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The Welfare State in Crisis? Lucio Baccaro 6 April 2009 Overview • What is going on? – – – – 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