Chapter 8
Post-industrial transitions: towards WS 3.0
If they are to remain vital and effective, welfare states must adapt to changing circumstances. Social and economic processes are constantly in motion, so the adjustment and updating of policy is an integral, ongoing part of welfare government. (Indeed, where programmes are not indexed-linked, changes in living costs or in patterns of compensation affect the value of benefits, tax credits, and allowances making inaction a significant policy choice.) But social and economic change sometimes takes a deeper, more structural form and necessitates policy change of a more fundamental nature. Today, in all the western nations, a paradigm change of this kind is underway.
For several decades now, the world’s advanced nations have been transitioning from industrial to post-industrial production—an economic transformation accompanied by wide-ranging changes in social, political, and cultural relations. Welfare states have increasingly had to deal with new kinds of social risk and new forms of economic insecurity as well as new difficulties dealing with the older problems for which they were designed. Adjusting to these upheavals is a challenge for welfare state governance everywhere. And although national responses vary, the evidence suggests that a common set of solutions is currently being developed: a new generation of policies that we might prospectively call ‘Welfare State 3.0’.
When the disruptive effects of these transformations first made themselves felt in the 1970s, welfare state opponents seized the opportunity to press a radical, free-market agenda, representing the problems associated with structural transition as proof that welfare state government was no longer viable. And although some of the reforms they introduced have been widely embraced—improved accountability for public agencies, for example, or enhanced choice for service users—neoliberals were more concerned to reduce welfare state government than to adapt it to new times. But the heyday of neoliberalism now appears to be passing, even in its US and UK heartlands, and government policymakers are increasingly focusing on the challenge of making welfare states fit for a post-industrial world.
WS 1.0 emerged within a specific historical conjuncture and was designed to fit a particular set of social and economic circumstances. While these circumstances continued, the welfare state was viewed as a remarkable success story, fostering broadly shared economic prosperity, creating relatively affluent middle classes, and raising the living standards of the worst-off citizens. But times have changed and the need for adaption and renewal is now a major policy challenge and a political problem for welfare states everywhere.
A changing world economy
Sustained economic growth and welfare state expansion were made possible in the post-war decades by an expanding world economy, the dominance of western manufacturing, cheap energy, a stable international monetary system, and a Fordist regime of mass production and mass consumption. They were also enabled by the framework of commercial and financial relations set up at Bretton Woods in 1944—a set of institutions that facilitated trade, funded development, and maintained fixed exchange rates while providing national economies with a measure of control over their own fates. Under this system of ‘embedded liberalism’, individual states could limit the cross-border movement of capital and currency, thereby protecting their economies from the full force of international competition. And because domestic investors, producers, and consumers had few exit options, it allowed governments to regulate labour markets and fund social spending.
Bretton Woods survived until 1971 when the US government, hard pressed by the costs of Vietnam (an unpopular war that was waged without tax raises to fund it), a large trade deficit, and recurring runs on its currency, unilaterally devalued the dollar and ended its convertibility into gold—a development that destabilized the international system and relaxed the controls that had disciplined national economies. At the same time, the expansionist phase of world economic development came to an end and a period of contraction began, marked by severe recessions, low economic growth, and high rates of unemployment—all of which adversely affected welfare state funding. When the OPEC nations doubled the price of oil in 1973, effectively ending the era of cheap energy, it plunged western economies into deep recession.
Globalization
Globalization—the integration of economic and social relations on a world scale—is driven by technological advance: by ultra-rapid transport, containerization, electronic communications, super-computers, and so on. But it is also propelled by the cross-border reach of multinational corporations, by regional trade agreements and economic integration, and by the political choices of nation-states. From the late 1970s onwards, these transnational phenomena increased in importance as governments opened their economies to international markets, removing tariffs, relaxing restrictions, and enabling free flows of capital, currency, and labour.
