1

Report for the Portuguese Presidency of the European Union

The Future of Social Europe:
Recasting Work and Welfare in the New Economy
- MAURIZIO FERRERA, ANTON HEMERIJCK and MARTIN RHODES
1
-
CONTENTS
1. Introduction and Summary
2. Challenges to European Social and Economic Policy
3. Welfare Regimes and Adjustment Problems
4. Effective Responses: Policy Mixes and Institutional Reform
5. What Role for EU Social Policy?
6. The Future of the European Welfare State
1. INTRODUCTION AND SUMMARY
The aim of this report is to examine the changing nature of the European social model and its
capacity to deal with both domestic and external challenges in the early 21st Century. A
popular view is that West European welfare states are crumbling under pressure from
external competition, while the globalization of production and finance, combined with the
policy constraints of EMU, have all reduced the capacity of the state for implementing
corrective remedies. More and more frequently, efficiency and equality, growth and
redistribution, competitiveness and solidarity are referred to as polar opposites that can only
thrive at each others expenses. Our argument in this report is much more nuanced - and
optimistic.
First, we counter the argument that welfare states are crumbling under external and
domestically-generated pressures. Although apparently in crisis due to the combination of
factors mentioned above, welfare states have in fact changed very little in recent years.
According to an OECD investigation of 15 cases of fiscal consolidation involving 11
countries, in all but one (Ireland 1986-1989), governments pursuing consolidation increased
revenues as a percentage of GDP in the 1980s and 1990s and in nine of the 15 cases, revenue
increases accounted for the majority of fiscal consolidation. Transfer spending fell in only
seven cases, and generally by very modest amounts. Only three of 15 cases reduced transfer
spending by more than one per cent of GDP while six achieved that large a cut in public
consumption, and seven in investment spending). Support for the welfare state remains high

1
Respectively, of the University of Pavia and Bocconi University, Milan; the Department of Public
Administration, University of Leiden; and Department of Social and Political Sciences, European University
Institute, Florence. We would like to thank Martin Schludi, Franca Maino, Jackie Gordon and Fernando Mendez
for their assistance at different stages of this proejct.
2
amongst publics everywhere and institutional stickiness creates tremendous resilience against
pressures for change. The most important changes in Europe have been increased
managerialism (in line with a new and spreading orthodoxy of public sector management);
attempts to make certain benefits (especially unemployment support) more incentive
compatible; a marginal degree of privatization (mainly in health, and mainly in Britain),
some decentralization; and attempts (largely successful) to control budgetary expansion. This
hardly amounts to neo-liberal convergence.
Second, we correct the view that national states are increasingly impotent to deal with the
range of challenges that confront them. Steering capacity is being constrained by
developments beyond national borders; but this does not necessarily mean a loss of state
control or 'neo-liberal' convergence, in either institutional change or policy objectives.
Indeed, as during much of the post-war era, reforming labour market regulation and recasting
welfare states will require that most European countries follow a 'third path' between the
state and the market, involving an accommodation of market pressures with the preservation
of social protection and consensus. Governments have been introducing reform within their
systems to deal with perceived cost pressures by experimenting with finance, the organization
of provision and access to benefits. While this has not undermined the core of the major
programmes for social protection, important changes are now occurring, in many cases as the
result of complex new bargains.
Thirdly we wish to emphasise the importance of understanding the diversity of European
welfare states. An appreciation of the different problems and potential for reform of Europes
clusters of welfare states is critical both for accurate analysis, comparison and policy
prescription. Too often, the welfare state is referred to as if it were a phenomenon uniformly
manifest across national territories. It is worth alluding briefly to these differences before we
proceed:
1. Historically, the Scandinavian model with its high levels of employment relied heavily on
public sector employment growth. The main problems confronting the Scandinavian
countries are, first of all, difficulties in financing their costly welfare states under
conditions of high capital mobility. Secondly, there is a need to expand private sector
employment to compensate for the stagnation or decline of job opportunities in the public
sector.
2. In contrast to the Scandinavian model, welfare state financing and private sector service
employment do not appear to be particularly problematic in the Anglo-Saxon countries.
However, the Anglo-Saxon welfare states lack support for highly competitive, export-
oriented, high-quality specialization in production based on co-operative industrial
relations and a well-trained labour force. As a result, there is little investment in training
at the low and medium bands of the labour markets skills spectrum. Since the lean
Anglo-Saxon welfare states provide only meagre levels of social protection, low
qualifications go hand in hand with poverty and social exclusion.
3. The continental regimes with their highly regulated labour markets are confronted with
low employment levels (both in the private and the public sector), high levels of benefit
dependency, as well as high long-term and - in the case of Belgium and France - youth
unemployment. Since the continental welfare states rely mainly on payroll taxes for
financing, private service employment is often priced out of the labour market, especially
at the lower end of the earnings scale. In contrast to the Anglo-Saxon countries, poverty
and under-qualification are not acute problems for the continental welfare states.
4. The Southern welfare state pattern has created a widening gap between labour market
insiders with extensive coverage and under-protected labour market outsiders (a chasm
3
that is most pronounced in the clientelistic, pension-heavy Italian welfare state). Like the
continental welfare states, the Southern model also relies heavily on payroll taxes for
financing, whereby private service employment is priced out of the labour market. In
terms of poverty, the Southern model follows the Anglo-Saxon pattern.
However, the variety of welfare state arrangements and problems does not preclude an
overall assessment of the process of reform that all must engage in. The general task in this
process which we explore in detail in the latter sections of this report - is one of identifying
new value combinations and institutional arrangements that are both mixed (in terms of
solidarity and growth objectives) and virtuous (capable of producing simultaneous advances
on all the affected fronts). The scope for policy innovation lies between the twin constraints
of (1) preserving social justice objectives and (2) solving those fiscal and policy failure
problems that undermine economic imperatives at both the macro and the micro level. Yet
there is still scope for much innovation in the policy mix in reconciling these objectives.
Moving forward with this agenda requires considerable imagination in defining that policy
mix as well as substantial investment in new institutional arrangements. As we stress, the
search for new solutions can be greatly helped by supranational mechanisms of co-ordination
and evaluation, as well as by processes of mutual observation and learning. If European
societies wish to reset themselves on a course of just growth, they will have not only to re-
adapt their welfare institutions to the new context, but must increase their adaptability as
such, enhancing their social and policy learning capabilities and inaugurating novel
institutional combinations between security and flexibility.
The main themes of the analysis that follows can be presented up as follows:
while globalization has been exaggerated and wrongly blamed for most of the adjustment
problems faced by European welfare states, a combination of external and domestic
pressures poses a series of adjustment problems for European welfare states.
these adjustment problems are manifested quite differently however in Europes four
different welfare state clusters. Their future sustainability depends on their capacity to
deal with their respective shortfalls and contradictions often generated by their past
successes - within the new external context.
the key predicament of policy adjustment in the open economy is best described as the
endeavor to match equity and efficiency, work and welfare, under international
constraints. Policy adjustment is a system-wide search for a new, economically viable,
politically feasible, and socially acceptable profile of social and economic regulation.
policy effectiveness is assessed across a group of countries in terms of four measures of
policy effectiveness: macroeconomic performance, employment performance, the level of
social protection and the distributive outcomes in terms of wage dispersion, income
equality, and poverty.
while the available policy solutions necessarily differ from one country to another, they
are often functionally equivalent and the general requirements may be summarized as:
robust macroeconomic policy, wage moderation and flexibility, employment-friendly and
efficient social policy and labour market flexicurity.
in this context, the construction of Social Europe may have produced a less splendid
edifice than many of its proponents had aspired to, but nonetheless, the achievements of
the last few decades have helped reinforce significantly the basic underpinnings of the
European social model ands provide a foundation for a central role for the EU in ensuring
policy effectiveness and best practice.
4
apart from building on these foundations with further hard initiatives (directives, an
expansion of the social dialogue, the inclusion of fundamental rights in the European
Treaty), soft measures (benchmarking, mainstreaming) and open co-ordination are
promising institutional mechanism for advancing on all areas of common concern;
finally, as we discuss in our final chapter, the future will be one in which permanent
welfare re-calibration proceeds along four dimensions the functional, the distributive,
the normative and institutional in order to ensure the adaptability and sustainability of
the European social model.
5
2. CHALLENGES TO EUROPEAN SOCIAL
AND ECONOMIC POLICY
This section assesses the relative importance of challenges coming from the
international political economy (global trade competition, the
internationalisation of finance) and from the domestic political economy
(rapid technological change, the shift from industrial production to
services, the transformation of the world of work, demographic change and
changing household and family patterns) and the interaction between these
external and domestic pressures. It is precisely the nature of this
interaction, which manifests itself differently in different types of welfare
states, that defines the adjustment challenge facing the European social
model and its component, national welfare states.
The current predicament of the welfare state is best described as an endeavour to match
equity and efficiency. Today, many observers fear that the welfare state is haunted by a tragic
trade-off between economic efficiency and social justice (Esping-Andersen 1996; Iversen and
Wren 1998). Can those states continue to find positive solutions to the challenges that
confront them in the early 21
st
century? The pessimists would say no: globalization and the
pace of socio-economic change has rendered the aspirations of the golden age welfare states
utopian. Sustaining the ties that bind citizens to each other and their communities within
social contracts has become all but impossible as the policy-making autonomy of national
governments declines and their control over their borders disappears.
In this report we take a different view. Although governments may no longer be able to rely
on their protective post-war policy profiles to achieve the objectives of full employment,
social protection and equality, the nation-state still is the principal site of policy change. They
are also complex negotiation systems. Policy changes have to be endorsed by elected
governments and parliament and continue to be mediated by national political parties,
organized interests, and other relevant institutional structures like bureaucracies and systems
of interest intermediation. Nation-states are not like markets easily overrun by economic
forces - they are communities of fate: the nation-state ties together citizens whose material
life chances are bound by national economic performance and domestic arrangements of
social and employment policy. Social contracts in contemporary Europe remain an important
component of democratic societies and contribute to their prosperity. As we argue below and
in subsequent chapters, this does not mean that the status quo is sustainable in its present
form. But it does mean that, if institutional arrangements and policy mixes are suitably
modified, then the core principles of the European social model can be preserved and in many
respects enhanced in their translation into the real worlds of European welfare.
The Challenges to European Welfare States
European welfare states face multiple challenges. Of all the forces influencing the future of
welfare, the external challenges are probably the least well understood. Thus, the debate on
globalization is often couched in terms of the misleading dichotomy of convergence versus
divergence. For example, a frequently asked question is whether national policy profiles have
come to resemble one another as they have faced the same international economic constraints
6
over the past three decades? In fact, since the pressures of economic internationalization
affect different welfare states in varying ways and to differing degrees and at different points
of time, the analysis developed in this report suggest that such a blunt juxtaposition is not
particularly useful. Not only does it fail to capture the full complexities of the economic and
politics of national processes of policy adjustment, but it provides little basis for genuine
comparative analysis or for policy prescriptions.
Moreover, it is important to acknowledge that national economies have neither been wholly
absorbed into a new global order nor their governments totally incapacitated. Non-tradables
remain important in most European economies and national comparative advantage and
specialization remain critical for international competition. Good arguments for the
compatibility of large welfare states with internationalization are regularly rehearsed. Welfare
states emerged in line with the growing openness of economies and facilitated the consequent
process of socio-economic adjustment. Government consumption appears to play an
insulating role in economies subject to external shocks (Rodrik 1996; Rieger and Leibfried
1998). Moreover, governments and in Europe we need now to acknowledge that by
government we mean a multi-level system of political authority retain the capacity to
reform their welfare states and are far from being disempowered by global forces.
Second, there has been a tendency in many policy debates to focus on the less tangible forces
of globalization and to downplay the overriding importance of domestic challenges. By
contrast with the impact of demographic changes, of the dysfunctional nature of certain
institutional arrangements, of the failure to respond to new needs and risks generated by
socio-economic change, there are many good reasons for believing that the overall impact of
globalisation has been exaggerated, as have its potentially adverse consequences for
employment and social standards. Moreover, welfare states have generated many of their own
problems and these would have created severe adjustment difficulties, even in the absence of
greater exposure to flows of capital and goods.
By helping improve living standards and life spans, welfare states have created new needs
that social services were not originally designed to meet. At the same time socio-economic
change, alongside institutional inertia, has meant that certain new needs and risks are not
being adequately covered. As we discuss in subsequent chapters, some of the biggest
adjustment problems are related precisely to this need to bring welfare provision into line
with new risks. Rising health care costs and pensions provisions have contributed massively
to welfare budgets and fiscal strains (Pierson 1998). Sustainability also requires that new
ways are found both to finance health and pensions amidst growing cost pressures, as well to
change the incidence of the cost burden via changes to taxation or social insurance systems.
The maturation of governmental commitments and population ageing demand reforms to
health care provision and old age pensions (in 1992 these accounted for 80 per cent of all
social protection outlays in the European Union) if costs are not to escalate and employment
creation stymied by higher direct taxation and/or payroll taxes. Yet such policies are
constrained by the popularity of generous welfare programmes and the commitment of a
range of political and vested interests and beneficiaries to defending them. Finding a way
forward demands, as we argue in chapter 6, a recalibration of welfare along three dimensions
the functional, distributive and normative if these challenges are to be successfully met. A
fourth dimension institutional reform will also be essential if reform is to proceed in an
environment of consensus and blockage and conflict are to be avoided.
7
But having relativised the globalization argument, it would be wrong to dismiss it completely
- especially as many have claimed that international pressures constrain the capacity of states
to respond to precisely the list of domestic challenges catalogued above. Serious attention
should be paid to the claim that financial market globalisation limits government policy-
making autonomy, and that market integration constrains the capacity of states to engage in
redistributive tax policies. There may be a potential incompatibility between certain types of
national welfare arrangements and increasingly integrated product markets (especially in
Europe), especially in compounding the effects of technological change on patterns of
employment.
Welfare and Work in the International Economy
In order to understand the nature of internationalization, we really need to consider the
historical background of developments since the 1970s which made stable macro-economic
management and the progress of welfare societies much more problematic than hitherto.
During the Golden Age of economic growth between 1945 and the early-1970s, most
advanced industrial societies developed their own country-specific brands of welfare
capitalism. The various models of welfare capitalism were built upon relatively coherent
policy mixes of macro-economic policy, wage policy, taxation, industrial policy, social
policy, and labour market regulation. The comparatively smooth interplay between these
interdependent policy domains contributed to the achievement of economic growth, full
employment, social protection, national solidarity, and political stability. At the level of the
international political economy, the post-war consensus was supported by the regime of
embedded liberalism (Ruggie 1982). Central to the regime of embedded liberalism, next
to capital controls and trade barriers, was the Bretton Woods monetary system of stable
exchange rates. Although there were exceptions (Britain, for example, experienced problems
early on in sheltering its welfare state from balance of payments and currency crises), this
gave national policy makers in most countries a substantial degree of freedom to pursue
relatively independent economic and social policies without undermining domestic and
international stability (Scharpf and Schmidt 2000).
Already in the late 1960s, problems of labour discipline and accelerating inflation were
threatening to erode the historical settlement between capital and labour that had helped
underpin the development of social insurance and welfare provision around the notion of the
social wage (Crouch and Pizzorno 1979). But the virtuous dialectic between economic
growth and social policy development was effectively brought to an end in the early 1970s.
Since then, three important changes in the international political economy have unsettled the
relative goodness of fit across important policy areas and between the domestic and
international political compromises. It has consequently became increasingly difficult for
advanced welfare states to deliver on their core commitments of full employment, social
protection and equality. First, after the first oil price shock of 1973, the problem of stagflation
(the contemporaneous rise of inflation and unemployment) came to haunt national
economies. Second, the emergence of a very restrictive international economic environment,
with extremely high real interest rates, in the wake of the second oil crisis of 1979, pushed up
unemployment to levels not seen since the Great Depression. Low growth, rising social
expenditures, and recurrent external disequilibria led to fiscal crises in many of the European
countries. Third, since the mid-1980s, the liberalization and deregulation of capital and
product markets (most notably the creation of a single European market with a single
8
currency), have further constrained national fiscal and monetary policy and exacerbated
pressures in favour of austerity in social and employment policy.
Against this background there are a series of interrelated pressures that European economies
and their social protection systems have had to come to terms with.
First, there is the changing nature of the European macro-economy since the end of the
1980s. Although the international macro-economic environment of the second half of the
1980s was relatively favourable and thus helped many countries to bring inflation and public
deficits under control, in Europe German unification prevented a soft landing. Because the
Bundesbank feared that monetary unification and sharply rising budget deficits might
endanger price stability, it switched to a very restrictive monetary policy in 1991/92. Pegged
to the D-mark, in part via the EMS, the other European economies had to follow suit.
However, some countries were not able credibly to abide by the constraints on monetary
policy imposed by the EMS. As a consequence Italy, Sweden and the United Kingdom had to
devalue their currencies substantially. Partly as a result of the currency crisis, most European
countries went into recession in the early 1990s, marking another rise in unemployment. As a
result of high interest payments on the public debt and rising unemployment, public debt rose
considerably in the majority of countries. If countries were to reduce their debt and the
corresponding debt service in line with the EMU convergence criteria, some of the countries,
especially Belgium and Italy, would have to run primary budgets of over 5 percent for several
years. This has translated into savings in all areas of public expenditure, including the social
services.
Second, a more general international set of changes is linked to the globalization of finance.
Although its effects are often exaggerated, the interaction of a number of developments
should be acknowledged. First, there is the Mundell-Fleming theorem or the unholy trinity
which states that exchange rate stability, capital mobility and domestic monetary
independence cannot all be achieved simualtaneously. In an environment of international
capital mobility, it becomes increasingly costly for individual states to pursue an
expansionary monetary policy as part of an effort to stimulate growth and employment
(Webb 1991: Andrews 1994).. This individual capacity has now in case been surrendered by
EMU member states. Second, the emergence in the 1970s of a new world market for capital
has resulted in an explosion of global short-term flows, making capital restrictions more
difficult to maintain. In the absence of relative capital immobility, domestic policy priorities
e.g. full employment have been subordinated to defending the balance of payments, a
priority to which both fiscal and monetary policies have been redirected.
Third, there is tax competition. This phenomenon is probably less extensive or at least less
pernicious in its overall effects than many have claimed. Although it has been argued that
international capital mobility has generated a shift away from capital taxation, governments
continue to rely on corporate taxes for a significant, and in some cases, a growing share of
revenue. Changes in the structure and rates of taxation have coincided with attempts to make
the overall changes revenue neutral or protect the revenue needs of the state. Rate cuts have
been offset by broadening the tax base and the elimination of investment-related allowances,
credits and exemptions (Swank 1992; 1998). Nevertheless, even if corporate tax reforms have
not shifted the tax burden onto labour, by eliminating taxes as a means of boosting
investment and employment, life has become harder for governments wishing to use the tax
code for expansionary welfare policy. While revenues from capital income taxation may not
have fallen, on average, they have also not increased. This contributed to the fact that the
9
average total tax ratio of the 18 most advanced (and largest) OECD countries has stagnated
since the mid-1980s and has not kept up with increasing public expenditures. Tax
competition may not be the main cause of the financing problems of the welfare state, but it
has constrained policy responses by making some forms of revenue-raising more costly at a
time when pressures for increased spending abound (Clayton and Pontusson 1997; Ganghof
and Genschel 1999).
Fourth, there is a transformation of the political environment. Manifold policy failures to
manage the crises of the 1970s and 1980s produced a distinct shift in the balance of political
power from the left to the right, while powerful interests have used the opportunities provided
by capital market and trade liberalization to strengthen their ideological opposition to
generous systems of social and employment protection which we can refer to (following
Swank, 2000) as the political logic of globalization. In other words, the rhetoric of
globalization may in many instances be more important than the reality. Thus, increased
international financial integration is said to have strengthened the social and political power
of capital in particular capitalists with mobile or diversified assets. However, the power of
multinationals to arbitrage diverse national structures and force deep, structural
convergence across diverse societies has been much exaggerated (Ruigrok and Van Tulder
1995). The evidence shows that the bulk of FDI continues to go relatively high-wage and
high-tax countries (Weiss 1997). Nevertheless, the relocation threat a major manifestation
of the political logic on globalization - can exert a powerful influence on domestic policy and
institutional arrangements, as shown in certain high regulation European countries where
large firms have used it to weaken the power of unions and force concession bargaining.
Finally, and perhaps of most immediate importance for this report, is the influence of trade
competition and technological change on employment and income distribution. This
influence has significant implications for how welfare and work interact. There is much
uncertainty among economists as to whether the blame for the decline in demand for certain
skills and income polarisation should be attributed to one rather than the other or perhaps to
a combination of the two. Thus, the thesis that trade with the South will lead to declining
demand for unskilled labour and either lower wages or higher unemployment in the North has
been contested (see Wood 1994 for argument in favour of this thesis; Freeman 1995 and
Burtless 1995 for those against). Better qualifications command a return to human capital and
protect many workers in the North. Specialization in different goods reduces downward age
pressures in developed nations. Others argue that technological change is the real culprit in
inducing a shift from lower to higher skilled labour demand (Slaughter and Swagel 1997).
Nevertheless, it is unlikely that trade has nothing to do with this. One way or another, there
appears to be a relationship between international competition, technological change and the
declining demand for certain types of workers.
Work and Welfare in the New Economy
We believe that the most important challenges to European welfare occur precisely at this
point - at the intersection of the international and domestic economies in the area of
employment. In order to clarify this point, it is worth considering the ways in which trade
pressures and technological or post-industrial changes may interact in changing the nature
of employment, its role in the life cycle and its impact on welfare states. Unemployment
problems and the need for the modernisation of social protection systems should, on the
whole, we argue be attributed mainly to the post-industrialization of advanced economies to
10
which globalisation (e.g. greater trade competition across a growing range of sectors) may
make some contribution but cannot on its own explain.
Taking the post-industrial change argument first, Freeman and Soete (1994) among others
have argued that the advanced economies are experiencing a shift from an older Fordist
techno-economic paradigm - based on energy-intensive production systems and services - to
a new techno-economic paradigm based on information-intensive production systems and
services. The rapid growth of e-commerce is just its latest manifestation, but one with
potentially enormous implications for employment, the organisation of work and skills as
well as for competitiveness, since as and Soete (1999) stresses, the information and
communication technologies (ICTs) can to some extent be considered as the first truly
global technology. The consequence is far-reaching managerial, organizational and
distributive changes, including unemployment among particular categories of workers but
new opportunities for others.
Snower

