Download The Welfare State in Crisis?

The Welfare State in Crisis?
Lucio Baccaro
6 April 2009
Overview
• What is going on?
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–
–
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Economy
Society
Politics
Ideational sphere
• Is there really a crisis and what are its features?
• Reform efforts
– Pension reform
– Labor market policy
The Usual Suspect:
Globalization
• Is globalization responsible for the increasing
strains of the welfare state?
– Trade liberalization
– Liberalization of capital movements
– Migration
• The argument:
– Globalization forces countries with extensive welfare
states to compete with countries with lower levels of
social protections and costs; the only way to compete
is by reducing such social protections and costs
– Race to the bottom
– Demand for protection and protectionism
Does the Globalization Argument
Hold Water?
• In theory, globalization could lead to greater, not
lower, demand for social protection (greater
exposure to risk)
– David Cameron, 1978; Peter Katzenstein, 1985; Dani
Rodrik, 2000
• Empirically, the correlation between globalization
and welfare state strain seems spurious:
– Welfare state tensions and globalization move
together in time and that’s what explains the empirical
association
Looking at the Globalization
Argument in Detail
• Difficult to find a direct link between international trade
and the welfare state
– Unskilled unemployment may be the linkage
– Unemployment increases financial pressures on the welfare
state
• Capital movement liberalization operates by limiting
governments’ ability to run public deficits
– True, but the accumulation of deficits was a feature of the years
of welfare state expansion
• The migration argument is very weak
– Migrants may contribute to unskilled unemployment
– However, they are largely excluded from national welfare states
– To the extent that they increase birth rates and reduce the
dependency ratio, they are actually a resource for the welfare
state
Demographic Changes
• Population aging
– Lower birth rates
– Increasing life expectancy
• Tendency to grow of the two largest welfare state
programs
– Pensions
– Health care
• In addition, coming to maturity of major pension
programs
• Furthermore, the baby boom generation approaches
retirement
• Lower population of active workers + higher population
of retired workers lead to financial pressures on the
welfare state
The Challenges of a PostIndustrial Society
• All advanced countries have shifted to a
structure of employment dominated by services
• The Baumol’s cost disease
– Productivity growth in the service sector is lower than
in the manufacturing sector
– Employment share of services grows relative to
manufacturing
– Relative prices of services (including public social
services) tend to grow
– This by itself requires a growing share of GDP to
finance services
Social Transformations Add to
the Challenges
• Increased female labor force participation in the
labor market
• Changes in family and marriage patterns
– Greater rate of divorce
– Greater proportion of single parent families (mostly
headed by single mothers)
• Increased demand of care services (especially
child and elderly care)
• Care services are mostly labor-intensive and
thus fall squarely into the Baumol’s disease
Different Types of Welfare State
• Three types: liberal, continental, and
social-democratic
• Three types of financing:
– Minimalist, financed through taxation
– Transfer-based (categorical), financed
through social security contributions on wages
– Universalist and service-based, financed
through taxation
Impact of Baumol’s Cost Disease
on Welfare States Models
• The “trilemma of the service economy” (Iversen
and Wren, 1997)
– Liberal welfare state: allows for the development of a
low-wage (private) service sector
• High employment rate, no deficit problem, high wage
inequality
– Continental welfare state: does not allow for the
development of a low wage service sector
• Low employment rate, no large deficit problem, low wage
inequality
– Social democratic welfare state: public provision of
services by the state
• High employment rate, fiscal problems (taxes or deficit), low
wage inequality
In Synthesis
• Endogenous dynamics (population aging, maturation of programs,
de-industrialization, societal transformations) build pressure of the
welfare state
• Increasing number of recipients, lower number of active contributors,
higher relative cost of services (due to Baumol’s disease)
• Increased female participation lead to new demand of care services
• Financial sustainability of the welfare state is strictly dependent on
high employment rates and low rates of dependence
– Hence the biggest problems are with systems characterized by low
labor market participation rates
• Different types of welfare states are faced with different problems
– Liberal: high inequality; Continental: low employment; SocialDemocratic: fiscal problems
Political Changes
• The transformation of European social
democracy (Kitschelt, 1994)
– E.g. New Labour in the UK, the German
Social-Democratic Party under Schroeder, the
Italian experience with the Olive Tree and the
Democratic Party
Political Cleavages
Individual Freedom
+
Libertarian
Left-Libertarian
+
State intervention
-
Conservative
Christian Democratic
or traditional WorkingClass Party
-
The Path of Social-Democracy
Individual Freedom
+
S.D
+
State intervention
-
-
Impact on the Welfare State
• In their move to the center, social-democratic
parties:
– Emphasize the importance of individual initiative and
responsibility
– De-emphasize high taxes and state provision of
services
– Underscore human capital as key to equality of
opportunities
– Are unwilling to restore their old working-class allies
(trade unions) to their former privileged status
Crisis of Trade Unions
• Trade unions are in crisis everywhere
• The only national trade union movements
to buck the trend are Belgium, Denmark,
Sweden, and Finland
• Hence, the two key political supporters of
the welfare state, social democratic parties
and trade unions, and both undergoing
deep transformations
Ideological Shift
• State intervention in the economy no
longer unquestioned
• Reagan and Thatcher’s revolution
• The welfare state leads to:
– Moral laxitude
– Wrong incentives
– Inefficiency
– By strengthening the state, it threatens
individual freedom (Friedman)
Concluding Remarks
• Numerous pressures, mostly domestic, on the
welfare state
– Demographic change
– Maturation of programs
– Consequences of de-industrialization
• Lower productivity, higher cost of services, dilemmas of the
service economy
– Political transformations: social-democratic parties
and trade unions
– Ideological transformation: public is no longer
beautiful