The welfare state and globalisation are compatible / [Alfred Pfaller] - [Electronic ed.] - Bonn, 2001 - [2] Bl. = 22 KB, Text . - (Policy information / International Policy Analysis Unit ; 2001,1)
Electronic ed.: Bonn : FES Library, 2001

© Friedrich-Ebert-Stiftung

Text also available in German language


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Uncompetitive, because too costly?

„The welfare state as we know it can no longer be maintained in the age of globalisation." This argument meets with wide acceptance today, by some with regret, by others with undisguised satisfaction. The argument refers to the pressure on costs deriving from heightened international competition. The welfare state, it is claimed/as-sumed/feared, makes labour so expensive that the relevant products or the relevant production location cannot survive in international competition in the longer term. Other places, so the argument goes, are already producing at lower costs, or else countries are increasingly trying to undercut one another in the battle for market shares. The locations with the lower welfare costs set the standard which the others will have to adapt to sooner or later.

If one accepts this line of argument, it follows that countries have two options.

  • They give way to the pressure of competition, cut the costs of the welfare state and thus safeguard the competitiveness of the national labour force on the internationally disputed markets. The upshot: lower social security.

  • They do not give way. As a consequence, many jobs are lost, simply because they are no longer competitive. Companies which keep their production facilities in the country offset this by rationalising jobs away wherever they can. The upshot: increasing unemployment causing in turn the erosion of the welfare state.

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High productivity does not protect against undercutting

Welfare state supporters in high-wage countries often use the following argument to counter this: we shall offset the high costs by high productivity and high product quality. We are able to do this because of our high level of training, our sophisticated infrastructure, our high density of production (which creates „economies of scope"), our responsible trade unions, our relatively peaceful industrial relations (a consequence of our highly developed welfare state) and our more than hundred-years old „culture of productivity". Developing countries cannot compete with these advantages, but have to offset them with low wages, low real estate prices, low environmental standards, etc.

It is true that all this has in the past made possible high wages (and non-wage labour costs) in the countries of the „North", even though they were facing international competition. But, among other things, „globalisation" means that such advantages spread geographically, maybe not everywhere, but nevertheless to many regions with a massive labour surplus. A major reason for this is the increasing possibility for companies to organise manufacturing and distribution across national borders („transnationally"). When they shift production to a different location, they also transfer their manufacturing expertise and management skills. The upshot: the previous production advantage no longer protects the „Northern" high-wage countries as much as it once did. The statistics may nonetheless keep attributing to them a productivity lead because large numbers of their low-productivity jobs are shed and only the highly productive ones are left.

The extent to which globalisation has already advanced in terms of heightened competition between different locations can be regarded as an open question. There are some indications that the situation is not yet all that dramatic. But the trend towards greater competition on costs (or even just towards a greater ability to black-mail the employees) cannot be categorically denied.

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Even structural adjustment ultimately provides no protection

A further argument which plays down the dangers of globalisation refers to the changes in production structures which have always resulted from changes in the international division of labour: the „North" hands over a few lines of production to low-cost „Southern" competitors and concentrates on those activities in which the latter – despite globalisation – cannot compete (high-tech, skills-intensive production and services).

But this – per se correct – point does not devalue the argument about cost pressures, for two reasons:

  • The high productivity sectors intended as escape routes may prove to be too small to absorb displaced „Northern" workers on a sufficient scale. All the industrial countries are moving into these sectors and jostling for position. High-tech plus local services (education, health, legal advice, administration, etc.) may be an option for the Greater London area, but not for the whole of Britain and certainly not for the whole of western Europe. So low-wage competition can very much represent a threat to parts of the workforce in high-wage countries.

  • Structural adjustment does not offer protection against competition amongst the high-wage countries to undercut one another.

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The key point:
social protection is possible at any wage and productivity level

Gross labour costs can only be as high as the market for goods and services allows. If foreign competition puts pressure on labour costs, then adjustment must occur in some form. That may be via the exchange rate. But it may also be that gross wages have to stagnate or even fall for a period in some areas.

However, the welfare state has nothing to do with the absolute wage level, and everything to do with the distribution of the gross national product (or more correctly, the total wage sum permitted by the market) between three components:

  • direct consumption

  • provision for old age, illness, etc.

  • solidarity with those on lower incomes.

The proportions allocated to provision for oneself and solidarity with others go into the welfare state, with provision for oneself accounting for the lion’s share. The proportion to be diverted for this purpose is a political decision, not one dictated by the market. In principle, high proportions for provision and solidarity can even be diverted from low incomes. But correspondingly little will then be left over for direct individual consumption.

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The welfare state can be made „globalisation-proof"

There are various mechanisms whereby the gross wage permitted by the world market is distributed amongst the various uses. In many continental European countries (Germany, France, Italy, Belgium, Austria and others) the most important mechanism is that of wage-related social security contributions which are shared by employers and employees. The demands made on the money allocated to these contributions derive from the needs of the various social security systems (pension, health insurance, unemployment insurance). The key factors defining these needs are

  • the development of the age composition of the population,

  • the cost trends in the health sector,

  • the development on the labour market.

For the process of wage-setting, these are independent variables. If they are not to be questioned (so that no-one has to be ill just because he/she earns little, or so that no-one has to suffer a drastic cut in his/her standard of living in old age), there is only one sensible conclusion: the wage available for direct consumption should be treated as a residual figure. The amount to be negotiated between employers and organised labour should be the „total hourly wage", and not merely that arbitrary sub-set which is called the „gross wage" in some countries (e.g. Germany). The „total hourly wage" derives from

  • the competitive situation on the product markets („globalisation" may play a role here),

  • and the bargaining power of labour, which has much to do with the scarcity of manpower.