Post-war welfare states developed in a world where national governments could set the terms for economic action within their borders. Increased internationalization of trade, production, and consumption, together with the deregulation of financial, capital, and currency markets, have made that much less possible. Instead of being accountable solely to their electorates, governments must now seek the approval of international markets which stand ready to punish profligate social spending, high corporate tax rates, or above-average inflation. Meanwhile, EU member states are increasingly pressed to coordinate social protections and labour market policies within the constraints imposed by monetary union. The economic autonomy of individual states is thereby diminished, as is their room for manoeuvre in setting social policies.
De-industrialization
In post-war western economies the leading industries were Fordist assembly line manufacturers, employing large numbers of semi-skilled male workers to mass produce consumer durables for domestic markets. These manufacturing sectors powered economic growth, increasing productivity through economies of scale and technological advance, raising consumer demand with steadily rising wages, and increasing profits as markets expanded. The result was a sustained period of full employment, providing low-skilled male workers with secure, unionized jobs, improved workplace conditions, and an expanded range of welfare services.
By the mid-1970s, this too began to change. Manufacturing jobs moved to low-wage economies in developing nations, taking advantage of reduced transportation costs and the new freedom to invest abroad. In the industries that remained, advanced production techniques reduced the numbers of workers and placed a premium on highly skilled employees. In 1960, 35 per cent of the US workforce had industrial jobs: today less than 20 per cent do. Over the same period, the UK has seen manufacturing sector jobs fall by half.
De-industrialization—and a shift to a more service-based economy—has occurred in all the OECD countries, though its timing, extent, and consequences vary. Nations such as Germany and Sweden have taken steps to retain a modernized industrial sector focused on high-skilled, quality production. But the larger western pattern is the decline of manufacturing industry and the rise of a more skill-differentiated service sector, with major consequences for the nature of employment.
Labour markets
WS 1.0 was premised on certain labour market assumptions. Its planners assumed full employment in manufacturing and agriculture, with male workers earning a family wage sufficient to provide for dependants, a prospect of life-long employment, and steadily increasing wages. Seventy years later, few of these assumptions hold good. From the 1970s onwards, western countries experienced large rises in unemployment, the real income of working people stagnated, and an increasingly precarious labour market generated large numbers of long-term unemployed, underemployed, and ‘working poor.’ People with jobs now work more intensively for longer hours and ‘dual earner’ households have replaced the breadwinner-and-housewife model of the 1950s. Work is unevenly distributed, with divisions between work-rich and work-poor households, and large groups of ‘supernumeraries’ that labour markets fail to absorb—young people in search of a first job, ageing workers made redundant, people who have never worked. Prior to 1970, low-skilled workers could find steady, unionized jobs in industries where technological advances resulted in improved productivity and rising wages. Today, the low-skilled are often jobless or employed in service jobs with little scope for improved productivity and few employment protections.
De-industrialization has increased unemployment, altered gender patterns, and changed the skills that are in demand. Average unemployment levels in the UK went from one-third of a million in the 1950s, to half a million in the 1960s, to nearly one million in the 1970s and more than two and a half million throughout the 1980s. An economy dominated by manufacturing and blue-collar jobs shifted to one characterized by services and white-collar jobs while the gender composition of the workforce changed from two-thirds male to one-half female.
The decline of industrial production has meant that unskilled and semi-skilled unionized jobs for men have become increasingly scarce (see Figure 16). And though service industries have taken up some of the slack, the low-skilled jobs generated by services such as retail, cleaning, catering, security, and social care are less well paid, often part-time or temporary, rarely unionized, and filled by women rather than men. The result is that male manual workers have become jobless while married working-class women have entered the workforce in ever-greater numbers. In high-tech services such as finance, IT, business, and healthcare there is a premium on higher education, technical skills, and scientific training—and employees in these sectors command high salaries and fringe benefits. (Though privately-provided pension plans are becoming less common and less generous—shifting from defined benefit to defined contribution—thereby making even affluent employees somewhat less secure.) At the lower end of the market, employment is increasingly precarious and poorly paid with large numbers of workers in casual employment, with ‘on-call schedules’ and ‘zero hours’ contracts.
