Welfare States and Inequality

[Music] Hello and welcome to EU Today, a podcast from the Center for European Studies, a Jean Monnet Center of Excellence at the University of North Carolina at Chapel Hill. Thank you to the Erasmus+ program of the European Commission, the EU delegation to the US, and the US Department of Education for supporting our center and its programs. On this podcast, we sit down with scholars and policy leaders to discuss pressing issues facing the European Union. We hope you enjoy it. Hello and welcome to EU Today. My name is Brett Harris and I'm a contemporary European Studies major at the University of North Carolina at Chapel Hill. In this episode, I will be interviewing the Jean Monnet Center of Excellence key staff members and UNC faculty, Dr. Evelyn Huber and Dr. John Stevens. Evelyn Huber is the Moorhead alumni distinguished professor of political science at UNC. She has contributed articles on social policy and political economy in the EU and Latin America to leading journals in political science and sociology. She also received an honorary doctorate from the University of Bern in 2010. John D. Stevens is the Gerard Elensky Jr. distinguished professor of political science and sociology at UNC. He's also a director of the UNC Center for European Studies, a Jean Monnet Center of Excellence, which houses the Transatlantic Masters program. He is also the chair of the Contemporary European Studies major at UNC. His main interests are comparative social policy and political economy with area of foci in Europe, North America, and the Antipodes. Together, Dr. Huber and Stevens are authors and co-authors of five books, including Capitalist Development and Democracy with Dietrich Ruschmayer, Development and Crisis in the Welfare State, and Democracy in the Left, Social Policy and Inequality in Latin America, which are all winners of book awards. In this episode, Dr. Stevens and Huber discuss different models and outcomes of welfare states, as well as their ongoing project, "Increasing Inequality in Post-Industrial Knowledge Economies." Hello and welcome to EU Today. My name is Brett Harris, and today we're welcoming Dr. John Stevens and Dr. Evelyn Huber from the University of North Carolina at Chapel Hill. Thank you both for joining us today. So you both have been working on this project, "Increasing Inequality in Post-Industrial Knowledge Economies," for quite some time now. What is the state of the research now, and what are your preliminary conclusions? Okay, let's start by defining the set of countries we're looking at. It's the universe of economically advanced democracies, North America, Europe, Australia, New Zealand, and Japan. So 21 countries altogether. In these countries, inequality fell from a high in the late 20s to a low in the mid-80s, and then it's begun to increase again. In some countries, modestly, and others like the U.S. really steeply. So that's what we're studying. We're trying to figure out both why these countries all move in the same direction through time, but why they do so at much varying speeds, some of them getting very unequal and others, only modestly. Right. So when we study income inequality, we have to look at wages and salaries and capital income on the one hand, what we call market income, and redistribution through taxes and transfers, or what we call the welfare state. Okay, great. Thank you. And so in your research, you mentioned different types of welfare states. Could you elaborate on maybe what defines welfare state and what variations differentiate the different models that you're interested in? Right. I mean, this could take an hour, but we'll try to make it pretty concise. So the welfare state is the totality of transfers, money transfers, and free or subsidized social services provided by the state. So it includes pensions or Latino as social security here, social assistance, food stamps, public housing, vouchers, but also healthcare and education. Now, all affluent post-industrial democracies have welfare states, but they differ very significantly in their types of welfare states. So we generally distinguish four different types. The social democratic or Nordic welfare states, the Christian democratic or dismarking or continental welfare states, then third, the liberal or residual or Anglo-American welfare states, and fourth, the Southern European welfare states. Now, they differ in generosity and in the redistributive profile. That is how egalitarian are their benefits and in how much do they provide in terms of social services. So the most generous and redistributive and service-oriented welfare states are the Nordics or the social democratic welfare states. Their benefits are universalistic in the sense that they cover everybody, and they do so with generous pension systems, for instance. They also have generous unemployment insurance, they have free healthcare for everybody, they have free education at all levels, and they have free or subsidized childcare and elder care. So they really have taken on a bunch of care responsibilities, which then makes it much easier for parents, particularly modern, obviously, to combine work and family. The continental, which we call Christian democratic welfare states, and we'll get to why they got these names in a little bit. So those welfare states, they are about as generous on transfers. They spend roughly equal amounts, but the transfers are less universalistic and redistributive. Different groups get different types of