Once the - individual and collective - preferences with regard to the provisions to be made for the various risks of life and the degree of solidarity to be afforded for the less well-to-do (as well as with regard to leisure and the freedom from excessive mobility) have been taken into consideration, a net wage is left over. It would have to be adjusted to the changing „needs" of the social security systems.

However, in reality net wages are mostly not adjusted but defended. If at the same time social security costs are expanding (e.g. because of adverse demographics), competitiveness might indeed be affected. Of course, in the individual case, the claim of „excessive" labour costs may just be part of the usual battle noise accompanying wage negotiations. But the point here is that in the bargaining process labour loses sight of the – essentially political – decision about the distribution of the total wage and that it perceives social-security contributions as being not part of the wage. Employers also view them as „non-wage" labour costs. When the conflict over labour costs heightens, it is primarily the expanding „non-wage" part which is seen as endangering competitiveness. The „welfare state versus global market" battlelines are drawn. Yet the real problem is the rigidity of the net wages in the face of – largely unavoidable – rising welfare costs.

A system which uses general taxation to pay for provision and solidarity, as the Danish one, is more resilient in the face of globalisation. Here, the basic decisions on distribution between consumption, provision and solidarity are clearly taken politically. The costs for provision and solidarity are explicitly deducted from the incomes of the individuals. Since, in view of international competition, companies can be taxed only to a certain extent, increases in the funding needs of the social security systems typically have to be financed by taxes on household incomes or on consumption (value-added tax, energy tax, etc.).

Another way to immunise the welfare state against globalisation is to essentially privatise provision for the risks of life and to leave only solidarity to be organised by the state. This is most clearly possible with regard to old-age pensions (the largest single position of the total welfare-state bill), because here the level of benefits depends, to a very large extent, on the amount of the contributions paid into the system. Privatisation, therefore, will not diminish social protection. But it will defuse the conflict over „non-wage" labour costs. The Swiss pension system shows how private provision can be combined with welfare-state solidarity. There the elderly are protected against poverty by an egalitarian basic pension, which is contributed to by all citizens (not only employees). But keeping up one’s standard of living after retirement requires a private top-up insurance.

The demographic transition makes provision for old-age income - regardless of the pension system - ever more expensive and thus reduces the income available for immediate consumption. Therefore it would be especially important to stay clear of the competitiveness issue. Ultimately, pensions are not at risk as long as people opt to make provision. But the unnecessary competitiveness debate puts at risk the solidarity dimension of the welfare state, i.e. the implicit and explicit subsidies to families and to those on low income (important e.g. in public health insurance).

„Immunising" social benefits against the pressure of competition poses no problem in economic terms. But in quasi-corporatist states like Germany it is very difficult to alter existing institutions, since every entitlement, no matter how petty, tends to be defended. In political terms, therefore, this type of welfare state remains susceptible to pressures from globalisation.

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The welfare state and full employment

So far, however, the pressure on the continental European welfare states has come less from globalisation than from mass unemployment. This form of the welfare state is mainly funded by contributions linked to regular employment contracts. Thus, it relies more on full employment than other forms of the welfare state. Mass unemployment deprives it of people paying in and increases its outgoings.

Mass unemployment is not a result of globalisation. It is the effect of 25 years of sluggish economic growth combined with a failure to adapt the labour markets to this central condition.

When reflecting on how to safeguard the welfare state, one should therefore focus on:

  • adapting the labour market to sluggish economic growth, or

  • regaining high growth rates, and, of course,

  • adapting the supply of manpower to the changed structure of demand.

These are questions which involve a separate discussion. But, to begin with at least, globalisation is a secondary problem here which tends to distract attention from the real questions.

Once again, the key factor blocking a socially acceptable adaptation of the labour market is political in nature.

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Nevertheless, globalisation does make life more difficult for the welfare state

A „globalisation-proof" welfare state is feasible. But it requires a big political effort the success of which is not a priori guaranteed. Still, globalisation does create a less favourable economic environment.

1. Increased mobility of capital, coupled with increased mobility of highly skilled labour, results in a redistribution of the tax burden.

The consequence is greater injustice, but for the foreseeable future no lack of funding for the welfare state. Even in the past, the welfare state has not tended to be a mechanism for redistribution from capital to labour or from the rich to the poor. In simplified terms, it was always a massive redistribution machine within the working class. The people who funded it were always those who benefited most from it.

Besides, several countries grant „tax gifts" to various groups of high earners, without there being an economic necessity for such privileges.

2. Insufficiently regulated capital markets are endangering economic growth and thus making it more difficult to maintain existing welfare state schemes.

  • Overshoots in exchange movements keep harming the competitiveness of countries or induce them to keep interest rates high, which in turn impairs economic growth.

  • Repeated financial crises in individual countries or groups of countries result in a decline in demand which is felt around the world.

As a consequence, the maintenance of the welfare state principle (appropriate parti-cipation of all citizens in national prosperity) is rendered more difficult, because:

  • unemployment tends to be higher (the consequence: higher claims on the welfare state, lower contributions, the threat of poverty for the long-term unemployed and for workers with a low scarcity value on the labour market);

  • in the battle for shares of stagnating or even shrinking markets, an international race to undercut is fostered and the political will to maintain a just society is weakened.

Alfred Pfaller

Friedrich Ebert Foundation, 53170 Bonn, fax: +49 / 228 / 883 625, e-mail: PfallerA@fes.de

© Friedrich Ebert Stiftung | technical support | net edition fes-library | Juni 2001