16. Union density, OECD, 1960–2008.
Nations vary, of course, as do policy responses to economic trends and market forces. Governments in the USA and the UK have reduced union power, deregulated labour markets, and enabled employers to pay poverty wages. The regimes of continental Europe and Scandinavia have mostly maintained trade unions as social partners, upheld minimum wages, and retained employment protections. But every economy has been subject to structural upheaval and governments have had to choose between higher levels of unemployment or larger numbers of working poor.
Gender and family
Post-war welfare states were designed to secure male breadwinners on the assumption that their ‘family wage’ would meet the needs of wives and children. And they took for granted the existence of stable families where women provided domestic labour and cared for children and elderly relatives. The unpaid welfare services supplied by housewives, mothers, and daughters were an essential supplement to state welfare and effectively subsidized WS 1.0.
Today, as more women move into paid work, as fewer men’s wages can support a family, as more marriages end in divorce or separation, and as more people set up home alone or as single parents, that supply of unpaid welfare is greatly diminished. Again, these trends have serious consequences for welfare states, especially in Nordic and liberal welfare regimes where divorce and out-of-wedlock birth rates are high. (More than half of all children in Scandinavia and the USA grow up without both biological parents.)
Of course the primary effect of women’s entry into the labour market—together with liberalized divorce laws, benefits for single parents, and enhanced social services—has been to reduce women’s dependence on men and increase their control over their own lives and careers. But with new freedoms come new risks, and these developments have created challenges for welfare states struggling to deal with the fall-out of family break-up, the needs of working mothers, and the problems of an increasingly diverse set of households.
Demography
Population characteristics and dynamics are of the utmost importance for welfare states. In the 1950s and 1960s, western nations had small numbers of elderly and large numbers of working-age people, making for a healthy ‘dependency rate’—i.e. a favourable ratio of many contributing workers to few welfare state beneficiaries. In subsequent decades, these actuarial advantages disappeared. People lived longer and the elderly population expanded, as did the numbers of very aged people. When Old Age Pensions were introduced in Britain in 1907, life expectancy was 48 years for men and 49 for women. Few people lived long enough to claim the pension to which they were entitled at age 70. Today’s life expectancies are 75 and 80 years respectively and the population of retirees drawing pensions—eligibility for which started, until very recently, at 65 for men and 60 for women—has grown dramatically. In 2009, 13 per cent of America’s population was aged 65 or older; in the UK, the figure was 16 per cent with that population group projected to double over the next 35 years.
The extension of the life course is a tremendous boon, particularly where the elderly remain healthy and enjoy sufficient resources. And it is surely one of the welfare state’s greatest accomplishments to have enabled older people to retire from work and live in relative security and comfort. But an ageing population brings increased costs and imposes heavy burdens on health and social services as well as on state pensions—especially when more retirees live alone and look to the state for care rather than to their families.
Western nations have also experienced a decline in birth rates. Women have fewer children than they did in the mid-20th century, with the result that the populations of many European and Scandinavian nations are not reproducing themselves. These trends have produced major changes in the age composition of European populations with ever-fewer workers paying for ever-more retirees. (American birth rates are above replacement level and immigration is high, resulting in a growing population.) When commentators talk of a demographic time bomb affecting pensions, entitlements, and healthcare, it is these trends they have in mind.
Migration and cultural change
Social provision meets less resistance in societies exhibiting high levels of social solidarity and fellow feeling. Small, homogeneous nations—such as Norway, Sweden, and Denmark—tend to have more generous, more inclusive welfare states than do large, heterogeneous countries such as the USA. It matters, therefore, that in recent decades western nations have experienced large waves of immigration and have become more ethnically and religiously diverse. In the early 1990s more than 10 million EU residents were nationals of non-European states, and a further 5 million were EU nationals who had moved between member nations. Even Sweden is becoming more diverse: 12 per cent of Swedes are now foreign born and about a quarter of those under 18 are immigrants or the children of immigrants. As a result, the solidarities upon which welfare states rely are becoming more difficult to sustain. Consider, for example, how the claims that EU migrants make on national welfare states have become a source of political tensions in the UK, where stories about East European migrant workers and ‘benefit tourists’ have scandalized the public and fuelled anti-EU sentiment.