benefits, and in particular, they provide fewer services. They finance a number of social services, but those are typically privately provided, so particularly childcare is a very important example. Then we have the liberal or, but we also call residual annual American welfare states. They are called residual because they really just take care of the very needy that are not taken care of by family or the market. Now, that is not entirely true for all programs and in all countries. So, for instance, in the United States, social security is the most generous part of the welfare state. And in Britain, of course, we have universal healthcare, but as a group, they spend the least and they are least redistributive. A lot of their benefits are actually means tested. As I said, they neither finance nor provide many social services, but leave them to the market and private education plays a very important role. And finally, we have the southern Europeans welfare states, which were most of all latecomers, particularly Portugal, Spain, and Greece. They really only developed their welfare states with significant extent after they became democracies. They show a mixture of the continental pattern in their transfers that is segmented on equal benefits and the Nordic pattern in health services. Several of them have universal public health services. In terms of care services, they continue to rely very heavily on the family. So, we also sometimes call them familialistic welfare states. Great. Thank you. And so, there's a lot of variation between those. What reasons are there, kind of, for these differences and variations between welfare states? These welfare states were constructed over a long period. The first modern piece of the social policy was passed in Germany in the 1880s. But when we look at their overall development, we can say the three or four decades after World War II with the period of rapid development of these welfare states across these groups of countries. And if you look at the dominant political force, then you will understand what kind of welfare state they had. So, the reason they called the Nordic welfare states, social non-pratic welfare states, is it turns out that social democrats and their allies were the dominant political force in the Nordic countries in that four-decade period, 45 to 85. In continental Europe, it's the Christian democratic parties, in most cases. Sometimes, Christian democratic, some of the democratic alliances, but it's really the Christian democratic ideology or Catholic ideology that impregnated on them. In the Anglo-American countries, they were governed primarily by center-right and center-secular parties. And so, these broad party families are what really impregnated and led to the very... So, if you look at the variation of these welfare states in 1950, they're not that different from each other. If you look at them in '85, they're very different. Great. Thank you. And so, in what ways does the type of welfare state impact how inequality manifests within that state? So, as we just discussed, the welfare state is there to reduce poverty and inequality resulting from market income. The welfare state has a big role in shaping market income to begin with, largely through education and training, that is skill training. The other factor that shapes the market outcomes are labor market institutions. Right. So, let's have a closer look at the labor market institutions. The central role is played by unions and the collective bargaining system. And these vary greatly between countries. And the patterns roughly correspond to the welfare state types. In the Nordic countries, for instance, unions are very strong. They are still organizing more than 60% of the workforce. So, it is not surprising. Obviously, unions have historically been and still are a major voting block for social democratic parties. So, it's that alliance that has both built the welfare state and the system of industrial relations. And they work in tandem, basically, to produce less egalitarian outcomes. In the continental countries, unions now organize between 20 and 30%. And in the US, for instance, only about 11%. So, those are really enormous differences. Now, historically, in all these countries, unions were stronger, right? There was a time when unions were relatively strong in the United States as well. So, unionization has declined everywhere, but very important differences persist. The second or a second important aspect in a labor relations system has to do with legal contract extension. In other words, are contracts negotiated by unions extended to non-union members or non-unionized enterprises? Contract coverage in the Nordic countries reaches between 80% and 90% of the labor force. So, that's the over-helving majority of employees, wage and salary earners, people who are eligible to be covered by a negotiated wage agreement, they are covered. The continental countries, it varies from 60% to 90%. And again, by contrast, in the United States, it is less than 15%. So, clearly, that makes for very different dynamics of earnings distributions. Also, in many Nordic and continental countries, there are works councils, that is, there is legislation that establishes works councils that represent labor interests at the enterprise level. Such works councils, again, depending on the country, in some countries, they are mainly consultative, but in others, they actually have co-determination rights on things such as wage, working conditions, if