(1997) identifies four critical associated developments responsible for the greater
dispersion of incomes and a shift in labour demand - between versatile and well-educated
workers on the one hand and non-versatile workers and poorly educated workers on the other:
the reorganisation of firms into flatter hierarchies with a large number of specialised teams
reporting directly to central management;
radical changes in the organisation of both manufacturing and services linked to the
introduction of flexible machine tools and programmable equipment, allowing a
decentralisation of production and the adoption of lean and just-in-time methods;
dramatic changes in the nature of products and in seller-customer relations;
and the breakdown of traditional occupational distinctions and of what is meant by
skilled versus unskilled workers when employees are given multiple responsibilities,
often spanning production, development, finance, accounting, administration, training and
customer relations.
By making some jobs less secure, while rendering certain skills and workers redundant, these
developments are creating greater reliance on unemployment insurance, public support for
education and training and a wide variety of welfare state services. The risk is that this
generates what Snower calls the quicksand effect - the phenomenon whereby welfare
structures designed for a different era become bogged down and unmoveable, generating
negative effects, destroying incentives and making redistributive policies inefficient, while
the productivity of welfare services declines and their cost increases. As Robert Lindley
(1999) agues and as we elaborate in subsequent chapters in respect of welfare reform:
The potential impact of the knowledge-based society will be pervasive.
Rights and responsibilities will need to be redrawn. New understandings will
be required, including those forged between social partners in industry,
between local partners, and among communities in areas of acute social and
economic disadvantage. Partial visions of the knowledge society, focusing
only on competitiveness, will be inadequate. They risk losing major
opportunities, where virtuous circles of rising productivity, profitability,
employment and job quality could be entered and where pursuit of equity and
efficiency could actually reinforce each other.
But as already intimated, competitive issues are also important in understanding the scale of
the employment problem. Here it is useful to make a distinction between the internationally
exposed and the sheltered sectors of the economy (Scharpf 1998). The exposed sector not
11
only includes agriculture and industry, but also those services that are exposed to
international competition, such as transport and communication and financing, insurance and
business services. The sheltered sector includes locally consumed service activities in
wholesale and retail trade, restaurants and hotels and the heterogeneous category of
community, social and personal services, including public education, health care, and social
services, but also a wide variety of privately financed household and personal services. If we
further distinguish between high-skill and low-skill employment, we get the following 2x2
table:
Figure 2.1. Labour Market Structure
Exposed Sector Sheltered Sector
High Skill Employment
Expanding (small numbers)
Public sector stagnant, expanding
in private sector
Low Skill Employment Declining Opportunities?
In the exposed sectors, competition has become becoming more intense. This is not only
because low-cost producers in Southeast Asia and Eastern Europe have entered the markets
for advanced industrial goods and services. More importantly (given the fact that trade with
the rest of the world accounts for only as small proportion of European trade) it is due to the
removal of remaining regional barriers to the free movement of capital, firms, goods, and
services by the completion of the European internal market. This has required the economies
of Sweden, Germany and the Netherlands, for instance, where wages, non-wage labour costs,
other taxes and regulatory costs are high by international standards, to exploit all the
opportunities for increasing the efficiency of production and the quality of innovation.
Bringing the technology argument back in, in combination with the availability of new
information technologies, this has meant a significant increase in the demand for high skill
workers in the exposed sectors. Even if the overall levels of employment in the exposed
sectors could be maintained, the employment opportunities for low-skill workers is falling
rapidly in these sectors.
Turning to the sheltered sector, the low level of employment in sheltered sector in the
European Union stands in sharp contrast to the employment miracle in the service sector in
the US. Employment in the sheltered service sector in the European Union as a whole
accounts for only 39.2 percent of the working age population, compared to 54.2 percent of
the working age population in the US. Higher employment in the United States in the sectors
of wholesale and retail trade, restaurant, and hotels and community, social and personal
services is usually accounted for by low and more flexible wages, easy hiring and firing, and
low levels of social protection. This is in part confirmed by recent job growth in UK, with
presides over similar labour market and social policy regime as in the United States (Crouch,
Finegold and Hemerijck 1999). The American employment miracle, however, is not only
confined the low skill services. Also with respect high skills services, the rising demand of
affluent consumers for high-quality services was directly translated into additional
employment opportunities for teachers, professors, doctors and paramedical professionals.
This is in large part due to the fact that in the United States education and health care are to a
considerable extent financed from private sources.
This stands in sharp contrast to many European countries, where education and health care
services depend primarily on taxes and social-security contributions. Moreover, in the 1990s,
12
most European countries had to cope with rising costs of unemployment combined with
political and economic pressures to reduce the tax burden and with the commitment to reduce
public deficits. In this regard, the impact of globalization makes itself felt. The launch of the
European Union and its Central Bank, along with the already substantial constraints on fiscal
and monetary policy imposed by global financial markets, have placed strong limits on the
capacity of individual European countries to stimulate employment growth in the public
sector. As a result, cut backs have led to a reduction of employment opportunities in
education and health care.
Thus, post-industrial change has created a service sector trilemma in which the goals of
employment growth, wage equality and budgetary constraint come increasingly into conflict.
Creating private service sector employment entails lower wage and non-wage costs, risking
greater inequality while generating such employment in the public sector is constrained by
budgetary limits (Iversen and Wren 1998). If service sector employment is to be generated in
the private sector, this entails adjustments to wage and non-wage costs for the less skilled and
greater wage inequality. Creating such employment through the public sector (the traditional
Scandinavian solution) entails increased budgetary pressure at a time when deficits and
higher taxes are definitely out of fashion. The alternative to doing neither would appear to be
continuing if not rising unemployment
The move towards a knowledge-based society, moreover, is likely to exacerbate and increase
the risks of social exclusion, affecting in particular low skill groups who have not or cannot
acquire the skills to succeed in the knowledge-based economy (Lindley 1999). They face
stagnant or declining wages in the United States and greater difficulties in finding
employment in the countries of the European Union. Highly educated workers, on the other
hand, are the winners; their jobs have become more secure and/or better rewarded as a
consequence of increased international trade and the advancement of information technology.
Job losses continue to be concentrated among people who have not completed at least
secondary education or who lack formal vocational qualifications. The average
unemployment rate of low skilled groups is two to three times as high as that of skilled
workers. Spells of unemployment for the low skilled have increased in frequency and
duration. Almost half the unemployed the European Union has been without a job for more
than a year. Long-term unemployment leads to a further erosion of skill levels. Moreover, the
long-term unemployed are stigmatised by employers; once they have been out of the labour
market for more than a year, they are perceived to be unfit for work.
The pressing challenge for policy therefore is twofold: to up-skill low skilled groups through
extended schooling, vocational training and education, in particular with the view that life
long learning is becoming vital if citizens wish to participate as full members of the
knowledge and information society: and second, engage in a concerted policy effort to
increase job opportunities for low skilled groups who, for whatever reason, continue to lack
marketable skills. Not all unemployed groups can be made fit for a high-skill employment by
retraining. It has to be accepted that the number of low-skill content jobs has to be increased,
while underpinning such low-income forms of employment with appropriate reform of social
security and tax systems to prevent the proliferation of a mass of working poor. We address
this issue more completely in chapter 4.
13
Defending the European Social Model: The Challenge of the Policy Mix
Thus, external constraints can interact with domestic developments to make life harder for
policy makers seeking positive sum outcomes. International tax competition and domestic tax
resistance restricted the possibilities of governments to raise taxes, which, in turn, has further
constrained the scope for expenditure based social and employment policies. Financial
constraints have been reinforced by the costs ageing and rising health care expenditures.
Finally, increased competition in product and capital markets in combination with rapid
technological change led to a significant decline in the demand for low-skilled labour in the
exposed sectors. Under the conditions of fully liberalized capital markets, strategic
devaluations have been ruled out as a tool to restore price competitiveness, since this would
be likely to induce capital flight. European economic and monetary union has abolished or at
least radically diminished national autonomy in exchange rate, monetary and fiscal policy.
But the policy conclusions are not all pessimistic. First, there is no inevitability about the
emergence and victory of what the French call a pense unique or about convergence on a
neo-liberal set of solutions. Trade competition, the globalization of finance and tax
competition all exert potentially important pressures on government capacities for sustaining
welfare state commitments. However, although it is frequently maintained that international
capital mobility combined with growing trade openness have eroded the major pillars on
which the Golden Age welfare state rested i.e., the combination of international liberalism
with significant domestic state intervention and social protection we argue below that they
continue to have relevance to the contemporary period of substantial capital and trade
openness and that domestic state intervention and social protection especially in the
generous corporatist-continental type welfare states remain not just feasible but strong.
As argued persuasively by Swank (2000), is rather in the liberal welfare states that neo-liberal
policies are most likely to be accepted, and where the erosion of the welfare status quo is
most likely to proceed, primarily because of the competition and lack of trust among their
domestic constituencies, created by a heavy dependence on means-tested rather than
universal benefits. By contrast, the political logic of globalization of neo-liberal type plans
for welfare state restructuring have commonly been met in the Scandinavian and
continental European welfare states by high levels of cross-class political resistance. In these
systems, cross-class solidarity, trust and confidence in the system continue to be promoted,
underpinned by inclusive electoral institutions and centralised welfare authority. Thus,
institutions, norms and values interact to render welfare systems resistant or vulnerable to the
twin political and economic logics of internationalization.
The cushioning of systems against what we can call negative integration i.e., the
absorption of economies into a world economy which is destructive of national welfare
distinctiveness can also allow a process of adaptation in which the essence of the European
social model can be sustained. The key features of that model (which we elaborate in chapter
5 below) are extensive basic social security cover for all citizens; a high degree of interest
organisation and co-ordinated bargaining; and a more equal wage and income structure than
in many other parts of the world. Now each of these principles is institutionalised to differing
degrees in the continental European economies and Ireland and the UK are clearly outliers.
Differences in government spending are very high, accounting for almost twice the
proportion of GDP in Sweden as in Portugal. Nevertheless, it is important that Europe
continues to commit itself to the implicit guarantee that its citizens will not be abandoned to
cope on their own in the market place and resists pressures for a race to the bottom. So far,
14
there are few signs that this is occurring (Barnard 2000). This is not just because of the
resistance of vested interests to any dismantling or retrenchment of the welfare status quo;
that does occur and is a problem that European welfare state reformers have to contend with
in their efforts to make the welfare state equitable, efficient and sustainable. It is also because
social protection can help promote the productive capacity of our economies; because it
reconciles people to difficult but unavoidable trends which can enhance the efficiency and
wealth of nations if channelled effectively.
By and large, the European social model allows for a more socially acceptable and peaceful
adjustment to international economic pressures thanks to the more developed welfare state
and better employment relations. Europes comparative advantage continues to lie in its
capacity for avoiding large inequalities, allowing long-term skill-investment, and social
protection against all major social risks. The new and future challenges associated with the
spread of e-commerce and the proliferation of jobs in the information technology and
communications sectors means skills upgrading across the population and the diffusion of
especially generic skills. The welfare state can help people adjust to the otherwise painful
changes that this transformation of the economy will entail and the search for greater
flexibility in both the labour market and in the functioning of social protection must go
hand in hand with security. Thus welfare is not an impediment to but rather reinforces
Europes responsiveness to the new challenges of the information or knowledge based
society.
Using the language of the European Commission, social protection can be an effective
productive factor. The persistently high level of unemployment in the countries of the European
Union, in comparison to the United States, seems to provide ample evidence to support the
intuitively appealing claim that a comprehensive welfare state undermines economic efficiency.
However, we should not forget that some of most advanced European welfare states, among
which Denmark and the Netherlands, practically match the American job miracle, while
sustaining adequate minimum standards of income, health, work, education and housing, as
distinct citizenship rights. This then suggests that generous welfare policy does not necessarily
inhibit economic progress.
Apparently, some policies and institutions make economic competitiveness and social justice
compatible, while others may not. To be sure, both income equality and inequality have their
advantages for the economy. Following traditional neo-classical economic reasoning, income
differentials are essential to economic growth. They constitute crucial incentives for improving
economic efficiency and ensure that labour supply and demand are matched swiftly, by
encouraging workers to work harder and successful employers to offer high wages relative to
their less successful competitors. Universal access to education is good for overall productivity,
economic growth and social cohesion. By the same token, a solid safety net reduces dire poverty
and social instability. From this perspective, social policy and economic performance are
closely, perhaps even indissolubly, interconnected. Social policy provision can potentially
contribute to reducing uncertainty, help create and stabilize collective goods, channel and
mitigate social conflict, foster co-ordination, while reinforcing a spirit of public co-operation and
trust.
The line of reasoning behind the potential positive effect of social policy on economic
performance clearly makes a virtue of institutions that simultaneously impose constraints on and
provide opportunities for individual and collective actors in the political economy. We can
catalogue the positive, efficiency-enhancing outcomes of welfare as follows:
15
social policy is an investment in sustainable economic adjustment and can offer a solid basis
for flexibility and risk-taking, and thus as a contribution to economic activity and wealth
creation.;
the welfare state invites people to enter socially-useful wealth-creating occupations that are
risky for the individual;
by compensating workers and families who contribute to the common economic good by
exposing themselves to periodic market contingencies, the welfare state encourages private
initiative and economic progress;
welfare state provisions, social expenditures, institutions of collective bargaining and worker
participation, and job protection regulation can all provide for a positive investment climate
by fostering stability and creating a healthy, well-educated and highly productive work
force;
adequate levels of social protection help reduce poverty: poverty is bad for any economy,
especially when it is passed down the generations, excluding disadvantaged groups from
economic progress. Dire poverty not only contributes to wasting human capital. It can also
threaten social stability and cohesion;
security against the adverse effects of illness, disability, unemployment, old age, divorce or
child-bearing is of value to the citizens who are protected by social policy and also to society
and the economy at large, on which the burden of the cost of poverty and social instability
would fall if there were no social protection;
however hard to measure, adequate social protection in terms of income support during
periods of short-term unemployment may reduce the search costs for new jobs, fostering
efficient employment matches;
moreover, universal social protection potentially enhances labour market flexibility: people
change jobs more easily when they do not have to worry about whether they will lose their
pension plan or social insurance if they do so.
active labour market policies contribute to curing unemployment by improving the matching
of workers to jobs and keeping the unemployed in contact with the labour market.
policies directed at improving the skills of the unemployed, can make an important
contribution to improving the prospects of poorly qualified job-seekers in the labour market.
access to adequate levels of education clearly makes for good economic performance by
generating a highly-qualified workforce;
if successful, active labour market and vocational training and education policies not only
contribute to lowering unemployment and raising productivity levels by upgrading skills,
they also have a moderating effect on wage increases.
A comprehensive system of collective bargaining permits macro-economically responsive wage
setting. Institutions of social partnership, in particular, channel strategies of flexible adjustment
to changes in world markets (Streeck 1992):
the institutions of collective bargaining, legal extension of collective agreements, and works
councils foster long-term trust in systems of industrial relations, both at enterprise level
together and at the macro-level;
employment protection and legally-sanctioned worker participation through works councils
contribute to competitiveness by engaging workers in production processes, which is
beneficial to both the social climate and productivity;
institutions of social partnership encourage employers and trade unions to jointly invest in
and administer vocational education and training programmes, contributing to the country's
competitiveness by upgrading human capital.
16
Finally, social protection and budgetary expenditures are powerful stabilizers of economic
activity because they help to stabilize effective demand during recessions. This kind of
keynesianism through the back door is still operative today. Social expenditure tends to increase
during economic downturns and decrease during upswings.
Thus, as in the past, competitiveness today still relies heavily on realizing gains from co-
operation and social cohesion, provided by public policies and welfare state institutions.
Following this line of reasoning, the optimal world of internal flexibility is built not by unilateral
management action but on teamwork and low levels of hierarchy within firms. High levels of
skills and capacities for skills acquisition are critical. They depend, in turn, on national education
and training systems which, again contrary to standard neo-classical economic expectations, can
prove to be flexible to new demands. Too high a level of external flexibility, i.e. the absence of
regulatory constraints on firms, destroys trust and undermines internal flexibility. This trade off,
producing a productive form of regulated co-operation is a critical factor for sustaining both
competitiveness and consensus in European labour markets and welfare states.
In line with this prescription, welfare retrenchment can have negative consequences for
economic performance. A substantial reduction in employment protection and worker
participation may lead to a decreased willingness by both employers and employees to invest in
enterprise-specific training because of an expected decrease in the average length of job tenure.
This could result in countries sliding from a highly competitive high-skill equilibrium down the
slippery slope of low-skill equilibrium, with dire consequences for economic competitiveness.
Moreover, substantial cuts in social security benefits may strengthen cyclical movements in the
economy. In short, the pursuit of labour market flexibility without regard to social costs may be
counterproductive if these social costs prevent people from responding positively in terms of
acquiring training and skills.
That said, the way that the social security and wider welfare state systems operate will
undergo important changes in the years to come since social protection is not always
productive. Thus the regulations that cover both employment and the funding of welfare have
helped produce perverse consequences from the anti-unemployment strategies of the past.
Indeed, each welfare regime has created its own employment pathology. As we discuss in
greater detail in chapter 3, in the Scandinavian countries, the distributional costs of generous
social contracts were met by those in employment who have paid high taxes for an over-
developed public sector to soak up the potentially unemployed. In continental Europe, the
price of adjustment has been shouldered by the unemployed, comprised largely of younger,
female and older workers. In southern Europe, an acute inside-outsider problem has
developed as a result of the fragmentation and disparities in the income support system for
those without work, with large differences in the level of protection given to core and
marginal workers.
Thus, social policy is not a productive factor per se. Any account of the positive interaction
effects between social policy and economic performance required the identification of effective
policies and institutional conditions. Not every social policy initiative contributes to a high
degree of goodness of fit between social cohesion and economic performance. If we wish to say
anything profound about the relative economic proficiency of social policy, we are obliged to
direct our attention closely to the particular combinations of institutions and policy choices
under different problem constellations. We should therefore never turn a blind eye to the
negative, unintended and perverse, side effects of social policy provisions:
17
although comprehensive welfare provisions are not necessarily economically dysfunctional,
certain forms of social protection do have a negative impact on economic processes;
excessively generous social security benefits of long duration do undermine work incentives,
contribute to a heavy tax burden and lead to high gross labour costs;
high levels of expenditures on social protection absorb capital and thus crowd out private
entrepreneurial initiative;
moreover, social security contributions raise the costs of production and rigid forms of
dismissal protection raise the costs of hiring and firing. Poverty and inactivity traps destroy
human capital.
Thus, the infamous poverty traps in many means tested welfare programmes in the Anglo Saxon
welfare states represent clear disincentives for the partners of the unemployed to actively seek
employment or to carry on working, as the benefit is reduced by one pound for every pound that
partner earns. The 'compensatory' - transfer based - welfare states of Continental Europe seem
trapped in a pathological vicious cycle of 'welfare without work' (Esping-Andersen 1996).
Because social security benefits are predominantly financed out of payroll contributions from
workers and employers, a complicated pattern of mutual interaction between investments,
productivity, labour participation, wage costs and (non-wage) social security arrangements is
operative under the continental welfare regime. Under increased competitive pressure, firms
in high-wage economies can only survive if they are able to increase productivity. This is
most commonly achieved through labour-saving investment strategies, raising productivity
levels of workers through high-quality vocational training and education, and/or by laying off
less productive or too expensive, mostly older, workers. High minimum wages and
substantial non-wage labour serve here as a productivity whip.
However, they can also engender an inactivity trap, whereby a virtuous cycle of
productivity growth runs into a vicious cycle of high wage costs, exit of less productive
workers and rising social security contributions, requiring further productivity increases on
competitive firms, eliciting another round of reductions in the work force (Scharpf 1997a).
Employment disappears in sectors where productivity increases stagnate and the prices of
goods and services cannot be easily raised. Moreover, if service-sector salaries are linked to
exposed-sector wage developments, this logic frustrates job-growth in the labour-intensive
public and private service sectors, especially at the low end of the labour market. The
particular interplay between competitive adjustment and social protection in the continental
welfare state has clear negative labour market effects:
overall low employment and high levels of structural inactivity; low female participation
rates; declining participation of older workers;
underdevelopment of part-time jobs;
and a below-average job growth in the service sector;
at the low end of the labour market this engenders on the demand side a shortage of jobs
for the low skilled and on the supply side a lack incentives to enter the labour market;
moreover, the inactivity trap of the continental welfare state reinforces existing 'insider-
outsider' cleavages. Existing privileges of a diminishing group of 'insiders' - highly
productive workers with high wages and expansive social rights - will be safeguarded at
the expense of a growing population of inactive 'outsiders' (elderly workers, women and
youngsters), who remain financially dependent upon either the welfare state or traditional
breadwinners.
If these employment pathologies are to be tackled, and if income inequalities are not also to
increase, such changes must be accompanied by other innovations. These will include
18
reforms to taxation (e.g. the introduction of negative income taxes) and the way in social
security systems are financed and deliver benefits alongside a reregulation of the sheltered
sectors of continental economies, to price people with low or non-existent skills into work.
Europe can adapt to the challenges of the information and communications technology
revolution, and this revolution can be employment-enhancing in the long-term, if it invests in
a new form of flexibility for the workforce (in which occupational patterns and skills profiles
are more important than inequality-increasing wage flexibility) and engages in extensive
institutional innovation, including a greater attention to the spread of information and
communications skills through the education and training systems. There also needs to be a
co-ordination of supply-side policies across all European countries, focusing on the rapid
diffusion of the new techno-economic paradigm throughout the wider socio-economic system
(Freeman and Soete 1994; Snower 1997; Soete 1999; Lindley 1999).
Again, there is no necessity for radical deregulation to attain these goals. Positive-sum
outcomes are possible. As we discuss in detail in section 3, 4 and 5 below, many countries are
already engaged in policy innovations to reduce the quicksand effect of social policy
provisions by tackling the costs of transfer-heavy welfare state and redesigning benefit
formulas so as to make them both financially sustainable and more employment friendly. As
for taxes, there are solutions, including taxing more heavily spending with an unavoidable
physical presence, namely property or shifting the burden to consumption, including levies on
energy use, pollution and other green taxes, although this may be regressive and also
destructive of low-productivity service employment. There is thus a considerable need to
rethink a range of fiscal policies and their relationship with social security expenditure. But
none of this is necessarily inimical to negotiated paths of adjustment. Nor is responding to the
accentuated power of the markets. We should recognize that globalization has often been
made the scapegoat for the failure of certain countries to control their domestic sources of
social conflict and spending. The real task is to build or rebuild domestic coalitions and
arrangements containing trade-offs that make such policies credible with both powerful
national and international interests.
Conclusion
As we argue more specifically below, responding to this complex set of challenges in
political and policy terms involves a complex two-level game in most European countries,
incorporating both an electoral arena and an arena of interest intermediation (Pierson 1998).
Unilateral, state imposed solutions of a neo-liberal stripe are actually quite inappropriate and
indeed infeasible for these countries, as we argue in section 5. Distributive conflict over
welfare reform is likely to intensify political controversy over the adjustment process and
unless carefully managed, this could easily lead to the mobilization of disadvantaged groups
and ideological conflict over competing visions of the welfare state. In many European
countries opposition to welfare cutbacks have proven to be quite fierce. In short, any
governments success in the electoral will be critically dependent on its ability to steer the
process of adjustment between the Scylla of economic mismanagement and the Charybdis of
dismantling the welfare state.
But electoral incentives, institutional stickiness and the veto points created by powerful
vested interests devoted to defending transfer-heavy welfare states and their redistributive
outcomes make anything other than incremental and negotiated reform, based on complex
bargains and linkages between policy areas, very difficult. The crux of the problem can be
19
construed, pace Pierson (1998), in terms of irresistible forces (post-industrial pressures)
meeting immovable objects (strong public support and veto points). Reforms to health care
systems, pensions and labour markets all require a careful process of adjustment if social
cohesion as a governing principle of these systems is not to be sacrificed and if core
constituencies and their representatives (welfare professions, the labour movement, citizens)
are not to erect insuperable impediments to change. Despite their dissimilarities in terms of
adjustment problems all face the common problem of making welfare reform acceptable and
legitimate. We return to this particular set of issues in chapter 4. But first we investigate in
greater detail the problem constellations of each of Europe four worlds of welfare.
20
3. WELFARE REGIMES AND ADJUSTMENT PROBLEMS
Europe's welfare regimes or families are analysed in terns of an adaptation
of the conventional 'three worlds' model to include a distinctive 'southern
type. We then consider the particular nature of the adjustment challenges
they currently face in terms of social security, labour market and
employment policy reform. Of course, these families have sometimes
important differences among them, and we begin to illustrate in this section
how national features can differ.
Seen from below, the social protection systems of the member states appear to be highly
diverse: indeed so diverse that it may seem impossible to identify common traits and almost
pointless to speak of the European social model. Each nation has followed a distinctive path
of welfare state development, which has left its mark on todays policies (and politics). In the
eyes of country specialists, the dynamics of persistence clearly overshadow those of
convergence. However, as the rich literature on welfare state models (or regimes, or types)
has shown, certain countries are less dissimilar than others. In fact they share a number of
institutional ingredients that are systematically linked, producing a distinct logic of
development over time and that, today, pre-structure in similar ways the reform agenda, in
terms both of constraints and opportunities. Drawing on this literature, four different families
of welfare (one could say four different social Europes) can be identified: the Scandinavian,
the Anglo-Saxon, the Continental and the South European. They can be differentiated
according to 1) risk coverage and eligibility; 2) the structure of benefits; 3) financing
mechanisms and 4) organisational arrangements.
Before we consider these families in turn, it is worth comparing their relative performance
along a number of indicators in order to gain a clearer idea of their adjustment problems and
reform potential. We begin by distinguishing among four categories of policy effectiveness:
macroeconomic performance, employment performance, the level of social security spending,
benefits and services, and the distributive outcomes in terms of wage dispersion, income
equality, and poverty.
The various performance indicators reveal considerable cross-country differences in each of
these dimensions. With respect to macroeconomic performance (table 4.1) the picture is very
mixed. The relative position of a country is clearly dependent on the selection of and the
relative weight given to the different indicators. However, looking at GDP growth as main
indicator for macro-economic performance, Ireland, Denmark, the Netherlands, and the
United Kingdom displayed clearly an above average record in recent years, while Germany
and Italy experienced only meagre rates of economic growth.
21
Table 3.1. Macro-economic performance
GDP GROWTH
A
INFLATION
B
STRUCTURAL
BALANCE 1998
C
CURRENT
ACCOUNT
BALANCE
A
GDP PER
CAPITA IN
1997
D
Ireland 8,9 1,8 1,0 2,6 96
Finland 4,9 1,1 0,9 4,1 95
Luxembourg 4,3 1,2 154
Denmark 3,6 2,0 0,6 0,8 119
Netherlands 3,2 2,1 -2,0 5,8 103
Portugal 3,2 2,7 -2,2 -2,4 68
UK 3,1 2,6 -0,4 0,0 95
Spain 2,9 2,5 -1,6 -0,3 74
Sweden 2,6 0,7 3,2 2,0 95
France 2,4 1,3 -2,4 1,6 99
Belgium 2,4 1,6 -0,7 4,5 108
Austria 2,4 1,2 -2,0 -2,1 107
Germany 2,0 1,4 -1,4 -0,6 103
Italy 1,8 2,4 -1,4 2,4 99
EU 15 3,2 1,6 -0,7 0,9 96
USA 3,3 2,3 0,9 -2,0 136
Japan 0,9 0,8 -5,0 2,4 114
a
Average 1994-1998
b
Average 1996-1998
c
General government
d
OECD = 100; in purchasing power parities
e
estimation for 1997
Sources: OECD (Paris, 1999): Statistical Compendium (Economic Outlook; National Accounts I), own
calculations
With respect to employment performance, table 4.2 also reveals substantive variation.
National employment records display a span in employment/population ratios from 78.1
percent for the United Kingdom to 50.8 percent for Italy. For unemployment the span extends
from 2.8 percent in Luxembourg to 11.7 percent in France. Cross-national differences are
even more pronounced with respect to the level of long-term unemployment. However, the
comparison does confirm a general finding we return to on a number of different occasions
below: that those countries with an employment performance significantly below the average
(Germany, Belgium, France, Spain and Italy) are welfare states of either the Continental or
the Southern regime type. Their strong reliance on payroll taxes to finance social security
drives up non-wage labour costs; all combine modest levels of public and private
employment. This is not to say that continental welfare states per se are unable to escape the
inactivity trap discussed in chapter 2. The Netherlands and Portugal with above average
employment levels, low unemployment and modest levels of youth unemployment, which
seem to have been able to reverse or steer away from the vicious cycle of welfare without
work are cases in point.
22
Table 3.2. Employment performance in the European Union (1998)
Employment ratio
a
Unemployment ratio
b Long-term
unemployment
c
Female employment
ratio
Youth unemployment
d Participation rate, men
aged 15-64
Austria 67,4 4,7
1,3
59,0 7,5 42,5
Belgium 57,3 8,8
5,3
47,5 20,4 33,9
Denmark 75,3 5,1
1,3
70,2 7,2 61,1
Finland 64,8 11,4
3,6
61,2 22,0 44,5
France 59,4 11,7
5,1
52,3 25,4 41,3
Germany 64,1 9,4
4,9
55,6 9,4 55,6
Greece 54,9 9,6
4,4
39,6 32,1 57,0
Ireland 59,8 7,8
4,9
48,2 11,5 63,0
Italy 50,8 12,2
8,1
36,7 32,1 42,6
Luxembourg 60,2 2,8
1,1
45,6 6,4 35,1
Netherlands 69,8 4,0
2,1
59,4 8,2 46,9
Portugal 66,8 4,9
2,1
58,1 9,5 67,3
Spain 51,2 18,8
9,0
35,7 34,1 57,7
Sweden 71,5 8,2
3,0
69,4 16,8 71,4
United Kingdom 71,2 6,3
2,4
64,2 12,3 62,6
EU Average 61,1 10,0
4,9
51,3 19,1 52,2
a
Total employment/Population 15-64 years
b
Standardised ratio
c
Long-term unemployed (12 months and over) as percentage of labour force
d
15-24 years;
Sources: OECD, Employment Outlook 1999, own calculations.
23
With respect to levels of social protection (table 4.3), we again continue to observe
tremendous cross-regime variation. Denmark, Finland and Sweden continue to be the most
generous welfare states with very high levels of spending, especially on social services. The
continental welfare states remain at intermediate levels of generosity and clearly spend less
on social services than their Nordic counterparts. At the lower end of the scale of social
protection we find the liberal Anglo-Saxon and the Southern welfare states, which are lean in
term of both of social expenditures and public services
Table 3.3. Level of Social Security in the European Union
Social expenditu-
res in percent of
GDP
a
Net replacement rate of
unemployment benefits
c
Elderly and disabled
services as percent of
GDP
Family services as
percent of GDP
Austria 29,5 66 percent 0,36 0,49
Belgium 30,0 71 percent 0,15 0,13
Denmark 33,6 83 percent 3,04 2,10
Finland 32,1 83 percent 1,69 1,41
France 30,8 82 percent 0,78 0,37
Germany 30,5 75 percent 0,58 0,78
Greece 23,3 -- -- 0,01
Ireland 18,9 57 percent 0,46 0,14
Italy 24,8 42 percent 0,20 0,10
Luxembourg 26,2 88 percent 0,48 0,43
Netherlands 30,9 83 percent 0,67 0,36
Portugal 21,6 83 percent 0,20 0,29
Spain 22,4 73 percent 0,26 0,08
Sweden 34,8 81 percent 3,37 1,72
United Kingdom 27,7 68 percent 0,68 0,48
Average
27,8 74 percent 0,92 0,59
a
1996
b
1993; percent of average earnings men/women, 25-64
c
1995; Net replacement rates after tax; average
for four different family types (single, married couple, couple with 2 children) and two earnings levels (APW-
level and 66,7 percent of APW level); including unemployment benefits, family, and housing benefits in the first
month of benefit receipt; it is assumed that waiting periods are met
d
1992; OECD mean = 100, average for
different family types, before housing costs
e
Total social spending is considerably underestimated as private
(quasi) mandatory pensions are not included in the figures,
Sources: Eurostat; OECD (Paris, 1999): Social Expenditure Data Base 1980-1996; Gern (1998); Eardly et al,
(1996); OECD (Paris, 1998): Benefit systems and work incentives; own calculations
Welfare state generosity is also reflected in the distributive performance of the welfare state
(table 4.3). The Anglo-Saxon countries display not only high levels of wage dispersion, but
also comparatively high poverty rates and a comparatively inegalitarian distribution of
disposable household income. The outlier here is Ireland, which displays medium levels in
distributive outcomes alongside extremely high levels of economic growth. The continental
welfare states are by and large located in the middle range, displaying a medium performance
in terms of distribution. However, within the sample of continental welfare states, the
spectrum is wide. The Southern welfare state, with average levels of wage dispersion, reveals
strong disparities in terms of post-tax and transfer income distribution and poverty. This
24
should perhaps be interpreted as a consequence of its pension-heavy and clientelistic,
insider-biased welfare state and the lack of an adequate safety net for youth, single mothers,
and the long-term unemployed. The exception here again is Portugal. Belgium, Germany, and
the Netherlands, although belonging to the continental cluster, reveal a comparatively
favourable performance along all three dimensions, coming close to the Nordic welfare states
in terms of distributive performance.
Table 3.4. Distributive performance 1994
Poverty rate
a
Gini-coefficient
b
Wage dispersion D9/D1
c
Austria 12,1 0,297 3,66
Belgium 11,4 0,296 2,25
Denmark 4,4 0,227 2,17
Finland 2,38
France 9,9 0,290 3,28
Germany 10,9 0,296 2,32
Greece 14,9 0,351
Ireland 9,4 0,357
Italy 12,5 0,314 2,8
Luxembourg 9,5 0,304
Netherlands 5,2 0,247 2,6
Portugal 15,9 0,368 4,05
Spain 14,9 0,340
Sweden 2,13
United Kingdom 11,6 0,345 3,3
Average 13,6 0,322 2,81
a
percent below 50 percent of Median income
b
Lower figures indicate a more egalitarian structure of
distribution of disposable income
c
D1 refers to the lowest income decile, D9 refers to the highest income decile
(latest year available)
Sources: Eurostat, Sozialportrt Eurpas 1998; OECD (Paris, 1996): Employment Outlook, July 1996.
The performance indicators confirm the continuing distinctiveness of the four worlds of
welfare. But this comparison of policy effectiveness also reveals that relatively successful
employment and social policies are possible under very different welfare state arrangements.
Ireland, Denmark, the Netherlands, and Portugal, respectively originating from the Liberal,
Social Democratic, Continental and Southern worlds of welfare capitalism, are interesting
examples.
The policy profiles in these countries thus deserve a closer inspection. Despite their
affiliation to different welfare regimes, these countries all display an above-average
employment performance: overall employment levels have increased, with fluctuations, since
the early 1980s and are at present above the international average (except for the Netherlands,
which has caught up very rapidly from a very low starting level).
2
At the same time,
unemployment rates have fallen substantially and are currently rather low in these countries.
Female employment in the Netherlands, Ireland and Portugal is still at an average level, but
has been growing rapidly in recent years. Female employment rates in Denmark clearly
exceed the average. In comparative perspective, rates of youth unemployment are low in
Denmark and the Netherlands, and about average in Ireland and Portugal. Interestingly, these

