The Welfare State in Crisis?

1. The Welfare State in Crisis? Lucio Baccaro 6 April 2009

2. 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

3. 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

4. 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

5. 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

6. 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

7. The Challenges of a Post-Industrial 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

8. 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

9. 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

10. 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

11. 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; Social-Democratic: fiscal problems

12. 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

13. Political Cleavages Individual Freedom + Libertarian Left-Libertarian + - State intervention Conservative Christian Democratic or traditional Working-Class Party -

14. The Path of Social-Democracy Individual Freedom + S.D + - State intervention -

15. 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

16. 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

17. 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)

18. 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