In other respects too, welfare states now operate in cultural settings that differ from those of the 1940s and 1950s. Individuals born in the post-war years came to have values, tastes, and expectations that bore little resemblance to those of their parents who lived through the Great Depression and World War II. Decades of job security and rising wages produced relatively affluent middle classes for whom collectivist protections seemed less necessary and who expected higher quality services and benefits. Where welfare states failed to keep up, affluent workers turned to the private sector; becoming less supportive of welfare institutions and less willing to pay taxes to fund them. (As US House Speaker Tip O’Neill complained: ‘We in the Democratic Party raised millions out of poverty, and made them so comfortable they could become Republicans!’) Only where welfare states took care to sustain high-level benefits and quality services did they retain the crucial support of their middle classes.
American industrialist Henry Ford wrote in 1922 that ‘Any customer can have a car painted any color he wants so long as it is black.’ Over time, the basic, standardized tastes that Fordism presupposed were replaced by the more varied tastes and lifestyles of a more differentiated society of individuals. Where depression, total war, and post-war austerity had taught ‘we’re all in this together’, decades of peace and prosperity saw the re-emergence of social fragmentation and a less collectivist ethos. This intensified individualism was fostered by consumer capitalism: by its market differentiation, its advertising, and its stress on lifestyle choice and expressive individuality. But it was also an effect of welfare states, which reduced the dependence of individuals on family and neighbours and provided them with autonomy and choices they would not otherwise have. Paradoxical as it seems, the welfare state has been a powerful vehicle for the spread of individualism.
WS 1.0 was designed to meet the needs of ‘the industrial worker’, ‘the common man’, and ‘the average family’. It operated at the level of national aggregates—the national economy, macro-economic processes, the population as a whole—thereby deriving the benefits of scale, of large-scale risk pooling, and of uniform administration. And it addressed itself to ‘employees’, ‘families’, ‘the unemployed’, and ‘old age pensioners’ on the assumption that these were relatively homogeneous groups that had similar needs and preferences. The post-war welfare state was premised on the possibility of aggregation, of common experience, and of collective address.
The increasing importance of individualism and social differentiation—and the powerful processes of disaggregation that they bring about—has brought these assumptions into question. So too has the fragmentation of social classes; the decline of trade unions and political parties; and the destabilizing of families and communities. The category of ‘the unemployed’, for example, no longer refers to a relatively homogeneous group of out-of-work male breadwinners. It now includes the underemployed; part-time or temporary workers; people who stay in school or retire early because they cannot find work; people who are deemed disabled but who are really unemployed; the long-term unemployed; and those who are temporarily out of work as they move between jobs. One-size-fits-all benefits become increasingly inappropriate, as do the associated techniques of comprehensive risk pooling and mutualization. Social programmes have had to become more individuated and better adapted to the situations and biographies of specific individuals. Long-term processes of collectivization are being countered by new processes of individualization—and welfare states are caught in the crosscurrent.
New social risks
Ageing populations raise the cost of pensions, healthcare, and social services. More joblessness increases demand for benefits and reduces revenues. Family break-up and lone parenting increase the number of women and children in poverty while reducing the private welfare provided by family networks. And so on. But serious as these cost pressures are, a more fundamental difficulty is that today’s precarious labour markets and unstable families generate a set of new social risks (NSRs) that unreconstructed welfare states fail to address.
Welfare states are elaborate and effective risk-management machines but today they encounter risks for which they were not originally designed. WS 1.0 addressed labour market risks by promoting full employment and providing social insurance, with social assistance for those who fell through the cracks. New phenomena such as long-term joblessness, precarious employment, and destabilized families reveal the limits of social insurance and change social assistance from a marginal form of welfare to an increasingly central one. At the same time, older social risks such as mass unemployment have reappeared in the wake of the global financial crisis, testing the coping capacities of standard social insurance. The challenge that welfare states now face is to develop policies that address the new social risks while renewing their capacity to manage the old ones; a challenge that the neoliberal reforms of WS 2.0 did little to meet.
