,
357

vec14, lnSA, lnU
1
.9
.9
.8
.8
.7
.7
.6
.6
Proportion
Proportion
vec14, lnU, lnSA

1
.5
.4
.5
.4
.3
.3
.2
.2
.1
.1
0
0
100
200
300
100
Months
200
300
Months
Graphs by irfname, impulse variable, and response variable
Figure 3 Results from a Cholesky forecast-error variance decomposition experiment
we may also be interested in whether or not a shock in unemployment dies out over time, i.e.
whether the effect is said to be transitory or permanent. The graph displayed in Figure 4 shows
that the estimated impulseresponse function converges to a positive figure, which indicates
that a one-unit impulse in unemployment has a permanent effect on the number of households receiving means-tested social assistance.
Testing for leadership in the short-run model

Since unemployment was found to be weakly exogenous to the system of equations, we can
factorize the model into two single equations and estimate each equation separately using
standard OLS regression: one marginal model of changes in unemployment and one
conditional model of changes in social assistance recipiency (for details, see Lindquist, 2005).
The marginal model of changes in unemployment can be used to test whether or not lagged
changes in social assistance recipiency predict changes in unemployment. Likewise, the
conditional model of changes in social assistance recipiency can be utilized to test whether
vec14, lnU, lnSA
.15
Proportion
.1
.05
0
0
100
200
Months
Figure 4 Results from an impulse-response analysis
358
300

lagged changes in unemployment predict changes in social assistance recipiency. All in all,
these tests of Granger causality can be viewed as a test of leadership in the short-run model
(recall Definition 2). It should be remembered that short-run refers to the lag length identified
by the VAR(15) model mentioned above.5
The test for Granger non-causality in the marginal model is a test of the null hypothesis that
all of the lagged changes in social assistance recipiency are jointly equal to zero (YSA, t1 = . . .
= YSA, t14 =0). An F-test of the null hypothesis has a p-value of 0.3165, which suggests that
we cannot reject the null hypothesis that lagged changes in the receipt of social assistance do
not predict changes in open unemployment in the short-run model.6 In a similar way, the test
for Granger non-causality in the conditional model is a test of the null hypothesis that all of
the lagged changes in unemployment are jointly equal to zero (YU, t1 = . . . = YU, t14 = 0).
An F-test of this hypothesis has a p-value of 0.1425, which indicates that, at all conventional
levels, we cannot reject the null hypothesis that lagged changes in open unemployment do
not predict changes in the receipt of social assistance in the short run.7 Thus, unemployment
does not seem to be the leader and social assistance recipiency the follower in the short-run
model. Taken together, these tests indicate that, in terms of Granger causality, we can conclude
that none of the variables seem to influence each other in the short term.
Given that we are analysing monthly data, and that it has been shown that when unemployment increases new recruits typically live off earnings-related benefits from the unemployment
insurance rather than means-tested social assistance, it is not surprising that lagged changes in
unemployment do not predict changes in social assistance recipiency in the short term. However,
for the purposes of this study the key finding reached in this section is that there is no evidence
that lagged changes in social assistance recipiency predict changes in unemployment.
Concluding discussion
This article set out to address the much debated question whether the frequency of unemployment has a tendency to affect the numbers of means-tested social assistance recipients or
whether the direction of influence works the other way round. In order to distinguish between
theories about the direction of influence, and reduce problems related to selectivity and spurious
regression, we applied a multiple time-series approach based on vector error-correction
modelling on Swedish monthly data of aggregated open unemployment and means-tested
social assistance recipiency in the period 19912004.
Our results indicate that unemployment and means-tested social assistance are co-integrated,
and that adjustments to the long-run equilibrium are made through adjustments to the receipt
of means-tested social assistance, i.e. that the frequency of social assistance recipiency reacts
to changes in unemployment rather than the other way round. Although the percentage
correction of past equilibrium errors was rather small, they alone uphold the long-run relationship between the two variables. We also conclude that lagged changes in social assistance
recipiency do not predict changes in unemployment in the short run. Taken together, these
findings do not contradict the idea that it is unemployment that influences social assistance
recipiency rather than vice versa.
The present analysis necessarily has its shortcomings and the results should therefore be
interpreted with some caution. Besides standard problems related to omitted variable bias, it
would have been preferable to have had access to monthly time-series data for specific subgroups (e.g. young adults) that we know have a weaker degree of labour market attachment.
Since we know that frequency of unemployment and social assistance recipiency vary across
Sweden, it is also of importance to analyse whether the observed relationship in Stockholm is
valid elsewhere in the country. Given the results presented in this article it is also necessary to
emphasize that we are not suggesting that disincentive effects of means-tested social assistance
359