2
Between 1983 and 1998 employment/population ratios increased from 73 to 75.8 percent in Denmark and from
51.1 to 61.8 percent in the Netherlands. In the same period the OECD-18 average only went up from 64.6 to
66.5 percent.
25
four countries were able to avoid the kind of welfare state dismantling and social exclusion
that we encounter in the United Kingdom. This is also true for Ireland, which, although
clearly belonging to the liberal regime type, displays only medium levels of poverty and
inequality (see table 3.7).
These findings leave us with the intriguing puzzle that above-average performance can be
achieved in different regime types, suggesting that there is no inherently pathological model
or alleged villain. To be sure, different welfare states are affected differently by the various
dimensions of economic internationalization. As a result, they face different problems of
policy adjustment. However, as we have already emphasised in chapter 2, effective policy
adjustment is not only about tackling the challenge of international competition. Effective
policy responses have also to address regime-specific problems, which often go beyond
competitiveness per se. We now turn to an in-depth consideration of these regime-specific
problems, alongside the persistence of regime-specific strengths.
Scandinavia
In the Scandinavian countries, as is well known, social protection is a citizens right,
coverage is fully universal and everybody is entitled to the same basic amounts (high by
international standards) when social risks occur even though the gainfully employed receive
additional benefits through mandatory occupational schemes. Besides generous income
maintenance, the Scandinavian systems offer a wide array of public social services and active
labour market programmes, which sustain high participation rates for both men and women.
As shown by table 3.5, Nordic social spending levels have remained by far the highest in
Europe throughout the 1980s and 1990s.
Table 3.5. Social spending and taxation as a percentage of GDP (Scandinavian countries)
Social Expenditures Total taxation
1980 1990 1995 1980 1990 1997
Sweden 29,8 32,2 33,0 48,8 55,6 53,3
Denmark 27,5 28,1 32,1 45,5 48,7 52,2
Finland 18,9 25,2 32,0 36,9 45,4 47,3
EU-15 21,1 23,4 26,2 37,3 41,1 42,8
USA 13,4 13,5 15,8 26,9 26,7 28,5
Japan 9,9 11,2 13,8 25,4 31,3 28,5
Source: OECD 1999, Social Expenditure Database 1980-1996; OECD 1999,
Revenue Statistics (Statistic Compendium); own calculations.
Table 3.6. Government employment and labour market participation (Scandinavian countries)
Government
employment (1998)
Labour market participation rates (1997)*
Women Men
Sweden 21,2 85,8 90,6
Denmark 23,0 83,7 93,2
Finland 14,8 84,7 90,8
EU-15 12,1 71,8 93,4
USA 10,6 -- --
Japan 6,2 -- --
* Persons aged 25-49 years. Source: OECD; Eurostat.
26
The Scandinavian welfare state is also an important employer: in Denmark and Sweden,
government employees (largely women, especially in the social service sectors) represent
more than one fifth of the employed population, against an EU average of 12.1 percent (table
3.6). These systems embarked on the road to high public employment in the 1960s, when
financial resources were not a problem. A self-reinforcing mechanism then emerged whereby
the expansion of welfare state jobs encouraged women to enter the labour market, allowing
a de-familization of many caring functions, which in turn fostered the demand for more
services (Fargion 2000).
General taxation plays a large (though not exclusive) role in the financing of social
expenditure. This is especially true of Denmark, where social security contributions only
amount to around 3 percent of GDP (EU average = 28.6 percent). In Sweden and Finland
contributions make up a smaller share of total taxation than in Continental Europe, but larger
than in the UK or Ireland. Means-tested public assistance plays a rather circumscribed role.
The various functions of social protection are highly integrated and the provision of benefits
and services is mainly the responsibility of (central and local) public authorities. The only
sector that remains substantially outside this integrated organisational framework is
unemployment insurance, which is not formally compulsory and is directly managed by the
trade unions.
Thanks to their institutional solidity and coherence, the Scandinavian systems have long been
regarded (and to a large extent still) as the quasi-ideal type welfare state, resting on deep-
seated norms of egalitarianism and solidarity. However, the exogenous and endogenous
challenges that hit all keynesian political economies in the last quarter of century have also
impacted on this part of Europe, generating both a cost and a jobs problem. The early
1990s produced a veritable shock in both respects, especially for Finland and Sweden. GDP
fell for three consecutive years (by as much as minus 8 percent in 1991 in Finland), the
budgetary balances worsened dramatically and unemployment levels deteriorated alarmingly
especially compared with the near-full-employment tradition (see graph 3.7). The Danish
situation was somewhat different from the other two countries - with higher unemployment in
the 1980s, but better macro-economic conditions in the early 1990s (Stephens 1996).
27
The economic crisis of the early 1990s pushed up social expenditure, which in 1993 reached
36.9 percent of GDP in Sweden and 34.8 percent in Finland (the Danish peak was 32.6
percent in 1994). Thus, throughout the past decade the Nordic countries have been grappling
with pressures for cost-containment in their generous social programmes and for labour
market re-organisation - especially with a view to overcoming the service sector trilemma
by generating more demand for private employment.
Given the high level of popular support for social policies (rooted in the folkhemmet culture
and tradition - the welfare state is the house of the people) the reform agenda has been
shaped by a pragmatic, problem-solving approach, with no grand controversy on alternative
views and scenarios. The principles of universalism have not been significantly questioned,
even if this has meant cuts across the board of replacement rates (especially in the fields of
sickness and unemployment benefits), of eligibility conditions and benefit duration a sort of
universalism in reverse gear.
Graph 3.7. Unemployment rates in Denmark, Finland and Sweden
(based on national definitions)
0
2
4
6
8
10
12
14
16
18
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
%
Source: OECD.
Finland
Denmark
Sweden
28
Table 3.8. Main social policy reforms in the Nordic countries
Denmark
1994 Labour market reform
Unemployment insurance reform
Tax reform
1994-96 Changes in pension rules
Finland
1992-97 Restrictive reforms of unemployment benefits
1992-96 Restrictive reforms of sickness cash benefits
1992-93 Cuts in parental benefits
1996-97 Pension reform
Sweden
1991-97 Restrictive reforms of sickness benefits and sick pay
1993 Restrictive reform of unemployment benefits
1994 Agreement on pension reform
1994-95 Reform of parental benefits
1994-95 Reduction of child allowances
1998 Pension reform enacted (into effect from 2001)
Some significant steps have been taken towards the Bismarckian tradition in the field of
pensions: the link between contributions and benefits has been significantly strengthened by
the reforms of the 1990s in both Sweden and Finland. But this trend has questioned the
maintenance of a basic pension guarantee, independent of labour market status. Besides cost-
containment, a second important leitmotiv of the Scandinavian reform agenda in the 1990s
has been activation, i.e. the modification of social security programmes to give actual and
potential beneficiaries incentives to stay in or find gainful employment. The work-line as
it is referred to - has indeed been strengthened, especially in Denmark. The Danish labour
market reform of 1994 was one of the most far reaching and comprehensive moves in Europe
towards the activation of benefits (see Cox 1998)
3
.
The reforms of the 1990s have clearly downsized the Scandinavian model, at least in terms of
institutional generosity, and have also re-organised its system of incentives
4
. But the
underlying architecture of the model remains largely intact: in the words of Stein Kuhnle,
the Nordic welfare states stood the test of the 1990s, and have even shown that an
advanced, universalistic welfare state is not a handicap when a sudden, unexpected economic
crisis occurs (Kuhnle 2000). In a less conjunctural perspective, the architecture of Nordic
welfare seems well calibrated for responding to the new risks and needs associated with
ageing societies and with the transition to the new economy (cf. table 3.9). The presence of
basic income guarantees is a safeguard not only against poverty and exclusion, but also
against the penalties deriving from spells out of work and broken or composite careers. The
availability of a wide array of services allows Nordic welfare systems to respond more
effectively to the caring needs of families and to socialise their costs (including the cost of
children). Moreover, high rates of labour market participation attenuate the financial strains
on pension systems. As table 3.9 shows, the Scandinavian countries also invest highly in
labour market training (a crucial policy for more knowledge intensive economies) and their
education expenditure ratios are the highest by far in Europe.