So what exactly are these new social risks? Whom do they affect? And what are the new policies designed to deal with them? One set of NSRs stems from the dualized, precarious character of contemporary labour markets. Long-term unemployment and social exclusion; part-time or temporary work that brings insufficient security; career interruptions that reduce pension entitlements; having one’s skills become obsolete in mid-career; and being ‘working poor’ (i.e. full-time employed while earning poverty-level wages) are all examples. A second set—resulting from changes in family forms, gender relations, demography, and migration—includes being a single parent; being a divorced spouse; a child living in poverty; a dual-earner couple or lone working mother experiencing difficulties obtaining childcare or balancing work and family life; the very elderly in need of intensive support; and immigrants experiencing social and cultural exclusion.
The people most affected by NSRs are poorly organized, do not belong to trade unions, have little political power, and are ill-served by both WS 1.0 and WS 2.0. And the hazards to which these groups are exposed include marginalization and social exclusion as well as impoverishment. Welfare states are increasingly facing large groups who are disconnected from mainstream social life as well as from economic opportunities.
Towards WS 3.0
The more radical reform proposals prompted by the NSRs—a global tax on capital; a guaranteed minimum income; stakeholder schemes that provide a capital endowment to every child; the creation of a European welfare state; the re-establishment of Bretton Woods—have gained little traction in today’s political climate, though they hold out new horizons of possibility and act as vital reminders of what might be achieved given the support of powerful social actors or the effective mobilization of popular reform movements. Instead, the themes that have come to dominate the mainstream policy agenda are social investment (making social policy a productive factor by enhancing human capital, improving productivity, and increasing labour market participation); individuation (adopting more varied, more customized interventions that better fit the needs of diverse groups and individuals); and gender-sensitivity (promoting policies that cater to the specific needs of women and children); together with the ongoing concern to ensure the future solvency of pensions and healthcare.
The leading form of social investment—now the official aim of welfare regimes everywhere—is known as labour market activation. Instead of a passive welfare state that pays for long-term unemployment and in effect funds social exclusion, activation policies aim to provide people with the support they need to move back into the labour market and to build ‘social bridges’ enabling non-standard jobs to lead to more sustainable careers. At the core of these policies is a concern to increase human capital, to enhance the skills and employability of individuals, and to remove obstacles that stand between them and employment. Instruments currently in use include: continuing education; training and retraining; skills development; work experience programmes; job search assistance; job creation schemes; and the provision of public sector employment. A further, related measure is the ‘Earned Income Tax Credit’ (EITC) which subsidizes low-paid employees in an effort to lift the working poor out of poverty. EITC has been adopted in the USA and the UK with some success but other nations have been reluctant to adopt it lest it subsidize unproductive employers (as Speenhamland did in the 19th century) and reduce workers’ incentives to upgrade their skills.
Post-industrial security
As well as moving people into work, welfare states have had to adapt their arrangements to fit reconfigured labour markets that no longer resemble those of WS 1.0. Instead of making social insurance available only to workers in continuous full-time employment, the new aim is to make social security more flexible and extend it to people in non-standard contracts of employment. By offering insurance cover and employment protections to part-time and temporary workers (or to job-sharers) flexible labour markets can be rendered less precarious and insecure. And these ‘flexicurity’ arrangements make it more feasible to relax employment regulations and facilitate fixed term employment contracts, thereby encouraging job creation. The new guiding principles are flexibility and individuation: offering individuated assistance rather than uniform, one-size-fits-all provision.
Labour market and demographic changes have also put pension reform on government agendas everywhere. To adapt to today’s varied and non-standard employment patterns, pension schemes will have to become more inclusive, enrolling part-time and temporary workers and covering individuals (overwhelmingly women) who provide unpaid care or take career breaks to care for children and relatives. At the same time, efforts are being made to improve the actuarial standing of existing schemes to deal with demographic projections and worsening dependency ratios. Healthcare and social care costs are similarly affected and are also under intense scrutiny.
