Thoughts on Welfare States Adaptation Capacity to the Challenges of the Post-Industrial Era

Thoughts on Welfare States Adaptation Capacity to the Challenges of the Post-Industrial Era

How do changes such as globalization, demographic shifts and the change in family structure and life style challenge the different types of welfare states? Which is under the highest pressure to reform itself?

Postwar welfare states have all a general objective, namely, to secure some basic modicum welfare for its citizens. However, they differ in terms of the ambition of their goals and their internal logic. Thus, G. Esping-Andersen identifies three types of welfare state: liberal, conservative and social-democratic.

Beginning in the 1970s the socio-economic conditions of advanced capitalist economies in which the welfare state operated began to change progressively. Three sets of transformations in particular have affected the traditional functioning of welfare states. The first one is related to the economy. There was a gradual shift from industrial to post-industrial economy that relies more on the service sector for growth and job creation. At the same time globalization entailed further trade liberalization as well as the liberalization of capital flows. Secondly, advanced capitalist economies experienced population ageing. Thirdly, there were important transformations in the family structure.
The institutional framework and policies of postwar welfare states were not originally tailored to address these new characteristics and therefore symptoms of inadequacy arose such as fiscal strain and most importantly a trade-off between social provisions and full employment. Since the three welfare state models have different underlying assumptions and ways of delivering social benefits we can assume that these challenges affect them in dissimilar manners and that their capacity to adapt (and preserve at the same time their original logic) is also different.
The following pages analyze the difficulties faced by each welfare state in this new political economy.

Demographic shift
Population ageing is the consequence of an increase in life expectancy coupled with a declining fertility rate. This has a negative impact upon the welfare state in as much as it creates burdensome dependency ratios and hence severe fiscal strain.
Low fertility rates are associated with the changing role of women in society. On the one hand, women increasingly want to access the labor market in order to achieve economic independency and develop personal careers. On the other hand, in low-income strata they increasingly need to work either to escape from poverty or to maintain their accustomed living standard. However, the traditional tasks of housekeeping and children caring are still predominantly women’s responsibility, the final result being that they are overloaded and, therefore, less inclined to have children.
How does this problem affect the different types of welfare states?

The social democratic model is the least affected since female employment and fertility rates are “record high” in Scandinavia. The reason is that these welfare states have pursued policies of gender equalization and female integration in the labor market since the 1970s. The model socializes the costs of family hood through the provision of social services like child care and elderly care together with generous paid maternity and parental leave, which makes easier for women to combine work and the desire to have children.

On the opposite side we find the conservative welfare state, which is under the highest pressure in terms of population ageing. Indeed, Italy and Spain have the lowest fertility rates of the world and, except for France, the others do not fare much better. The explanation is to be found at the core of the model: it is strongly committed to the preservation of the traditional family (single male breadwinner and women devoted to housekeeping and family caring). This model emphasizes that the state will only interfere when family’s capacity to service its members is exhausted. Therefore, social services that could allow the harmonization of female work and family objectives are truly underdeveloped. In addition, women’s jobs tend to be more precarious and worse paid.

The liberal model does not have an in-built relationship with fertility rates. The North American states and Australia have a younger age profile than Continental Europe due to a large extent to immigration. On the other hand, both Canada and the United States incorporated from the beginning means-tested child allowances to their welfare state edifice but their relative value has eroded since the 1970s and indeed child poverty in the US increased sharply. At present one could argue that the expansion of low wage employment and precariousness can act as a disincentive to having children.

Changes in family structure and life-style
As stated above, nowadays the model of traditional family is becoming less preeminent. Family arrangements have changed due to a higher divorce rate and female employment. Thus we see the rise of either single parent (generally female-headed) or single person households, on the one hand, and double-earner families, on the other.

The problem is that the postwar welfare states were logically tailored to address the needs and risks of the postwar social order and that if social protection schemes do not evolve in tandem with society a discrepancy arises between what they offer and existing social demands.
Again and for the same reasons stated above, the conservative welfare has the greatest difficulties to adapt itself to the new social realities. Since one of the cornerstones of this model is the internalization of welfare provision in the family (traditionally conceived) via the male breath-winner it is ill prepared to face changing family arrangements. Thus, it does not provide social services to relieve the burden of either single or married working mothers, nor does it promote female and male wage equalization. Moreover, precisely because the social service sector (where women are more commonly employed) is underdeveloped, these countries present higher rates of women unemployment than the Scandinavian states or the US.