3
The Appendix of this report contains detailed information on the reforms listed in the tables of this chapter.
4
The streamlining of incentives has not only affected welfare beneficiaries, but also welfare producers:
important organisational and financial reforms have been introduced in the three countries in health care and
social services (Freeman and Moran 2000; Fargion 2000).
29
Table 3.9. Public expenditure on selected functions
Pensions
1995
Education
1995
Family and
elderly
services
Active labour
market
policy
1
Labour
market
training
1
Social
exclusion
2
1995
Denmark 5.6 6.5 5.28 1.89 1.07 1.5
Sweden 9.0 6.6 5.10 2.01 0.48 1.1
Finland 9.1 6.6 3.10 1.23 0.41 0.7
UK 7.6 4.6 1.16 0.42 0.09 0.3
Ireland 4.6 4.7 0.60 1.66 0.21 0.4
Austria 13.4 4.5 0.85 0.44 0.15 0.3
Belgium 10.3 5.0 0.28 1.29 0.29 0.7
Germany 10.9 4.5 1.36 1.27 0.34 0.6
France 12.2 5.8 1.14 1.37 0.35 0.5
Netherlands 7.8 4.6 1.03 1.76 0.22 0.7
Luxemburg 10.4 4.3 0.91 0.30 0.01 0.4
Italy 13.6 4.5 0.30 1.08 0.01 0.0
Spain 9.2 4.8 0.35 0.72 0.21 0.1
Portugal 7.7 5.4 0.53 0.87 0.28 0.1
Greece 10.1
3
3.7 - 0.35 0.06 -
EU 15 9.4 5.1 1.57 1.2 0.27 0.5
Source: OECD.
1
1998 or latest year available
2
Source: EC (there may be a slight overlap with the other categories of expenditure).
3
Or latest year available
Some unresolved problems remain, however, in the employment regimes of Scandinavia,
particularly as regards the growth of private employment in the sheltered service sectors. This
seems especially true for Sweden where jobs in these sectors have markedly declined during
the 1990s a trend which can be explained by the sensitivity of less productive services to
the high tax wedge, low wage dispersion and high minimum wages (Iversen and Wren 1998;
Scharpf 2000). If it is true that the margins for employment creation in both the public and
the private exposed sectors are quite narrow, then the key for solving the employment
trilemma lies in the social and political readiness to relax traditional norms of universalism
and egalitarianism regarding wages and job protection. So far, however, Homo
Socialdemocraticus (to use Esping Andersens metaphor) has been very reluctant to take
steps in this direction
5
.
a) The United Kingdom
The second social Europe is made up by one big country: the UK (Ireland shares many
elements of the UKs liberal tradition but has parted company from it in important ways in,
especially in its emphasis on negotiated adjustment)
6
. The coverage of social protection is
highly inclusive, though not fully universal (except for health care): inactive citizens and the
employed earning less than a certain threshold have no access to National Insurance benefits.
These benefits which are flat rate are much more modest than in Scandinavia.