there have to be adaptations like short work weeks, and so on and so forth. At any rate, you're talking about an institutionally anchor representation of labor, which clearly represents labor interests vis-à-vis both top management and basically shareholders. Okay, so let's look a bit at the figures as to what has happened to poverty and inequality since 1985. Now, this is a video. We've shown a bunch of graphs and tables, but it's not. So, rather than showing you what's happening in all these countries and selling measures, I'm just going to, we're just going to give you a few examples. And so we start with the U.S. This is the country where you had the biggest increases in inequality. For example, all these figures I'm going to give you are, 1985 and 2015, in that period, the share of U.S. income that accrued the top 1% of income earners in the United States rose from 12% to 20%. In terms of poverty, the market income poverty before the state intervenes increased from 17% to 21%. After taxes and transfers, so after the welfare state, from 11% to 15%. So in this whole period of 30 years, real median income, in the United States, real median income, household income, so the median household increase only 0.5% per annum in the whole period. At the same time, economic growth was 1.7% per annum. So this means that the upper income earners were reaping most of economic growth in the United States over that period of 30 years. The overall, I just gave you the top 1%, overall measures of inequality like the genie index, they have the same pattern. We can contrast this to a couple European countries. The top 1% in Sweden increased from 5% to 8.5%. So U.S. 12% to 20%. Sweden, 5% to 8.5%. Germany, the same group, 10% to 13%. So still increasing, but much less. In Sweden, in the United States, as I pointed out, only median household income over this whole period only increased 0.5% per annum. In Sweden, it was 2.6%. So the average Swedish household was getting better and better off every year in contrast to the average American household that was practically stagnant. The median income growth in Germany was much lower, but of course, this is a lot due to the fact our first date was 85. Then you had reunification of the much poorer East Germany with West Germany, which you still had 0.9%. So twice with the United States. So in terms of post-income poverty, it increased to 11%. Now in Germany, the big increases in inequality really hit the bottom. So low wage market expanded quite a bit in that same period. Great, thank you. Across the board, like you mentioned, we see these increases. What are some of the underlying reasons for these trends? So we have several. We have structural economic changes. We have demographic changes, and then we have decline in labor strength, particularly unionization. So let's start with the structural economic changes. Clearly, we have seen deindustrialization, and thus the loss of well-paying jobs for people with lower-medium skills. Now, deindustrialization is partly due to technological change and partly due to import competition. So if we look at technological change or that transition to the knowledge economy, what we see is an increase in demand for people with high skills, right? And basically, few jobs created in advanced branches of the economy for people with low skills. In other words, they are the jobs of being created as in personal services, restaurants, you know, beauty parlors, bars, you name it. That is, there are people spent their money who are participating in the knowledge economy. So if you have increased demand for people with high skills, then they will be able to command a greater remuneration, a greater return on their skills, unless the supply increases at the same rate, and that then would require a lot, and we will come back to this in a little bit, would require a lot of investment in education, right? So, there is a famous book by Golden and Cass, which makes precisely that argument that the United States has been losing the race between technology and education, and therefore you have this increase in technology. That's clearly part of the story, but it's not the whole story. So the, as I said, a lot of jobs are being created in the service sector, but those jobs are notoriously unstable and low paying. And so you have what we call a dualization of the labor market. On the one hand, we have people with stable, relatively well paying jobs, and on the other hand, we have people with a precarious attachment to the labor market, temporary jobs, part-time jobs, typically without benefits, poorly paid, and so on and so forth. So a lot of people also point to globalization, particularly trade competition and outsourcing and immigration, and we clearly know that those things are going on, but the results in econometric analyses are not very robust for these variables, meaning that technological change and deindustrialization are the key factors. Then we have demographic changes. We have a greater proportion of single mother families, and single mother families are notoriously vulnerable to poverty. It's hard to take care of kids and work at the same time, particularly in countries without very extensive public child care. So these developments help explain common trends towards greater inequality, but other developments differ more across countries. So as I mentioned before, decline of union density has been universal, but it has been particularly strong in the Anglo-American countries. Other aspects