Welfare Perfomance at a Glance

Inescapable trade-offs, tragic trilemmas, or positive synergies?

After having traced the transformative dynamics of welfare reform over the past two decades, in the previous chapter, it is worth comparing welfare performance across a number of key economic and social indicators in order to gain a better picture of the extent to which certain outcomes can plausibly be attributed to reform dynamics. As has been argued in Chapter 5, three important conjectures have been advanced about the relationship between welfare efforts and socio-economic performance, that, I believe, are particularly helpful for the architecture of the argument I want to develop in this chapter. In the mid 1970s, the American economist Arthur Okun was the first to formulate what he called, a 'big trade-off' between equality and efficiency (Okun, 1975). To the extent that generous welfare states are used as the political means to reduce inequality and poverty, Okun argued that this potentially harms economic growth as a consequence of income and labour market distortions produced by comprehensive social policy provisions, labour market regulation, and progressive taxation. High levels of social spending could thus incur lower labour supply, higher unemployment, less investment in training and education, and, as a result, stagnating competitiveness.

Moving beyond Okun's dichotomy, by the late 1990s the political economists Torben Iversen and Ann Wren conceptualized that advanced welfare states were not so much confronted with an inescapable 'trade-off' between equality and efficiency but rather faced with the tragedy of what they coined the 'trilemma of the social service economy' (Iversen and Wren, 1998). The gist of it is that with the shift from an industrial to a service economy, in the shadow of accelerating economic internationalization, it has become inherently more difficult for welfare states simultaneously to attain the triple goals of budgetary restraint, earnings equality, and job growth. Government may pursue any two of these goals but no longer all three at the same time. Within a tight budgetary framework, private employment growth can be accomplished only at the cost of wage inequality. If wage equality is a prime objective, employment growth can be generated only through the public sector, at the cost of higher taxes or public borrowing (1998: 508). As international competition and technological innovation restrict job creation in the exposed (mainly manufacturing) sector, employment growth in advanced economies may be achieved either in well-paid public services, thereby undercutting budgetary restraint, or in low- paid private services, whereby earnings equality is sacrificed (see also Esping- Andersen, 1996; Scharpf and Schmidt, 2000a).

Over the past decade both policymakers and expert academics, notably Esping-Andersen, have started to rethink the interaction between economic progress and social policy: from 'trade-offs' and 'trilemmas' to Pareto-optimal 'mutual reinforcements' and synergies in even Rawlsean terms of benefiting the worst off (Esping-Andersen, 1999, 2008). Central to the notion of social investment is that the economic sustainability of the welfare state hinges on the number and productivity of future taxpayers. With a deliberate orientation towards 'early identification', social investment policy serves actively to mobilize the productive potential of citizens in order to mitigate new social risks, such as atypical employment, long-term unemployment, working poverty, family instability and lack of opportunities for labour market participation resulting from care obligations or obsolete skills. In order to succeed in the 'knowledge economy', human capital improvement through education and training, social services, and benefits, to help make the most efficient use of available human capital and avoid skill depletion, is paramount. Because it is difficult privately or collectively to insure new social risks, and as capacitating social services are not self-evidently supplied by private markets, it becomes imperative for public policy to step in for effective protection against new social risks. The social investment argument is very much rooted in the changed role of women over the past quarter century, alongside demographic ageing. As female participation is critical to sustainable welfare states in ageing societies and parenting crucial to child development, policymakers have good reasons to want to support robust families by helping parents find a better balance between work and family life. Basic income guarantees thus need to be complemented with capacitating services, tailored to particular social needs caused by life-course and family contingencies. For the rest of this chapter, I will survey the connection between economic performance and social policy provision in four parts. First, in section 2, I put the hypotheses of 'trade-off' between equity and efficiency to the empirical test of macroeconomic performance and redistribution by comparing key macroeconomic indicators, ranging from growth to inflation, fiscal balance, and public debt, and levels and trends in taxation, social spending, benefits, and services. Do generous social provision and high taxes crowd out economic growth? Is there a trade-off between the size of the welfare state and competitiveness? Or, ex negative, is there a trade-off between low welfare spending and high earnings inequality and high growth? After having addressed the alleged trade-off between the size of the welfare state and economic performance, I then turn to enquiring into distributive outcomes in terms of wage dispersion, income equality, and the risk of poverty for selected groups. Has it become progressively more difficult to correct market outcomes in terms of distributional fairness?