5
Esping-Andersen, 1999.
6
We will return to the Irish case in the next chapter.
30
Conversely, the range of social assistance and means-tested benefits is much more extensive.
Health care and social services are financed through general taxation, but contributions play
an important role in the financing of cash benefits. Tax and expenditure levels have remained
relatively low (cf. table 3.10), and the same is true for public sector employment (9.6 percent
in 1998, compared with an EU average of 12.1 percent and 10.6 percent in the US). The
organisational framework of the British welfare state is highly integrated, more centralised
than in Scandinavia and entirely managed by the public administration: the social partners are
excluded from policy making and management.
Table 3.10. Social spending and taxation as a percentage of GDP (UK and Ireland)
Social Expenditures Total taxation
1980 1990 1995 1980 1990 1997
United Kingdom 18,3 19,5 22,5 35,2 36,6 35,3
Ireland 17,6 19,2 19,4 32,6 34,8 34,8
EU-15 21,1 23,4 26,2 37,3 41,1 42,8
USA 13,4 13,5 15,8 26,9 26,7 28,5
Source: OECD 1999, Social Expenditure Database 1980-1996; OECD 1999, Revenue Statistics (Statistical
Compendium); own calculations.
The UK welfare state is usually regarded as the closest European approximation to the
liberal regimes of North America and the Antipodes, with their modest levels of protection,
tough commodification incentives, and a predilection for targeted provision with all its
adverse effects. This view is basically correct, with some caveats. Aggregate social spending
in the UK remains well above that of the US
7
, the NHS is a solid institution catering to the
needs of the whole population and the range of benefits offered (if not their amounts, in many
cases) is wide by comparative standards. But the institutional logic of the British welfare state
is indeed distinct from that of the other social Europes: overtime this logic has generated
specific outcomes and problems and has thus shaped a specific reform agenda.
The flat-rate nature of Beveridgean benefits and their coverage loopholes (based on
earnings thresholds) allowed Conservative governments in eighties and nineties to
residualize social protection and expand of low-pay, low-skill jobs
8
. The real value of
universal benefits (e.g basic pensions and child benefits) was left to erode while the earnings-
related supplements to National Insurance payments were abolished. A barrage of restrictive
measures were introduced in the field of unemployment especially regarding the young
unemployed - which culminated in the new Jobseeker Allowance in 1996, which has limited
the duration of benefits and made them conditional on rather strict activation criteria. The
middle classes were encouraged to opt out into non-public forms of insurance (e.g. private
occupational pensions after the 1986 reform) and the role of targeted, means-tested benefits
expanded rapidly despite the tightening of eligibility rules inspired by the new philosophy
of workfare. Between 1980 and 1992, means-tested benefits grew from 1.8 percent of GDP
to 3.9 percent - by far the highest in Europe (table 3.11). A comparison with other Anglo-
Saxon countries shows that in the 1990s the British welfare state reproduces the dual pattern
of provision typical of such liberal regimes, bearing close similarity to the US pattern.