that spring some labor and that we discussed, such as contract coverage, which are strong in the Nordic and Continental and even the Southern European countries, have not declined very much. So we can see this impact very clearly in the growth of the share of the top 1% that John just talked about. Strong unions and other aspects of labor strength, like works councils in econometric analyses, are shown to reduce the income share of the top 1%. So the runaway incomes at the very top are primarily a phenomenon of the Anglo-American countries, and all of those aspects of labor strength are very low. Just wanted to make it clear when Evelyn is talking about econometric analyses, it's our data analysis for this book. The quantitative prep we're just about to finish with. Okay, another key difference across the countries is skill distribution. European education and training system do a better job of increasing skills at the bottom. So when you have better skills at the bottom, you better pay at the bottom. With the advent of the knowledge economy, this particular in the Nordic countries that have distinguished themselves in investing in lifelong education and training, and thus have improved the skill levels on the average, and particularly at the bottom, we see this very clearly in the OECD's program of international assessment of adult capabilities. It shows that the United States, particularly the United States, but the other Anglo-American countries, skills at the bottom and off the bottom 5% are much worse than they would be in the continental European, which is not as good as the Nordic countries. So one of the reasons you have more income equality in the Nordic countries is investment in skills. Just in order of magnitude, the Nordic countries, if you look across daycare, K through seven, all levels of education and active labor market policy, the Anglo-American countries spend about 5.5% of GDP in the Nordic countries, 10% of GDP on skill, on those skill programs or education and training programs. So market income inequality has increased in every country, but to different degrees. The same is true for market income poverty. Well, for states everywhere, reduced poverty and inequality, but they have not been able to keep up with increased market income poverty and inequality. As a result, disposable household incomes and poverty and inequality have gone up everywhere, though the levels continue to differ. In European countries, EU austerity policies have been an important break on the ability of welfare states to counteract this increase in market income inequality. In the United States, it's more domestic politics with repeated significant tax breaks for corporations and upper income groups and a failure to invest in the skills that's the race between education and inequality over the past three or four decades. Okay, thank you for sharing all that. We're about ready to wrap up. Are there any last thoughts either you two would like to share? No, again, just a lot of in the kind of public discourse, it's, oh, well, it's globalization, it's trends that one can do nothing about. Okay, and that's what's behind inequality, transition to the knowledge economy. Well, yeah, those things are important, but there are policy choices that can be made to mitigate the egalitarian effects of these kinds of structural changes. And in order for these choices to be made, you need to have the appropriate political alliances. In other words, you need to have parties and groups and civil society that work together to push for those trends. Yeah, I mean, if you look at the economics of the cure on the increases and wage inequality and overall income inequality, what you see written all over the places skill bias technological change. So we have this transition to the knowledge economy, and we have certain semi-skilled jobs, basically symbolized jobs that were well paid, and they've gone away. And then there's a swath of workers who fall behind. And so, but it's, it's important to undermine as golden and cast in their 2008 book race between education and inequality is that for the first 75 years of the 20th century, the United States was winning the race between education and inequality is constantly expanding first secondary education so it became universal and then tertiary education. And then all of a sudden in the mid around 70, we stop. So if you look in 1970 and look at the percent of GDP that goes to education, the number one country in the world in terms of investment in education was Canada 8.6% of GDP tied for number two was United States and Sweden 7.2% GDP. Now the United States is at 5.5 Sweden is still up at 8%. So it's a choice we may not to invest in people skills in public expansion of public education. That's the point of their book. And so when people say skill by technological change, they forget their supply side to it. And that's the supply side. You know, you invest in people. If we would invest in the same amount as the Nordic countries do in people skills, we would have more equal outcomes, especially for people at the bottom. Definitely. Well, thank you very much for really thought provoking lecture. And thank you everyone for tuning in. Please note that any opinions expressed in the EU Today podcast are solely those of our guests and our hosts and not of the UNC Center for European Studies, which takes no institutional positions. Be sure to tune in for more episodes and subscribe to EU Today, wherever you listen to podcasts.