Challenges to Modern Welfare States

The oil crises of the 1970s put an end to the favourable economic conditions that were conducive to pro-welfare expansionary paths, and both external as well as domestic challenges became increasingly evident. External pressures of economic globalization and European integration were central themes in both the academic as well as political debate. However, contrasting views exist on the theoretical link between social policy and the opening of product, labour and especially capital markets. While the efficiency hypothesis predicts a ‘race to the bottom’ in social security provision (see Swank 2010; Glatzer and Rueschemeyer 2005), the so-called compensation hypothesis expects stagnation or even expansion of welfare state efforts. Increased labour market risks are compensated for by provision of social benefits for the potential or actual losers of economic globalization (Burgoon 2001; Hays 2009).

Beyond the general phenomena of trade openness and economic globalization, the European Union (EU) offers a special case of both economic and political integration. Both the direct and indirect influences of the EU on domestic social policy have been analyzed, thus differentiating between deliberate social policy-making at the EU level (positive integration) and spillover effects from economic policy and market building to the social sphere (negative integration), often driven by the European Court of Justice. In particular, the second channel of negative integration through ‘judges and the markets’ (Leibfried and Pierson 1995; Leibfried 2015; see also Roos in this volume) has put considerable reform pressure on European welfare states. Furthermore, the unintended consequences of the monetary union in the form of credit bubbles and the fiscal constraints imposed by the Treaty of Maastricht in 1993 affected social policy in heavily indebted countries. While positive integration is limited due to institutional obstacles, more recent research has stressed the growing importance of soft governance instruments (see, for instance, Bieber 2016 on education policy), such as the Open Method of Coordination, instruments that are ‘no longer geared towards a transfer of sovereignty from the national to the EU level, but rather facilitate collaboration among sovereign Member States’ (Kvist and Saari 2014, 193).

Beyond the limited regional scope of the EU, social policy initiatives are also launched by global actors, such as the World Bank, the International Monetary Fund and the World Economic Forum (see Kaasch in this volume). Finally, the collapse of the Soviet bloc not only discredited large-scale state intervention and undercut the political legitimacy of the welfare state; it also increased the heterogeneity of welfare systems and social standards in Europe. The eastern enlargement of the EU thus reinforced competitive pressure between member states and, at the same time, limited the opportunities for a re-regulation of social policy at the European level.

Domestic challenges are arguably pressing even harder on the financial and political sustainability of advanced welfare states. De-industrialization, the rise of the service economy and skill-biased technological change have reduced wage growth, especially at the lower end of wage and skill distribution (Wren 2013). This reduction has been accompanied by a parallel unequal distribution of labour market risks. Higher flexibility requirements in the service industry, unemployment and the massive rise of female labour market participation have facilitated the rise of atypical, and often precarious, employment relationships. Politically, this trend has been supported by the dualization of employment protection legislation, that is, deregulating employment at the margins while keeping core industrial workers well protected. Most welfare states, especially in Continental Europe, rely on contributions based on full-time standard employment, which, in turn, influence the level of protection. Labour market segmentation is spreading across countries, challenging welfare states to moderate the detrimental effects on inequality in the labour market, social protection and political integration (Hausermann and Schwander 2012).

Modifications in household composition due to increasing divorce rates and changed norms for family life imply further tasks for the welfare state. Ever more single-parent households are faced with high poverty risks (Misra et al. 2012), creating the need for both reliable childcare facilities and financial support. Demographic change caused by longer life expectancy as well as low fertility rates and longer education has reduced the share of the economically active population, leading to a shrinking contribution base of social security (Meier and Werding 2014). Finally, economic structural change has transformed the party systems of advanced democracies and reduced the power resources of unions, while migration and the influx of refugees have enhanced the ethnic heterogeneity of Western societies and accelerated the rise of right-wing populist parties across Europe.

In a nutshell, domestic as well as international trends have created new social needs on the one hand and financial as well as political restrictions on the other. The next sections illustrate the reactions of policy-makers and the implications of resulting welfare state change for different dimensions of inequality.

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