Lecture 4: Recalibrating the Welfare State

Recalibrating Europes welfare regimes

Peter Flora (1986)=> growth to limits=> predicament of Social Policy in Europe:

Programmes introduced during the trente glorieuses (45-75): reached max. extension=> coverage AND generosity

Financial Tensions through this growth to limits:

increase deficit and public debt

accrual of "automatic" entitlements often regarded as property rights

gradual loss of overall policies flexibility

Combination with other endogenous and exogenous changes:

rapid ageing

employment growth in the service sector

increasing pressures induced by globalization and economic integration and Monetary Union)

All of these lead to => Permanent Austerity:

o the status quo less sustainable
o institutional reforms more urgent , but seem to require quantum leaps in terms of adaptability

Likely to lead to a silver age:

Welfare of citizens a priority but balanced with concerns about intl competitiveness and cost constraint
Issue of Terminology:

Unhelpful to think in negative and reductive terms=> e.g. cuts and retrenchment=> more neutral expressions
Modernization (a term proposed by European Commission) (EC 1997)

Modernisation (97)

Reconfiguration (98-99)

Recalibration which includes

o Rationalisation: modification of existing programmes in line w/ new ideas on ho to achieve set goals
o Updating: specific actions to respond to new social needs

Recalibration&reconfiguration: existence of constraints emerging from domestic&external pressures

Further Dimensions of the concept of Recalibration:

Functional Recalibration=> social risks around which welfare provision has developed over time

Involves acts of rebalancing both within and across the established functions of social protection

From passive compensation to secured activation=> (welfare to workfare)=>!comp.&"budget pressure

Promotion of new benefits and services for new risks typical of other phases of life cycle

Poverty amongst children=> dangerous LR effects=>"education=>" HC=>"income&!unemployment

Single Mothers

Containment of old age protection=> requires re-writing the contract between the generations

Principal Dynamic=> Role of Women in the Market

High rates of fertility and participation may be compatible=> But this requires:

Promotion of broader equality&gender equality=> redistribution of care activities

Between genders

Between HH and the state

Distributive Recalibration => concerns recalibration of welfare between social groups

Labour Market Component=> labour market segmentation=> insider/outsider

Overaccumlation of insurance benefits on insiders (multiple per HH) and lack of protection of outer

Transfers have lost their original rationale => simply become sources of inequity

Generational Component: danger of elderlys pension crowding out youngers resources(!retirement age?)

Normative Recalibration: symbols, norms, values&discourses

Problem: gap between broad value premises and policies we now observe=> increasing

Before:

Focus on protecting the aged, sick and unemployed from poverty, social and political marginalisation

Social rights protection

Now:

! focused on work-related values & aspirations (learning, entrepreneurship, division of labour in family)

Guaranteeing social status and personal fulfilment

Social opportunities guarantees

Demographic Dimension=> requires reform of pensions in fair way

Intergenerational Equity: implies transition costs of population ageing be shared by young and old

Intergenerational Justice: change in status quo to the advantage of worst off in both retiring&labour

Requires casting a reform agenda as a win-win project: justifiable in terms of its underlying value premises

Politico-Institutional: striving towards a new state governance setting

Reconfiguring division of labour between levels of government in WS functions=> multi-level interactions

Decentralisation: !competitiveness and ! social solidarity:

Tailor active measures to regional Labour market conditions

! links between enterprises, educational institutions, social services=> generally all stakeholders

EU=> supranational social regulation (structural funds): national policies taken a semi-sovereign character

Actors of Social Policy making the new system of governance

Network governance=> capable of including outsiders

Decentralisation: ! competitiveness and ! social solidarity

Employment Traps:

Poverty Trap: benefits are cut when people ! their disposable income

Inactivity Trap: (Continental regimes)=> high level of benefits relative to earning capacity of low-skilled workers

Dilemma:

Providing tax credits and help overcome inactivity traps but they will create poverty traps for poorer
Scandinavian Welfare State:

Characteristics:

High-quality public social services => devote more to women, children active labour market policies

Outperform everybody else in terms of employment

Structure of System:

Social protection is a citizens right => everybody is entitled to the same basic amount

Wide array of public social services and ALMP => sustain high participation rates

General Taxation=> dominant role in financing

Integrated Organisational System=> provision of services under responsibility of public authorities

Unemployment insurance is the only sector substantially outside (Trade Unions)

Seems already well-calibrated=> i.e. able to respond to new risks and needs

Presence of a basic income guarantee=> protects against marginalisation and for broken careers (women)

High rates of labour-market participation=> attenuate strains on pension schemes

Nevertheless, strides in Recalibration

Functional Recalibration=> move from passive compensation to active promotion of employability