Both the socialdemocratic and the liberal models have the individual (as opposed to the family) as their unit of social protection and redistributive attention, and as they are free from the Catholic imprint they do not defend a fixed conception of family organization. Hence, in principle both models should be better equipped to adjust themselves to evolving risks and needs derived from different family structures. As we have seen, the social democratic welfare state responded swiftly and timely to this challenge by expanding the provision of social services that at the same time eased women incorporation in the labor market and provided them jobs. One can see gender equalization as part of the general socialist agenda of equality, but female work also served to expand the tax revenue of a state largely dependent on full employment.

Declining wages in the US have induced an increased female participation in the labor market from the 1980s onwards partly due to the necessity of supplementing male income. Due to its residual character the liberal welfare state does not provide extensive social services, which are to be found in the market. Since this is not affordable for the working poor, married mothers are impaired to contribute much and single mothers face very high poverty risks.

Globalization and post-industrial economy
Globalization entails trade and financial liberalization and integration that restrict states’ capacity to design their own political economies. Globalization promotes a race for competitiveness that pushes labor costs downwards which in practice means to cut heavy social contributions and taxes, high and rigid wages and extensive job rights.

On the other hand, the post-industrial economy, based on the expansion of the service sector, demands skilled and professional workers, while demand for unqualified labor depends mainly on low wages. Therefore, in contrast to the industrial economy where there was a relatively homogeneous industrial working class that absorbed masses of low skilled workers, in the post-industrial economy there is a growing differentiation between white-collar and blue-collar workers, as well as between highly productive and low productive workforce. In this context the demand for wage differentials arise eroding the unity of the labor force. Furthermore, the level of unionization in the service sector is much lower than in traditional industries.

All these factors together with a slower economic growth since the 1970s gave rise to the so-called trade-off between equality and full employment, i.e. between maintaining an acceptable level of wages and social protection, and generating jobs for the entire working force. This dilemma has spurred different responses from the three types of welfare states. In general, conservative and socialdemocratic welfare states privileged social protection and faced high unemployment, and the liberal welfare states opted for high employment at the price of growing poverty and inequality.

At first glance the socialdemocratic model appears to be the most affected since the core of its rationale is the combination of both elements: equality and full employment, the former being a direct consequence of the latter. This model assumed full employment as its guiding principle because the right to work is granted a high status and because the provision of highly generous and comprehensive social benefits depends on maximizing government revenue, i.e. on having most people working and the fewest possible depending on the welfare state for a living.
The distinctive feature of the social democratic model is the principle of egalitarian universalism. Benefits are allocated as a matter of rights irrespective of class or market position. Universalism in the provision of services has the explicit objective of generating equality or egalitarian results (an outcome that the other welfare state types do not pursue).

In the presence of an homogeneous industrial working class this objective proved to be feasible. However, with increasing differentiation of labor force the needs, interests and demands to be addressed by the welfare state became also heterogeneous. This undermines the socialdemocratic welfare state in two ways:

Firstly, the fragmentation of the working force renders consensus building regarding wage levels and social provisions more difficult. Secondly, if the egalitarian wage structure is kept in the presence of different qualifications and levels of productivity economic inefficiencies ensue in the form of disincentives to work and to invest in additional skills.

It is clear that the socialdemocratic welfare state has experienced severe tensions but at different points it has been able to come up with solutions and ultimately it has proved able to adapt itself. At the beginning the unemployment problem was checked with the creation of jobs through the expansion of public social services but this strategy found its limits in the mid-1980s, when the expansion of the public sector in the absence of productivity growth generated increasing fiscal strains. Afterwards it surrendered to the growth of wage differentials, the reduction of a number of social benefits, and the controlled privatization of some service delivery, but in compensation it pursued the active social investment strategy. In Sweden the second-tier earning related pensions grew in importance. Even if some authors argue that these are marginal adjustments, they entail a departure (albeit limited) from universalism. The relevant question (which I am not prepared to answer here) is whether these shifts have produced manifestly less egalitarian outcomes so far. If so, one can argue that the socialdemocratic welfare state has been able to effectively face the new challenges but at the price of losing its distinctive characteristics.

