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The Welfare State in Crisis?

Explore the impact of globalization, demographic shifts, and societal transformations on welfare states. Learn how different welfare state models face unique challenges and discover the keys to ensuring financial sustainability in an ever-evolving landscape.

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The Welfare State in Crisis?

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  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

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