The Farm, the City, and the Emergence of Social Security

55 Pages Posted: 6 Oct 2008

See all articles by Elizabeth M. Caucutt

Elizabeth M. Caucutt

University of Western Ontario - Department of Economics

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Nezih Guner

Universidad Carlos III de Madrid; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

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Abstract

In this paper we study the social, demographic and economic origins of social security. The data for the U.S. and for a cross section of countries make it clear that urbanization and industrialization are strongly associated with the rise of social insurance. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax. In the model social security emerges and is sustained over time as a political and economic equilibrium. Modeling the political economy of social security within a model of structural change leads to a rich economic environment in which the median voter is identified by both age and location.

Keywords: social security, political economy, structural change, migration

JEL Classification: H55, H3, D72

Suggested Citation

Caucutt, Elizabeth M. and Cooley, Thomas F. and Guner, Nezih, The Farm, the City, and the Emergence of Social Security. IZA Discussion Paper No. 3731. Available at SSRN: https://ssrn.com/abstract=1278932 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Elizabeth M. Caucutt (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

44 West Fourth Street, 7-180
Room 7-85
New York, NY 10012
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National Bureau of Economic Research (NBER)

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United States

Nezih Guner

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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