7
According Eurostat statistics, social protection expenditure in the UK is just slightly below the EU average: in
1996 the two figures were respectively 27.7 percent and 28.7 percent.
8
For a detailed long-term reconstruction and discussion of social policy and employment developments in the
UK, cf. Rhodes (2000a and 2000b).
31
Table 3.11. Social assistance expenditure in selected European countries
Cash social assistance
( percentage of GDP)
Total social assistance
expenditures as percentage of
social security
1980 1992 1980 1992
Germany 1,0 1,6 7,1 11,9
France* 0,6 1,3 3,5 6,4
Italy 1,1 1,5 9,1 9,1
Sweden* 0,8 1,5 4,6 6,7
United Kingdom* 1,8 3,9 21,9 33,0
EU-15 0,9 1,5 7,7 10,2
Australia 5,4 6,8 67,6 90,3
Canada 1,6 1,4 19,6 18,9
USA 1,1 1,3 29,3 39,8
Japan 0,4 0,3 7,3 3,7
* Including housing
Source: OECD 1996, Social Assistance in OECD Countries: Synthesis Report, Paris;
own calculations.
A second important ingredient of British reforms since the 1980s has been the introduction of
wage subsidies to supplement low pay. The first in-work benefits were introduced as long
ago as 1973 (as Family Income Supplement), but the new Family Credit introduced in 1986
was more generous - in terms of income supplementation and offsets for childcare expenses -
and became more widespread, especially when extended after 1995 to childless couples and
single adults as Earnings top-ups. It was thought that the expansion of in-work benefits was
would help remove the unemployment trap by increasing incomes for those in work without
reducing out-of-work incomes and at lower budgetary cost than general tax cuts. Besides
wage subsidies, on the employer side incentives to hire the low-skilled, long-term
unemployed were introduced in 1995 and 1996. These included a reduction of contributions
for employees earning below a certain level and a total exemption for up to a year when
hiring someone unemployed for more than two years.
These developments have had significant consequences. The erosion of universal provision
(as well as the market-oriented re-organization of health and social services) has contributed
to an early avoidance of the cost problem, as witnessed by expenditure trends. Thus, the
pension reforms of the 1980s have freed UK governments from one of the most complex and
difficult problems facing the governments of the other Social Europes - coping with
accumulated pension liabilities. In 1995, pension expenditure in the UK amounted to only 7.6
percent of GDP, one of the lowest figures in Europe (EU average: 9.4 percent; cf. table 3.9
above). Wage subsidies have fostered an expansion of private employment and a remarkable
reduction of unemployment (graph 3.12). Unlike many other European countries, the UK no
longer has a problem of jobless growth.
32
But inequality and poverty levels have also markedly increased partly due to the perverse
effects of welfare residualization. During the 1980s and 1990s, the nature of British
employment and the distribution of earnings have changed considerably. On the one hand,
there has been a sharp decline in fordist jobs in manufacturing and other non-service sectors
in the middle range of the earnings distribution. On the other hand, the increase in
employment has been concentrated in sectors like banking, finance and business services
where earnings are relatively high and in hotels, catering and other services where pay is low.
Meanwhile, earnings at the upper end of the spectrum have grown relative to those at the
bottom. The result has been a rapid polarization of incomes (table 3.13) (Rhodes 2000b).
Table 3.13. Income distribution and poverty in selected European countries
Gini-I ndex Poverty ratio
1983-1987 1992-1995 1983-1987 1992-1995
Belgium 22,8 23,0 4,8 5,5
Denmark 25,7 24,0 7,7 6,9
Sweden 22,0 22,9 8,0 7,3
United Kingdom 30,4 34,6 7,0 10,6
USA 34,1 36,9 17,9 17,9
Source: Gini and Poverty - Luxembourg Income Study Website: http://lissy.ceps.lu
The increase in the number of working poor is the other side of Britains success in creating
more jobs than in many of its European counterparts. Between 1990 and 1995, the number of
working families with children receiving means-tested Family Credit to top up low pay
almost doubled. Statistics also show a marked increase of poverty levels. In the mid-1990s,
nearly 10 million people in 5.7 million families were dependent on means-tested Income
Support, compared with 4.4 million in 2.9 million families in 1979 (Johnson, 1996; OECD,
1998). Recent studies report a worrying decline in income mobility, with growing numbers
stuck in a low pay/no pay cycle (Gurumurthy 1999).
With the New Labour government, a distinct reform agenda has emerged in the UK. While
not essentially questioning the functional links between the social policy/employment regime
and the economy, inherited from its predecessors, the new government has embarked upon a
strategy of rationalization in various directions (table 3.14).
G r a p h 3 . 1 2 Empl oy me nt pe r f or ma n c e in t h e Un i t ed K i n g d o m
1 9 8 0 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8
0. 0
10. 0
20. 0
30. 0
40. 0
50. 0
60. 0
70. 0
B
u
s
i
n
e
s
s
/
p
u
b
l
i
c

e
m
p
l
o
y
m
e
n
t

r
a
t
e

a
s

%

w
o
r
k
i
n
g

a
g
e

p
o
p
u
l
a
t
i
o
n
Bu s i n e s s e mp l o y me n t r a t e
U n e mp l o y me n t r at e
Go v e r n me n t emp l o y me n t r at e
Sour c e: OECD; own c al c ul at i ons .
33
Table 3.14 Main social policy reforms in the UK during the 1990s
1991 Reform of the NHS (internal market)
1995 Pension reform
1996 Introduction of the new job seeker allowance and of statutory sick pay
Family credit transformed into Working Families Tax Credit
1997-1999 Introduction of national minimum wage
Minimum income guarantees for disabled and pensioners
New deal and Welfare to Work initiatives provide new activation incentives
Changes in the NHS
These include fine-tuning benefit rules to neutralize the various traps created by old and
new welfare-to-work schemes, fighting against poverty and social exclusion through an
increase in minimum guarantees, tax reforms and the introduction of new targeted
programmes. The NHS is being strengthened and investment in human capital policies
increased with a view to upgrading skill levels. As shown in table 3.9 above, education
expenditure was just below the EU average in the mid-1990s, but spending on labour market
training (and, more generally, on active policies) was at very modest levels.
The enhancement of national human capital seems an especially important ingredient of New
Labours Third Way project, which explicitly aims to bring together the inherited neo-
liberal design and incentive structure with elements of Scandinavian-style active labour
market policy (Crouch 2000). But will the Third way succeed in reducing poverty and
inequality while preserving the UK economys recent capacity for employment creation? To
some extent, the dilemmas facing the New Labour government are the inverse of those facing
the other EU governments. In the solidarity/efficiency trade off, it is the former that needs to
be enhanced in the UK. The main political challenge for a strategy of modernization is that
of overcoming not the vested interests of entrenched welfare constituencies but the resistance
of the general public to paying higher taxes, regardless of their oft recounted willingness to
do so in opinion polls (Rhodes 2000a). So far, the Blair government has tried so solve this
dilemma by stealth, i.e. by finding indirect and invisible ways of spending and taxing. It
remains to be seen whether this strategy will continue to be politically feasible and more
importantly whether it will prove adequate for the tasks at stake.
c) Continental Europe
This family includes Germany, France, the Benelux countries and Austria. Here the
Bismarckian tradition centred on the linkage between work position (and/or family status)
and social entitlements is still highly visible both in the field of income maintenance and in
health. Only the Netherlands has made this tradition partially hybrid by introducing schemes
with a universal character (e.g. basic pensions). Benefit formulae (proportional to earnings)
and financing (through social security contributions) largely reflect insurance logics
although not strictly actuarial - often with different rules for different professional groups.
Replacement rates are generous and coverage is highly inclusive (although fragmented): thus
spending and taxing levels are high (table 3.15).
34
Table 3.15. Social spending and taxation as a percentage of GDP (continental Europe)
Social Expenditures (1996) Total taxation (1997)
Austria 26,2 44,4
Belgium 27,1 46,5
France 30,1 46,1
Germany 28,0 37,5 (1996)
Luxembourg 25,2 --
Netherlands 27,8 43,4
Switzerland 21,0 34,6
Average continental Europe 26,5 43,0
EU-15 26,2 42,8
USA 15,8 28,5 (1996)
Japan 13,8 28,5 (1996)
Source: OECD 1999, Social Expenditure Database 1980-1996; OECD 1999,
Revenue Statistics (Statistical Compendium); own calculations.
The occupation-oriented approach is also apparent in the organisation and management of
social protection. Trade unions and employers associations actively participate in governing
the insurance schemes, maintaining some marginal autonomy vis--vis public officials,
especially in health care. The majority of the population is covered by social insurance,
through individual or derived rights. Insurance obligations come into effect automatically at
the beginning of a gainful job though in Germany and Austria there is a minimum earning
threshold. Whoever falls through the insurance net in these countries is cushioned by fairly
substantial social assistance benefits.
In the debates of the 1990s, the Continental type of welfare state has often been regarded as
the villain of the piece - not just because of its costs, but above all because of its inherent
perversities, aptly captured by the metaphors of frozen fordism and inactivity traps
(Esping Andersen 1996 and 1999; Scharpf 1997). The root cause of the Continental
syndrome has been identified in its combination of three institutional characteristics:
the relative generosity of insurance-based cash benefits, indicated by high earnings
replacement ratios (often topped up by employers through wage extensions), long benefit
durations and a tendency towards institutional stretching by the welfare agencies which
administer social protection
9
;
the mainly passive or compensatory nature of insurance benefits, as demonstrated by the
limited conditionality attached to benefit receipt (e.g. active job search, availability for
job offers, training/rehabilitation requirements) and the low incidence of controls (on the
actual physical or labour market status of beneficiaries);
the mainly contributory financing of benefits. As indicated by table 3.15, the systems of
Continental (but also Southern) Europe display a higher ratio of social security
contributions to total social expenditure than the Scandinavian or Anglo-Saxon countries
(also graph 3.16)