Section 3 surveys the trilemma of employment growth, distributive justice, and balanced budgets. Has the modern welfare state become trapped in the uncomfortable position of having to let go of one the three nodes of the trilemma? Employment performance is central to Iversen and Wren's 'service sector trilemma'. The employment rate is a key benchmark for the sustainability of the welfare state against which the success of social policy can be measured. The reason for this is simple: benefits have to be paid from the taxes and social insurance contributions received from people in work; consequently, the more people that are in employment, the more taxes and social contributions are collected. Is high employment necessarily accompanied by rising relative poverty under conditions of balanced budgets? The section examines the available data on the employment rates and levels of unemployment for men and women and different age cohorts of younger and older workers, with a special emphasis on vulnerable groups, including women, youngsters, and immigrant workers. It also surveys the incidence of parttime employment and flexible employment, and key information on wages, working hours, labour market regulation, and active and passive labour market policies.

Section 4 is devoted to a better empirical understanding of social investment synergies; first, an analysis of the extent to the social investment policy prescriptions have found their expression in welfare expenditure trends. To what extent is family servicing, together with human capital investments, related to higher levels of employment for both men and women? And is it true, as the protagonists of social investment argue, that family- and gender- friendly capacitating services are much better able to mitigate post-industrial trends of intensified economic internationalization, demographic ageing, and family income polarization between 'work-rich' and 'work-poor' households, in comparison to more traditional passive male-breadwinner household social insurance? Section 5 concludes by taking up the burning question of to what extent successful moves in the direction of social investment priorities harbour (unintended) negative consequences in terms of relative poverty and redistribution. Have the advocates of social investment, with their emphases on new social risks, gender equality, human capital, activation, and family servicing, unknowingly renounced the classic protective functions and redistributive goals of the modern welfare state? Is it true that by reallocating social expenditure from 'passive' social security benefits to capacitating servicing activation and spending in the fields of family-oriented services and education, today's poor have been left aside? Some academic observers associate increased poverty in many countries with the new policy focus on future returns from social investments, and that, as a consequence, the welfare state has of recent times become less 'pro-poor' in its redistributive profile (Cantil- lon, 2011; Streeck and Mertens, 2011). Is the social investment state plagued by perverse 'Matthew effects', with the middle class disproportionally benefiting from capacitating social services because these are generally less redistributive than income transfers (Esping-Andersen and Myles, 2009)? Together, the sections of this chapter should allow us to answer the overarching question of to what extent different European welfare regimes have been reconfigured in the direction of the social investment edifice, and with what socio-economic consequences.

At the outset, I would like to underline that the purpose of this is largely descriptive, using mainly cross-national data from the Organisation for Economic Co-operation and Development (OECD) and Eurostat as background information to the empirics of trajectories of welfare reform across the European Union analysed in the preceding chapter.¹ My aim is to render quantitative plausibility to the qualitative regime analysis of Chapter 6. I therefore continue to use the fivefold delineation of European welfare states of the previous chapter. The countries under review are presented in welfare regime clusters, covering the Scandinavian welfare states of Denmark, Finland, and Sweden; the Continental welfare systems of Austria, Belgium, Germany, France, and the Netherlands; the Anglo-Saxon welfare states of Ireland and the United Kingdom; the Mediterranean social policy regimes of Greece, Italy, Portugal, and Spain; and the new Member States of Hungary, Poland, and the Czech Republic. One caveat needs explicit mention: Socio-economic performance in quantitative outcomes follow qualitative reforms with considerable time lags. Before reforms pay off in terms of growth, jobs, and social cohesion and equality, incubation periods are generally very long. Usually it is incoming governments that reap the benefits of painful reform enacted by their predecessors. The overall aim of this chapter is to provide a comparative survey of welfare regime performance with respect to a number of key indicators for 19 out of the 27 member states of the European Union. The data analyzed, contingent on availability, cover the time period between 1997 and 2007. I have opted for analysis of change over this decade, because, on the one hand, 1997 is often associated with the return of the argument of 'social policy as a productive factor', advanced by the Dutch presidency of European Union in the first half of that year, which idea was also embraced in the European Employment Strategy that was launched in the same year. I have chosen

2007 as a cut-off point for the more obvious reason that it was the final year before the onslaught of the financial crisis that so dramatically changed social and economic conditions worldwide.