Pension reform is highly political and all the major reform options encounter strong opposition. The retirement age could be set higher, which would require workers to contribute for longer and to draw benefits for fewer years. This option would produce immediate, large savings but all of its costs are imposed on older workers, most of whom want to retire as soon as it is economically feasible. (The statutory retirement age in much of Europe is currently 65 but the average real retirement age is 58 or 59.) An alternative would be to increase contribution levels across the board—which would hit low-paid workers—or to make higher-earning employees pay more: e.g. by removing the cap on earnings liable for contributions or making contributions more steeply progressive. Cutting pension benefits is a third option, but in many nations the elderly rely on pensions for their basic income. In the USA, for example, those in the bottom 40 per cent of the elderly population get 83 per cent of their income from social security.
Contemporary social policy is adapting to changing family forms by recognizing same-sex partners, providing support for single parents, and improving social services for the elderly. But the major thrust of current policy change is the development of more women-friendly approaches that enable more women to participate in the workforce (thereby adding to welfare state revenues and reducing dependency rates) and supporting working women’s ability to raise children and have a satisfying family life (thereby upholding fertility rates and reproducing the workforce). Women-friendly policies include support for working mothers and those with care responsibilities; pension credits for child-rearing; paid parental leave; affordable childcare; and provision for work absence when children are ill. Social services for the elderly are also women-friendly since it is mostly women who would otherwise provide unpaid care. The expansion of social services for the poor, the young, the old, and the excluded are also possible ways of addressing NSRs.
NSR reform and welfare regimes
Programmes addressing NSRs have developed at different paces in different nations—despite the Lisbon Strategy on economic reform and social cohesion which encouraged EU member states to coordinate reform efforts. The Nordic nations already have highly developed policies for women and active labour market policies. Sweden has had an active labour market policy since the 1950s, offering retraining, assistance with job placement, and, as a last resort, public sector jobs. (More than 25 per cent of the Swedish workforce is employed in government or public sector jobs.) By contrast, Germany’s welfare state, like that of other conservative regimes, continued until recently to bias its support towards male workers; to exhibit low labour force participation rates and low fertility; and to do little to address the risks associated with unemployment and family change. Liberal regimes have done more than the conservative regimes in this regard though some of their policies—most notably ‘workfare’—have tended to be more disciplinary than protective. With respect to pension reform, the UK is raising the age of retirement from the long-standing thresholds of 65 (for men) and 60 (for women) up to 68 by the middle of 2030s, by which time the gender differential will be phased out. In the USA, the age at which full Social Security pension benefits are available is set to rise from 65 to 67, though partial benefits can be taken at age 62.
Some of this variation between regimes is an accident of timing. The shift to post-industrialism occurred earlier in the Nordic nations, at a time when welfare states were still expanding and could more easily adapt. Other nations found adaptation more difficult because NSRs emerged in a period when their welfare states were undergoing retrenchment. More generally though, the pattern of national response to the NSRs maps onto the familiar pattern of regime variation described in Chapter 5.
The politics of welfare reform
States exercise power but they also solve problems. And the effort to shape a third generation welfare state is an example of how states adapt to change and learn from prior experience. But even when technical policy solutions have been effectively developed, political difficulties stand in the way of change.
Long-established welfare programmes have created constituencies of support with powerfully vested interests and a settled expectation of retaining them. The result is that insiders entitled to benefits are pitted against outsiders who are not. In many nations today a majority of the electorate prefers to preserve the current welfare state rather than reform it to better serve outsiders and future generations. Compounding these difficulties is the absence of short-term electoral rewards for political parties that seek to make necessary but painful long-term adjustments; and the fact that some of these changes will need to be supra-national.
The post-war welfare state was created with the support of powerful social movements amidst a worldwide crisis of capitalism and democracy. Today, the crisis is a low-intensity one, with poorly organized groups experiencing the worst of it. The challenge for governments everywhere is to carry through future-oriented changes and create reformed welfare states that effectively address contemporary risks while simultaneously enhancing economic efficiency. Well-adapted, high functioning welfare states are essential for modern capitalist democracies but the political challenges of building them can hardly be underestimated. And the more fractious and dysfunctional our polities become, the more difficult it is to assemble the coalitions and compromises upon which successful social policy depends.