Author: Shinyae Noh(Seoul National Univ.), Chul-In Lee(Seoul National Univ.)

To assess the income-smoothing capability of social welfare programs, we examine the cyclical behavior of welfare expenditures over business cycles. Using micro-level data from the Korea Institute of Public Finance, which provide detailed information on household receipts and payments related to social transfers and taxes, we obtain the following results. (i) Countercyclical responses arise mainly through extensive-margin adjustments, including benefit entry and continued entitlement, whereas cyclical benefit adjustments among existing recipients are limited. (ii) Cyclical taxes operate through reductions in tax burdens induced by income fluctuations, thereby serving as an automatic stabilizer. (iii) Regarding the effectiveness of cyclical responses, income taxes and social services are more relevant for responsiveness to business-cycle fluctuations, social insurance and income taxes contribute more to macroeconomic stabilization given their larger fiscal scale, and public subsidy appears more effective in protecting vulnerable households. These findings suggest that policy discussions during downturns may need to consider not only expanding benefit coverage but also strengthening cyclical benefit adjustment mechanisms or supplementary support for vulnerable households.