9
Examples of such institutional stretching can be found in the field of disability insurance, where the
definition of disability itself was gradually relaxed, taking into consideration not only the physical conditions of
claimants, but also the situation of local labour markets. For quantitative and qualitative indicators on the
generosity of Continental benefits formulas in the early 1990s, cf. EC 1993.
35
The interplay of these three elements has produced a distinctive syndrome. Honouring
generous insurance entitlements (especially those of maturing pension systems) has required
the maintenance of high contributory rates on the wages of standard workers in the
presence of highly protective systems of labour laws. This produces a number of adverse
consequences (Manow and Seils 2000):
it has discouraged firms from offering traditional fordist employment, accentuating a
labour shedding trend already connected with globalisation and post-industrialization;
it has created pressures for subsidised early exits from the labour market, to ease
company restructuring;
10
and high social charges have blocked the expansion of private service jobs (due to high
wage floors), while (because of fiscal overload) there is now little scope for expanding
public service employment.
As highlighted again by Scharpf (1997 and 2000), Continental labour markets are therefore
doubly deficient. On the one hand, like the US (but unlike Scandinavia) they have relatively
low public employment ratios, ranging from 9.1 percent in Germany to 14.8 percent in
France (1998 figures: US = 10.9 percent; Sweden = 21.2 percent). On the other hand, like
Scandinavia (but unlike the US), they have low employment ratios in sheltered services. In
the wholesale and retail trade, restaurants and hotels sector (ISIC 6 in the OECD
classification) where most of the American macjobs of the 1980s and 1990s are
concentrated - France and Germany have employment ratios of 10 and 9.4 percent
respectively, against a US ratio of 16.1 (Sweden = 11 percent)
11
.
Largely as a consequence of this syndrome, the Continental countries have registered
mounting rates of unemployment in the 1980s and early 1990s (table 3.17). The challenge of
unemployment has been responded to by further expanding the passive schemes of income
maintenance (unemployment, sickness, disability and early retirement schemes), in turn
requiring further increases in social charges. This self-reinforcing negative spiral has had an
especially large impact on low-skilled workers, the young and women. Historically
characterized by low levels of female participation, the Continental systems have not been
effective in promoting arrangements allowing women to combine work and family

10
This is revealed in striking fashion if one looks at participation rates of men above the age of 55: from around
80 percent in the late 1970s, by 1997 these rates had fallen to 33.9 percent in Belgium, 40.7 percent in Austria,
42 percent in France, 44.2 percent in the Netherlands and 54.6 percent in Germany (Scharpf 2000).
11
With ISIC 6 employment rates at 14.9 percent and 13.6 percent respectively, Austria and the Netherlands fare
much better than France and Germany. The Austrian success seems to be linked to the higher wage dispersion
tolerated by this countrys trade unions, while the Dutch case can be explained by the traditional economic
specialisation of this country (Scharpf 2000). For a more detailed discussion of these cases, cf. infra, ch. 4.
Gr aph 3. 16. Soci al cont r i but i ons i n % of t ot al soci al expendi t ur e
0
10
20
30
40
50
60
70
80
F GR S P D P B NL I A L UX EU-
1 5
S FL U K I RL D K
1 9 9 0
1 9 9 5
Sour ce: OECD; own cal cul at i ons.
36
(especially child rearing) responsibilities. The result has been an emerging bad equilibrium
between low female employment and low fertility with all the ensuing fiscal consequences.
Table 3.17. Unemployment and female employment (continental Europe)
Unemployment rate Female employment rate
1980 1990 1998 1985 1997
Austria 1,6 4,7 6,1 52,1 59,6
Belgium 8,0 8,8 11,8 37,2 47,0
France 6,2 8,9 11,8 50,7 52,7
Germany 3,2 6,2 11,2 50,1 53,6
Luxembourg 0,7 1,3 3,1 40,1 41,5
Netherlands 4,0 6,0 4,1 39,7 55,0
Switzerland 0,2 0,5 4,0 -- --
EU-15 5,2 7,0 8,9 45,6 50,5
USA 7,2 5,6 4,6 57,9 67,5
Source: OECD; Eurostat; own calculations.
All these problems have generated a complex reform agenda in the Continental systems,
centred on various measures:
containing the expansionary dynamics of social insurance;
rationalizing the structure of social spending by trimming pensions and passive benefits;
improving and updating family policy;
introducing active incentives in short-term cash benefits;
reforming labour market norms with a view to overcoming the insider/outsider cleavage;
and reducing the incidence of social charges, also via broad financial restructuring.
Significant steps in all these directions have been made in the countries of this group in the
1990s (table 3.18). The Dutch reforms, in particular, have proven quite effective in reversing
welfare without work
12
. But in the other countries, adjustment has proven much less
effective and quite turbulent both socially and politically. The street demonstrations in France
against the Jupp plan in 1995 will probably remain one of the most vivid symbols of the
thorny politics of European welfare in the 1990s. It is true that France has made noticeable
progress since the 1990s and that its employment performance has been improving in recent
years. But most of the structural reforms are still to be implemented.
While the Scandinavian countries have primarily a flexibility problem (i.e. creating the
conditions for an expansion of low-end private services) and the UK has primarily a
security problem (i.e. strengthening basic guarantees for low paid jobs), the Continental
countries must still cope with problems on both fronts. A major priority for these countries is,
quite understandably, that of rapidly advancing on the high road of competitiveness, based
on high-skill production, further mobilizing their relatively solid educational and training
systems (cf. table 3.9). But as discussed in chapter 2, this strategy on its own is unlikely to
generate high levels of employment. As recently argued by various authors (Esping-Andersen
1999; Scharpf and Schmidt 2000), the most promising way out of the Continental syndrome
is through the rise of service industries in the wake of greater female participation rates and

12
A detailed discussion of the Dutch miracle is contained in the next chapter of this report.
37
the transformation of household work into formal employment (including public, but
especially private flexible employment).
However, the Bismarckian approach - and especially its contributory logic - creates severe
obstacles to such post-industrial developments: it tends to price low-end services out of the
market and is ill-suited, in general, for formulating virtuous combinations of flexibility and
security. A close link between contributions and entitlements may in fact discourage work
mobility and prevent the provision of adequate benefits for the mobile. Thus de-frosting the
Bismarckian status quo and neutralizing its inactivity traps will definitely require additional
efforts. The Dutch case demonstrates that a virtuous circle of reform can be promoted under
certain circumstances (Visser and Hemerijck 1997) (see chapter 4). It remains to be seen
whether a Dutch-style process of sequential learning can emerge and develop in other
continental systems as well.
Table 3.18 Main social policy reforms in Continental countries during the 1990s
Austria
1993 Pension reform
1993 Major long-term care reform
1996 Reform of family benefits
1996/97 Reforms of pension, unemployment and disability insurance
1998 Package of activation measures
Belgium
1994 Reform of social security contributions
1996 Pension reform
1996 Package of cost containment measures in the health care sector
1997 Package of activation measures
1998 Reform of the right to career-break
France
1988 RMI introduced
1990 Introduction of the new Contribution sociale generalise (CSG)
1992 Reform of unemployment insurance
1993 Pension reform
1995 Juppe plan (reforms enacted n 1996 and 1997)
1997 New jobs for young people initiative
1999 Changes in health insurance
2000 35 hours for salaried employees
Germany
1989-1992 Pension reform
1993 Health care reform
1994 Introduction of the new Pflegeversicherung
1996 Social assistance reform
1997 Employment promotion reform act
1997-1999 Pension reform
Luxembourg
1996 Pension reform
1999 Introduction of dependency insurance
Netherlands
1990 Reform of sickness and disability benefits
1996 Labour market policy reform (flexicurity)
Partial privatization of sickness cost benefits
Reform of disability insurance and survivor benefits
New Social Assistance Act
38
d) Southern Europe
The fourth family of welfare states included Italy, Spain, Portugal and Greece. These
countries are quite different in terms of economic wealth: while Italian GDP per capita is
approximately equal to the EU average, the other three countries still at the bottom of the
prosperity league though they are rapidly catching up. The degree of social protection
maturity is also different across Southern Europe: the Italian system was created much earlier
than the other three, and this is reflected in spending and taxation (table 3.19)
13
.
Table 3.19. Social spending and taxation in Southern Europe
Social Expenditures
( percentage of GDP)
Total taxation
( percentage of GDP)
1980 1990 1995 1980 1990 1997
Greece 10,8 17,1 16,8 (1993) 29,4 37,0 40,6
Italy 18,4 23,1 23,7 30,4 39,2 45,0
Portugal 11,3 14,4 18,3 25,1 30,9 34,5
Spain 16,3 19,6 21,5 23,9 34,2 35,3
EU-15 21,1 23,4 26,2 37,3 41,1 42,8
Source: OECD 1999, Social Expenditure Database 1980-1996; OECD 1999,
Revenue Statistics (Statistical Compendium); own calculations.
Despite their socio-economic and developmental diversity, the South European welfare
states display a number of common institutional traits which set them somewhat apart from
the rest of the Continental cluster. First, these systems are mixed in terms of coverage: while
they are clearly Bismarckian in income transfers, which are occupationally fragmented,
they are Beveridgean in health, with universal national health services. Italy established her
Servizio Sanitario Nazionale in 1978 and Portugal, Greece and Spain followed suit,
respectively, in 1979, 1983 and 1986. However, only in Italy and Spain is a universal service
fully in place; Portugal and Greece are still in the implementation phase (Guillen 1999).
The safety net underpinning social insurance is only weakly developed in these countries: the
establishment of guaranteed social minima is recent and incomplete (cf. infra). Occupational
funds and the social partners play a prominent role in income maintenance policy, but less so
in health care, which is largely decentralized especially in Italy and Spain. Social charges
are widely used (generating some of the inactivity traps typical of Continental Europe), but
general taxation is gradually replacing contributions as a source of financing for health and
social services (again, in Italy and Spain the process has been completed).
The family is still highly important in Southern Europe and largely acts as a welfare broker
for its members (Perez Diaz, Chuli and Alvarez Miranda 1998). This is clearly revealed by
the high incidence of extended households comprising three or more generations (and/or
lateral kin), as well as by the high proportion of persons above 16 living with their parents
(table 3.20). Female employment is also low by international standards especially in Spain,
Italy and Greece - (table 3.21), partly owing to a distinct gender regime which treats

13
The remarkable catch up of Italy and Greece in taxation has mainly been driven by the need to control huge
public debts.
39
women () principally on the basis of family roles as regards their duties but sends them
unprotected onto the market in case of economic need (Trifiletti 1999: 54). Family benefits
and, especially, family services are still relatively underdeveloped (table 3.9).
Table 3.20. Share of young persons living with their parents ( percent) (Southern Europe)
20-24 years 25-29 years
1987 1996 1987 1996
Greece 63 73 39 50
Italy 81 89 39 59
Portugal 75 80 39 52
Spain 84 90 49 62
EU-15 -- 66 -- 32
Source: Eurostat 1998, Sozialportrt Europas, p. 58.
Table 3.21. Employment performance in Southern Europe
Employment
ratio
( percent)
Female employment
Ratio
( percent)
Unemployment
ratio ( percent)
Youth
unemployment
ratio
( percent)
Part-time
employment
( percent of total
employment)
1997 1985 1997 1996 1996 1996
Greece 56,8 37,4 40,1 10,1 31,0 3,4
Italy 51,3 33,5 36,7 12,2 33,6 7,0
Portugal 67,6 48,2 58,7 5,0 14,1 5,3
Spain 48,6 25,8 33,9 18,8 39,2 8,1
EU-15 60,5 45,6 50,5 10,5 21,2 17,7
Source: European Commission 1998, Employment Rates Report; Eurostat 1998; Erhebung ber Arbeitskrfte.
Ergebnisse 1997; OECD 1999, Social Expenditure Database 1980-1996; own calculations.
Although the South European welfare states suffer from many of the problems of the
Continental cluster, others are peculiar to them. The reasons are basically geo-evolutionary.
As mentioned, in Spain, Portugal, Greece (but to a lesser extent in Italy), the welfare state
developed later than in northern Europe and had to cope with more difficult socio-economic
environments - including the deep backwardness of the Souths Souths. In these four
countries social protection thus entered the age of permanent austerity in a state of
institutional and financial underdevelopment and laden with internal disequilibria. Their
social transfer systems display both peaks of generosity (at least in terms of legal formulae)
for certain occupational groups and serious gaps of protection for others. In the early 1990s,
for example, the standard pension offered by the four systems was markedly higher than the
EU average: 107 percent in Greece, 97 percent in Spain, 89 percent in Italy and 94 percent in
Portugal (EU average = 75 percent)
14
. But the minimum non-contributory pension was well
below the average: 8 percent in Greece, 19 percent in Italy, 32 percent in Spain and 30
percent in Portugal (EU = 36 percent) (EC 1993).

