Employment performance, gender, age, and labour market governance

Reasoning from the sustainability of the welfare state, employment is the most important measure of the success of social and economic policy. The reason for this is simple: benefits and social services have to be paid by the taxes and social security contributions from those in work. The higher the share of people who are gainfully employed, the broader this funding base is. In the event of high number of long-term unemployed, pensioners, and those on incapacity benefits and early retirement schemes, spending on social security goes up while at the same time revenues fall. Is there a trade-off between welfare generosity and employment performance, as Assar Lindbeck (1994) suggests, or can welfare state generosity be made compatible with high levels of employment (Kenworthy, 2003; Hemerijck and Eichhorst, 2008)?

Service sector employment has become the main source of jobs growth in recent decades. This can be immediately observed in Fig. 7.15: today services represent a high and still growing share of total employment in EU Member States, especially for women.

The rise of services is central to the trilemma argument by Iversen and Wren (1998), introduced at the beginning of this chapter. The gist of the 'service sector trilemma' is that with the decline of industrial jobs and employment growth in

Service sector employment as % of total employment. Source

Figure 7.15. Service sector employment as % of total employment. Source: OECD.

services, mature welfare states cannot simultaneously pursue three preferred policy objectives: curtailing inequality, seeking employment growth, and at the same time pursuing fiscal constraint in public budgets. The key constraint in the trilemma derives not so much from intensified international competition, but rather from the so-called 'Baumol cost disease', whereby productivity growth in the labour-intensive services cannot follow manufacturing productivity trends (Baumol, 1967). To the extent that services-sector salaries are linked to wage development in the more productive industrial sector, following the logic of the Baumol cost disease, this will surely inhibit job growth in the labourintensive public and private service sectors, especially at the low end of the labour market. In other words, services become comparatively more and more expensive to produce. Hence, in order to stay clear of stagnant job growth in the service sector either wages in the services have to come down or they have to be supported by the public purse. While the 'service sector trilemma' is heuristic- ally useful to link employment and the welfare state, as will be exemplified below, there some important shortcomings in the analysis. A major drawback, concerning redistribution, is that Iversen and Wren merely measure inequality before taxes and transfers (see also Iversen and Soskice, 2006,2009). Hence, they ignore the most important poverty-reducing effect of benefits, taxes, services, and other benefits in kind. A second obstacle is that they perceive public services merely as expenditures with no positive effect on productivity trends in the private economy (see Agell, Lindh, and Ohlsson, 1997). In the social investment perspective, by contrast, social services, ranging across early childhood development, education and training, and reconciliation policies for working mothers, harbour positive effects not merely on levels of employment but also in terms of private and public sector productivity trends, while potentially reducing poverty and inequality. Once we recognize the positive effects of social investment on productivity, participation, and redistribution, as I argue below, there is a way out of the service sector trilemma.

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