recipiency on labour supply do not exist. A key rationale for a macro-level approach is to
ensure that micro-data-based findings are not method-bound. Our macro-level approach
should therefore first and foremost be interpreted as giving credibility to previous Swedish
micro-data-based studies which have shown that unemployment is a key determinant of social
assistance recipiency.
The period focused on in this study covers the years 19912004 and is (among other things)
characterized by both rising and falling levels of unemployment. Given that around 90 per
cent of all Swedish employees belong to an unemployment fund, it is likely that when unemployment rises from a low level, and employees have to leave their jobs, the first victims
are mainly members of unemployment funds. As a consequence, the relationship between
unemployment and social assistance also weakens. There is thus reason to believe that the
relationship between unemployment and social assistance is contingent not only upon the
generosity and coverage of the unemployment insurance, but also upon labour market swings.
It is reasonable to hypothesize that there will be a stronger association between social assistance and unemployment when unemployment is at a low level, as it was in Sweden in the
period 19451990. Social assistance is the last safety-net provided by society for its less
fortunate members, and in good times with relatively abundant job opportunities these people
are the last to find work. As a result, they run a higher risk of losing the entitlement to unemployment insurance and of being forced to apply for social assistance. Thus, the question
of the direction of influence in an era of low unemployment remains to be explored with data
covering the period preceding the turbulent times addressed in this study.
Notes
Earlier versions of this article were presented at the Annual Meeting of the Swedish Sociological Association, Huddinge, 910 February 2006; at the Wednesday Seminar, Department of Sociology, Stockholm
University, 22 February 2006; and at the Social Policy Workshop, Network for Research on Social Policy
and Welfare, Stockholm, 1920 October 2006. We thank seminar participants for constructive suggestions
leading to improvements to the manuscript. The article also profited from comments made by Matthew
Lindquist.
1. The Swedish unemployment insurance system was modified in 1/1 1998. The change was primarily
an organisational one. However, the previous system included two types of benefits: earnings-related
loss-of-income and flat-rate cash assistance. It is unlikely that the organisational change should
influence the present results in a substantial way.
2. To investigate the nature of the potentially non-stationary series of unemployment and means-tested
social assistance recipiency utilised in this study, some scholars prefer to apply the augmented DickeyFuller sequential testing procedure to explore the presence of a unit root in each series. However, since
the test for cointegration we use in this article includes the case in which both series are stationary,
we defer formal testing until we test for cointegration (for a more thorough discussion of unit roots
and cointegration, see e.g. Dickey et al., 1986; Engle and Granger, 1987).
3. As noted above, VAR/VEC modelling is a standard technique in time-series econometrics. For a more
thorough description of the VAR/VEC modelling approach used in this article, see Lindquist (2005)
and Lindquist and Vilhelmsson (2006).
4. The Johansen methodology also requires that we test for the presence of deterministic components in
the model. Deterministic trends in a cointegrating VEC(p) model can stem from two sources: the mean
of the cointegrating relationship, and the mean of the differenced series. Placing restrictions on the
trend terms in a general VEC(p) model yields five cases: unrestricted trend, restricted trend, unrestricted constant, restricted constant, and no trend. One way of determining the presence of deterministic trends, while also testing for cointegration, is to estimate models corresponding to the five
cases outlined above and examine whether or not a trend in the cointegrating vector is statistically
significant. However, the graph displayed in Figure 2 indicates that only the fourth or the fifth case
360

is likely. When fitting models of the above kind, a model corresponding to the fifth case, that is a
VEC(14) model which does not include a trend or a constant, produces the best fit of the data
(estimates not shown to save space).
5. More formally, the marginal model of ln(YU,t) can be written as ln(YU,t) = 1 ln(YU,t1) + . . . +
14 ln(YU,t14) + + 1 ln(YSA,t1) + . . . + 14 ln(YSA,t14) + U,t. The conditional model of ln(YSA,t)
can be formulated as ln(YSA,t) = U ln(YU,t1) + SA ln(YSA,t1) + 1 ln(YU,t1) + . . . + 14 ln(YU,t14)
+ 1 ln(YSA,t1) + . . . + 14 ln(YSA,t14) + SA,t. For details about the empirical set up, see Lindquist
(2005).
6. The model has an adjusted R2 = 0.44 and the residuals are white noise (Bartletts B = 0.4287, p = 0.9929).
7. The model has an adjusted R2 = 0.51 and the residuals are white noise (Bartletts B = 0.3486, p = 0.9997).
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Does Social Assistance Recipiency Influence Unemployment?: Macro-level

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ACTA SOCIOLOGICA 2007

Does Social Assistance Recipiency Influence

Acta Sociologica 50(4)

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

Theoretical and empirical framework of reference

Acta Sociologica 50(4)

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

A brief note on the institutional setting and the study area

Acta Sociologica 50(4)

Data and methodology

Per cent of entire population

Per cent of population (1664 years)

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

Acta Sociologica 50(4)

An empirical model of the direction of spillover effects

As indicated above, the hypothesized relationship between the frequency of unemployment

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

Models and estimation

Acta Sociologica 50(4)

Testing for leadership in the long-run model

* Rank selected by a sequence of trace statistics.

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

* Johansen normalization restriction imposed.

Acta Sociologica 50(4)

vec14, lnU, lnSA

Graphs by irfname, impulse variable, and response variable

Graphs by irfname, impulse variable, and response variable

Figure 3 Results from a Cholesky forecast-error variance decomposition experiment

Testing for leadership in the short-run model

Figure 4 Results from an impulse-response analysis

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

Acta Sociologica 50(4)

Brnnstrm and Stenberg: Does Social Assistance Recipiency Influence Unemployment?

Acta Sociologica 50(4)

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