Attempt to ! private sector employment and " public sector employment

Although difficult to ! private sector if wage structure rigid

Labour Market Case-Study: Denmark=> gone the furthest down the activation road

Individual Action Plans=> ease occupational re-integration => especially for young unemployed

Subsidised Employment

Maximum Period of Eligibility=> decreased from 9 to 4 years (gradually)

Distributive:

! investment in youth training=> ease transition from education to work

Pension System Case-Study: Sweden:

Move from a defined-benefit to notional defined contribution schemes (roughly actuarially neutral)

Employees contributions => recorded in indie account => earns interest (tied to growth of wages)=> at
end transformation coefficient=> converted to an annuity based on life expectancy=> paid out

Notional=> contributions are credits (rather than fixed assets)

Distributive effect=> operates on the basis of a fixed relative position

Balance between contributions/benefits holding constant ratio of per capital earnings of those in working
population (net of contributions) to ratio of earning per capita of retirees (net of taxes)

Normative: Stronger emphasis on productivism

However=> pragmatic solutions=>deep-rooted WSism=> no questioning of principle of universalism

Further changes will require further chaning of this

Politico-Institutional:

Decentralisation => esp. in Denmark strengthening activation (see above) (14 regional councils)
Anglo-Saxon Welfare State: UK&Ireland

Characteristics:

Low overall level of taxation and low level of public secotr employment

Structure of the System=> general social security retrenchment (Thatcer&Major)

Means-Tested benefits and of short duration and flat-rate (Baveridgean)

Generally limited level of protection

Highly integrated=> entirely managed by public-administration (social partners only marginally involved)

Labour market unregulated=> wage dispersion is high BUT private sector employment is high

Also with low tax-wedge (difference between labour costs for employers and employees diposable income)

Labour composition:

Decline in Fordist Jobs (manufcaturing in middle range of earnings distribution)

Increase ins sectors like finance, business (high wage) and services where pay is low

Functional Recalibration=> Blair=> Make Work Pay => New Deal

It is a new contract=> state pledges to offer opportunities, unemployed promise to take the jobs

Mixture of incentives for skill enhancement and job-search compulsion

Personal Adviser: assigned to any new entrant => action plans

If the new entrant refuses => access to benefits made more difficult

Tax Credits=> e.g. Working Families Tax Credit: guaranteed family w/ full-time worker minimum income

Avoids stigma (it is run through the tax system) and establishes a direct link with wages (work>welfare)

Other Example=> Childcare expenses are tax-deductible for lone parents&have means-tested

Clasen=> excessive reliance on sticks rather than carrots

=> workers that remain outside, poverty continues to remain a persistent threat

Distributive Recalibration:

Introduction of minimum wage

Conservative curtailing the public supplementary pension scheme

Consolidated public finances but triggered massive increases in poverty&inequality among the aged

Blairs Solution=> Stakeholder Pension (compulsory for employers)

Provides minimum income guarantee for pensioners

Partially designed to cater for people in insecure employment

Institutional: gvt has shied away from corporatist exchanges

Blair stresses responsibility of individuals and favour business in delivery of training etc.

Problem: lack of competitive, specialisation in production => little overall investment in training

Normative Recalibration => Opportunity Promotion vs. Rights Protection

LT strategy to tackle poverty=> Opportunity for All=> rejects pursuit of egalitarianism through intervention

Accepts greater inequality if this is necessary for raising standards at the bottom (absolute, not relative)

=>radical redefinition of WS: not a safety net for unemployed; rather enabling re-entry into the labour market

Sustainability:

Blair has had self-imposed constraint => no ! in tax

=> up to now, financed through stealth taxes and spending

Is it politically feasible? Will it be adequate for the tasks at hand?

Ireland => departed from neoliberal due to unemployment rate that reached 18% in 87

Institutional: introduce wage bargaining in a more coordinate way (not decentralised, market-led approach)

Social partners agreed on wage moderation in exchange for tax cuts and control of inflation

competitive Corporatism

Normative=> are moving towards an understanding of relative inequality (not just ! absolutes)
Continental Europe

Characteristics&Structure:

Bismarckian tradition normatively supported by traditional family values (single breadwinner)

Only Netherlands and Switzerland have hybradised it somewhat=> little sign of recalibration elsewhere

Medium level of taxation

Trade Unions and employers association actively participate in governing insurance schemes

Often regarded as the villain=> fairly high costs and inactivity trap due to:

Generosity=> replacement rates, benefit duration, coverage is highly inclusive

Passivity nature of benefits

Contributory financing (70% in Germany through payroll taxes)

High minimum wages

Consequences:

Discourages firms from continuing to offer traditional Fordist Employment

Incentives for subsidised early exit from the labour market

Hampered !in private service employment (high wages) but also no public sector (budget constraints)