The liberal welfare state does not hold the promise of equality but, at the very best, of equity (i.e. given equal opportunities the outcome is different according to personal performance and effort). Put simply, its underlying rationale is that the market allocates resources efficiently, rewards work and saving and punishes the idle. The welfare state is meant to respond to market failures but should not act as a disincentive to work, therefore, benefits are modest and attached to demonstrable need (means-testing assistance). Because the state should intervene the less possible, it encourages market welfare either passively – by guaranteeing only a minimum – or actively – by subsidizing private welfare schemes and promoting negotiated occupational plans –.

So welfare provision is to a large extent dependent on the market, which until the 1970s produced good results in terms of aggregate welfare. When unemployment problems arose the liberal medicine was to deregulate so that the labor market could reach its equilibrium. Consequently, wages were allowed to plummet to market clearing levels. The result was indeed job growth but associated to low-wage employment of the young, unskilled and non-unionized in the service sector. This strategy is a failure because below-poverty income requires higher income maintenance transfers and produces poverty traps since low wages create a disincentive to work, and both things – higher transfers and work disincentives – go against the liberal rationale.

As it turned out, higher income transfers were not forthcoming (on the contrary, their relative value declined together with wage decline) and this failure to adjust social programs produced further income polarization and the expansion of the working poor. Under these conditions, today the liberal welfare state cannot even live up to the promise of equity since upward mobility is conditional upon adequate skills (not upon hard work as in the past) that are not easily acquired by the masses of low wage workers (particularly in the absence of active social investment policies) and thus poverty entrapment is a real possibility. In sum, one cannot say that the liberal welfare state model has responded effectively to the economic challenges since there is a general decline in aggregate social welfare despite strong employment growth. Indeed, full employment is meaningless if it merely substitutes the welfare poor for the working poor.

The conservative welfare state is neither committed to equality but to the preservation of status differentials. However, social rights are recognized, there is some redistribution that prevents extreme income polarization and provides an above-poverty living standard for the lower strata. This was partly achieved through a high level of labor market regulation and in many cases the existence of corporatist structures where social partners negotiate wage levels.

The distinctive characteristic of this model is the existence of highly developed status-differentiated social-insurance schemes, each with peculiar rules, finances and benefit structure. And this is exactly what renders reforms or adaptations of the welfare state very difficult, because the social security system generates many and varied powerful vested interests. In Tsebellis’s words too many veto players decrease the potential for policy change and indeed the Continental European welfare states have been very resilient to change (both in terms of flexibilization and of its familialistic emphasis).

The result is an acute unemployment problem that generates a big difference between insiders (with good wages and job security) and outsiders (that depend either on welfare transfers or on the male breadwinner’s wage). The short-term solution was to induce early-retirement with the hope of recovering full employment with low level of aggregate labor force participation. However, this strategy only compounded the problem because the higher cost associated with more pensioners enlarged the deficits of the social insurance funds (contributions simply did not match benefit payments) and is now being reversed.

Moreover, the strong bias towards pensions reveals that the conservative welfare state has not adjusted itself to the fact that the young, less skilled and single-parent families are becoming high-risk groups.
I would argue that the one advantage that conservative welfare state has over the socialdemocratic model is that its very structure permits to cater for different needs and expectations, which is an important ability in an increasingly differentiated society.

Conclusions

The social democratic welfare states have shown the greatest adaptability capacity and so far have yielded the best results in terms of welfare maintenance. The conservative welfare state is under the highest pressure to reform itself because it was rooted in a type of society that no longer obtains. If and when it finally gives away its familialistic approach and reprioritizes its goals, it will be able to overcome low fertility rates, it will be better prepared to address the new family types’ necessities and perhaps, as a consequence, resistance to labor market flexibilization will somewhat reside.

The liberal welfare state – if it is to provide welfare at all – is in desperate need of innovative strategies that revive the market’s capacity to maximize welfare, which in turn requires a greater degree of state intervention in mitigating its failures and redressing unacceptable results. I would not call this a “reform” but an overall reconsideration of the desirable relationship between the state and the market in the field of social protection.