! unemployment => ! social charges => ! unemployment => negative spiral

Unable to promote arangements allowing women to combine work and family

=> danger of a bad equilibrium=> low female employment and low fertility

Unemployment Trap (in addition to inactivity trap):

Employers must bear the total burden of SS=> productivity of low-skilled workers not sufficient to
earn the cost of their labour back for their employers

Barriers to Recalibration: deep cuts are needed and opposition of trade unions: Nevertheless some improvement

Normative: acceptance of need to include women in labour force; influcen of European Employment Strategy

Functional: ! spending on ALMPs and

Expanding female employment: most countries have been half-hearted

Employment Subsidies=> ! hiring of unskilled by exempting employers from social contributions

! employment without having an American-style surge in poverty and pay for themselves (i.e. " UB)

BUT:

Employers tempted to substitute LT unemployed for ST unemployed (to not have to pay)

Could harm Employers incentives to upgrade skills

Pension=> tax credits for parents who raise their children & equalised retirement age

Distributive:

Pension=> generally slow and incremental

Attempts to limit volume of beneficiaries moving towards early exit

Changes in indexation

Building up of advance-funded reserves within existing PAYG => used for when baby-boomers retire

Germany=> encourages private occupational pensions thru use of tax advantages

BUT=> no attempt to harmonise civil servants pensions with general scheme

Political-Institutional:

Move away from contributions to general taxation (88=> France RMI (Minimum insertion income)&Health
care expenditures financed through general taxation

France=> Parliament obliged to vote every year on social security budget

Gvt able to regularly adopt measures => no negotiation

Netherlands Success in resolving Welfare without work => policy agenda around jobs rather than transfers

Long Term Strategy consisting of:

Organised wage restraint

Allowed existence of services that were previously priced out of the labour market

Restriction of access to (and curtailing misuse of) sickness insurance

Promotion of Part-Time (PT) Work=> earnings between full and part-time narrowed to 7%

Accompanied by normative recalibration=> status of part-time work changed

Dutch dont recruit part-time to cut costs; rather to ! flexibility

In HH=> Wage restraint offset by ! in easiness and " in stigma of parti-time work

Working Hours Act (00): PT equal right to equal treatment in all areas negotiated by social partners
Southern Welfare State:

Characteristics => Bismarckian in terms of income transfers; Beveridgean in health care (universal NHS)

Tend to be pension-heavy with medium taxes

Italian system took off earlier=> reflected in higher spending and taxation level

Family acts as the welfare broker for its embers

Occupational Syndrome

Public services unevenly distributed and insufficient/inefficient

Sharp divide between insiders and outsiders

Challenges to Recalibration:

External adaptational pressures (EMU); globalisation and a particularly adverse demography

Policy Objectives of the 90s and beyond:

Functional: rationalisation of social protection => provision of means-tested safety net

Amato government=> established a minimum income guarantee

Little work done in desegmentating labour market (ITA), better in ES

Portugal=> one of the lowest unemployment rates (due to ALMPs)

Social market for employment=> insertion enterprises and local initiative targeted to most vulnerable

Distributive:

Cost Containment => Pensions decreased for historically privileged occupational groups

Dinis Pensin Reform (95)=> completely changed the pension formula => quasi-actuarial

Levelling off of certain rights=> e.g. retiring after only 20 years of civil service

Instituional:

Slowly moving toward general taxation

Decentralisation=> danger of ! territorial disparities within countries (esp. in Health Care)

Normative:

Novel discourse on current state and future prospects=> more to children, less to fathers

=> should aim less at indemnifying than at promoting peoples opportunities

Measured against the background of capitalism vs. communism=> clear indication of normative reca
Why the Differences?

Developmental Differences:

Timing of previous reforms

Degree of maturation

Aggregate levels and speed of economic and social well-being

Deliberate Institutional Configurations => i.e. the specific recalibration agenda that was emerging
Path Dependence:

History of WS reforms:

1970s=> Combatting staflation

1980s=> policy attention shifted towards issues of economic competitiveness

Now=> 3 forces => globalisation, Europeanisation and demography

Solutions will be path-dependence => radical change institutionally ruled out

Rather=> institutionally bound policy innovation

Scandinavian solutions no longer available=> were done in 70s under Keynesian strategy

Under the shadow of EMU this is no longer possible

BUT=> be creative=> e.g. Netherlands=> gvt teamed up with private employers to subsidise expansion of
childcare facilities

Common Threads

Insight that social protection is a productive factor=> social justice=> economic efficiency

To this end=> better to pursue changes with social partners

Importance of stressing employment as the principal channel to achieve effective citizenship

Important to also care for unactivable=>avoid them being on a merry-go-round (activation-unemployment)

! emphasis on supply-side