14
Figures express the maximum benefit obtainable after a full career as a percentage of the wage of an average
production worker. For details, see EC (1993).
40
Insiders and outsiders have been traditionally separated by a sharp divide in terms of
guarantees and opportunities in some cases with a middling group of semi-peripheral
workers moving backwards and forwards across the line (Moreno 2000). The black economy
is very extensive (between an estimated 15 and 30 percent), posing problems both of
efficiency and equity
15
. Employment levels are relatively low and unemployment is high,
especially among young people. But Portugal does much better than the other three in terms
of employment and unemployment (table 3.21)
16
. This country also shows higher levels of
educational and especially training expenditures (table 3.9) the latter being at their lowest in
Italy and Greece albeit against a background of poor educational standards and literacy
rates.
Catching up with their more advanced European counterparts has been made difficult by
exogenous constraints. Southern European countries have thus been forced to engage in a
politically difficult process of internal restructuring. The problems of doing so are
exacerbated not by EMU convergence criteria and globalization (more acute trade
competition) but also by a particularly adverse demography. Southern European populations
(especially those of Italy and Spain) are ageing at one of the fastest rates in the world (table
3.22). Pension expenditure absorbs a higher share of total social spending than elsewhere in
Europe and markedly so in Italy and Greece (graph 3.23).
Table 3.22. Fertility rates (children per women) in Southern Europe
1980 1990 1995
Greece 2,21 1,39 1,32
Italy 1,64 1,34 1,17
Portugal 2,18 1,57 1,40
Spain 2,20 1,36 1,18
EU-15 1,82 1,57 1,43
Source: OECD 1997; Bevlkerungsstatistik 1997.
As shown in table 3.24 below, the 1990s saw the initiation of an adjustment process centred
on some common measures:
the ironing out of benefit formulae for privileged occupational groups and for standard
fordist workers, while at the same time upgrading minimum benefits;
the introduction and consolidation of safety net programmes;
steps towards remedying deficiencies of family benefits and services;
and rationalizing and, in some cases, decentralizing the organizational framework and
financial incentives of national health services.
Various moralizing measures have also been introduced to combat corruption, clientelism,
tax evasion and the underground economy. Labour market reform and the promotion of

15
The size and persistence of the black economy in Southern Europe can be seen to some extent as a variant of
the inactivity trap that operates in other Continental countries (cf. supra) as side effect of high payroll
contributions and guaranteed social minima. The role of the latter is played in Southern Europe more by the
extended family (in which income from work or from the transfer system are pooled and redistributed) rather
than by social assistance subsidies per se. Subsidized inactivity should rather be thought of as underground
activism: but the two syndromes display structural analogies and have equally perverse implications.
16
The Portuguese case will be discusses more in detail in the next chapter
41
national competitiveness have also acquired increasing policy salience, as attested by the
emergence of new social pacts or dialogues between governments and the social partners
(Rhodes 1998b; 2000c). It must be noted, however, that while the issue of competitiveness
has become closely linked with that of social protection, the South European countries have
showed no inclination towards a social devaluation strategy based on low protection
standards (Guillen and Matsaganis 2000). Restrictive reforms have been undertaken primarily
for budgetary and equity reasons. And the overall tone of the adjustment debate is that of
upgrading social standards (through internal restructuring and in due course- revived
expenditure growth), aligning them with those of the other (Continental) member states,
rather than racing towards the bottom in order to gain competitive advantage.
The Southern welfare states find themselves on a difficult path of reform. Two developments
will prove to be critical for success. The first is the further consolidation of the basic safety
net, i.e. the floor of tax-financed benefits for individuals and households that lack sufficient
resources. The existence of a robust and reliable safety net for all citizens (end even
residents) is a pre-requisite not only for successfully combating poverty and exclusion, but
also for easing the post-fordist transition and its implications in terms of economic and social
flexibility. Spain and Portugal have already made some important steps in this direction, but
Italy and especially Greece still have to put some basic structures (e.g. a national minimum
income guarantee) in place. As shown by table 3.9 and graph 3.23, these two countries
display the most unbalanced pattern of social expenditure a pattern that urgently needs
incisive re-calibration.
The second ingredient for successful modernization is a more rapid expansion of the service
industries, which might encourage both more female employment and reinvigorated fertility.
Given financial constraints and cultural norms, the Scandinavian solution of collectivizing
family needs in the hands of the state is not a viable option for Southern Europe. More
feasible would be the promotion of a family-serving welfare mix, i.e., an amalgam of
intelligent public regulations and incentives, corporate arrangements, third sector activism
and private entrepreneurship to respond to the needs of the family (and especially women) via
new services offered in the formal economy. In parallel with labour market reforms
introduced by means of social pacts, gradually establishing conditions of flexicurity,
Graph 3.23 Spending for old age and survivors cash benefits as % of total social spending
(1980, 1990, 1995)
0
10
20
30
40
50
60
70
DK IRL S NL FL UK EU-
15
B D F LUX P SP A I GR
%

o
f

t
o
t
a
l

s
o
c
i
a
l

s
p
e
n
d
i
n
g
1980
1990
1995
Source: OECD 1999, Social Expenditure Database 1980-1996; own calculations.
42
easing mobility and re-absorbing the outsiders, the new family-serving policy mix may be the
crucial key for liberating Southern European familialism from its current plight. Given the
institutional legacies, marked territorial disparities and the size of the underground economy,
the promotion of this new welfare mix and, more generally, the search for a new balance
between flexibility and security is no easy task in the South. But the impressive reforms
already introduced in the 1990s on the road to Maastricht reveal how previously
unsuspected institutional capacities can be mobilized for change and innovation.
Table 3.24. Main social policy reforms during the 1990s in the South European countries
Greece
1990-92 Pension reforms
1996/97 New income tests introduced
1997 Social dialogue for the reform of social insurance launched
Agricultural pensions re-organised on a contributory basis
1998 Mini-reform of social insurance enacted
Social insurance extended to migrant workers
National Social Care Organisation founded
Spain
1991 Introduction of non contributory pensions
Abril report on health care
1992-93 Labour market reform
Reduction of unemployment benefits
1995 Toledo Pact on the future of pensions
Decree on health care services
1996 Social pact on pensions
Italy
1992 Amato pension reform
Reform of the reform in health care
1995 Dini pension reform
1996 Pact on Work
1997 Prodi welfare state reform
1998 Pact on development
Portugal
1993 Pension reform
New provisions for health care
1994 New active labour market policies launched
1996 Rationalization of family allowances
1997 National scheme of guaranteed minimum income introduced
1998 White Book on social security reform
Conclusion
In the above discussion of the welfare regimes we have identified not just regime-specific
institutional arrangement but also regime-specific pathologies. But we have also identified
examples of countries that seem to be moving away from the purportedly pure real types of
welfare capitalism. More importantly, it is precisely those countries that are deviating from
their original clusters in selected policy areas that have proven particularly effective in
addressing the most typical problems to emerge from regime-specific structures. The
empirical performance comparison reported above showed that Ireland, Denmark, the
Netherlands, and Portugal in particular do contemporarily comparatively well along the
performance dimensions sketched above.
We argue that the favourable record of these four countries can be attributed to a policy mix
that combines specific comparative advantages from different regime-types. We use their
43
example in part to inform the next stage of our analysis: the identification of effective
responses, in terms both of policy mixes and institutional reform.
44
4. EFFECTIVE RESPONSES:
POLICY MIXES AND INSTITUTIONAL REFORM
Welfare states have embarked upon different trajectories or paths of
reform. In each welfare regime, some countries stand out as high
performing pioneers of novel adjustment programmes. We identify those
policy mixes, sequences and institutional designs which have been most
successful. Without ignoring the importance of national distinctiveness and
the folly of ill thought out policy transfer, we set out a range of policy
options building on national 'best practice' for different types of welfare
state. We also illustrate the trade-offs and policy dilemmas that face
national adjustment. These can be overcome by forging strong links
between cohesion policy, economic reform and employment creation. In
many countries this is best achieved via a co-ordinated institutional
strategy.
The discussion in the previous chapter has illustrated how adjustment pathologies differ
according to welfare state cluster and looking more precisely at different countries apply to a
greater or lesser extent to family members. But as was also noted, certain countries have proved
to be more innovative than others, in certain instances breaking away from their groups and
becoming policy models for others to emulate. The case of the Netherlands in the Continental
family is the clearest and most notable example of this phenomenon. Portugal, Ireland and
Denmark have similarly engaged in far-reaching reform in terms both of policy and institutional
architecture, and have resolved what were once seen as crippling problems of economic
performance. It seems that precisely those countries that are deviating from their original
clusters in selected policy areas that have proven particularly effective in addressing the most
typical problems to emerge from regime-specific structures. It is their very hybridity that
appears to work in their favour in achieving a system-wide search for a new, economically
viable, politically feasible, and socially acceptable profile of social and economic regulation.
The lesson to be drawn from those experiences is not, however, simply an ill-thought out
strategy of policy transfer. Different welfare states not only confront a different set of
problems but they face rather different problems of policy adjustment, given their existing
policy mixes and institutional settings. Our argument is not that there is one best way. It is
rather that the requirements for successful policy adjustment can be met by different
strategies, as long as these are achieve an optimal mix of policy responses, addressing both
the general problems of competitiveness and post-industrial change as well as regime-specific
endogenous challenges. Below we identify the core requirements for successful adjustment in
social and economic regulation and highlight the successful strategies of reform and
adjustment by which these requirements have been met in various countries.
As welfare states have become increasingly constrained on the fiscal side they have to
increase the efficiency of their welfare programmes, if they are not willing to renege on the
core commitments of the post-war welfare state. This effectively means that advanced
welfare states have to become more employment-friendly. Below we will catalogue the
general requirements of a competitive, employment-friendly and equitable welfare state. The
central requirements in terms of the desirable policy mix may be summarised as:
a robust macroeconomic policy;
45
wage moderation and flexibility (achieved where possible within broader social pacts);
employment-friendly and efficient tax social policy;
labour market flexicurity;
and new methods of tackling poverty and social exclusion.
As far as the institutional approach is concerned, those countries seeking to innovate across
this range of policies, as well as finding more optimal ways of combining them, must also
improve their methods of institutional co-ordination. Thus, for many countries, working their
way towards an employment-friendly, welfare-sustaining policy mix has also required
building a new system of concertation. In the latter part of this chapter we illustrate how
numerous countries have innovated across related policy domains via social pacts.
a) Elements of an Optimal Policy Mix
A Robust Macroeconomic Policy
Macroeconomic policy under conditions of liberalized capital markets faces a trade-off
among three broad policy aims: Capital mobility, monetary autonomy, and a fixed exchange
rate cannot be achieved at the same time. Where financial capital is mobile, national
autonomy in interest rate policy can only be reached at the price of an unstable currency,
while a fixed exchange rate does not allow national control over interest rates (Mundell
1962).
Generally, price stability and budgetary discipline have become key elements of any
sustainable macroeconomic policy. Persistently high public deficits and inflation rates are
undesirable in themselves and incompatible with globalized financial markets. Although the
international price competitiveness of a national economy may be restored by strategic
devaluations (as Sweden still did in the early 1980s), this strategy nowadays runs the risk of
massive capital flight and in any case is ruled out for EMU member states. Moreover, high
public deficits increase the debt burden of the state. As a result, the room for fiscal
manoeuvre may become seriously constrained as interest payments on public debt rise. Italy
and Belgium, which had to pay about 10 percent of their GDP to service their public debts in
the early 1990s, are cases in point. Furthermore, if fiscal imbalances drive up interest rates,
this may crowd out investment in the business sector.
Conversely, a strict fiscal policy helps to bring down interest rates, which (over time) may
stimulate the economy, reduce the public debt burden, and strengthen the confidence of
consumers and potential investors in the economy. Finally, if the structural budget deficit is
low on average, there will be some leeway with which to activate the stabilizing function of
fiscal policy in periods of low economic growth. The Danish tax reform of 1994 is a case in
point, insofar as Denmarks comparatively low structural budget deficit allowed the tax
reform to be temporarily under-financed and a low-growth economy to be stimulated. By and
large, the perceived role of macroeconomic policy has drastically changed, from nearly
omnipotent instrument of full-employment policy to a necessary (but not sufficient)
background condition for limited damage control. Employment creation, however, must be
pursued by other policy instruments.
As empirical evidence suggests, countries that have been most successful in reconciling the
goals of employment and social security, like Denmark and the Netherlands, have pursued a
46
policy of budgetary discipline in recent years. The policy actors in these countries (including
the trade unions) also accepted that monetary policy has to be geared primarily towards price
stability rather than to full employment. As Denmark (which is not a member of the EMU)
also followed a course of macro-economic stability, there is reason to believe, that this
recognition basically gained acceptance irrespective of the Maastricht criteria.
Wage Moderation and Flexibility
The general shift from full employment towards price stability as a primary policy goal in the
1980s meant that macroeconomic policy could no longer serve as a buffer shielding other
areas of social and economic regulation from the burden of external adjustment. In the more
restrictive international economic environment since the early 1980s, wage restraint remained
an important requirement for successful adjustment by facilitating competitiveness,
profitability, and as a second-order effect employment. As it lowers wage costs, wage
restraint helps to boost competitiveness in the exposed sector.
However, the beggar-my-neighbour argument, which suggests that modest wage increases
given a fixed exchange rate lower unemployment merely at the expense of trading partner
countries, is misguided. A number of economists have argued that sustained wage moderation
is harmful to economic progress, because it puts downward pressure on demand, slows down
labour market allocation, and, finally, undermines productivity increases through innovation.
As the Dutch experience suggests, the employment effects of wage restraint are even stronger
in domestic services that were previously priced out of the regular labour market. Thus, there
is reason to believe that wage restraint would also be beneficial in a closed economy.
Moreover, if wage restraint leads to higher employment and a concomitant growth in
domestic demand, the overall effects of wage restraint on the current account are unclear.
Over the last decade, productivity levels in the Netherlands have indeed come down slightly,
but this should be explained by the increase in jobs for the low skilled. Finally, in the
Netherlands new jobs have mainly been created in the service sector via part-time
employment. The rapid expansion of new jobs has led to a concomitant growth in domestic
demand.
To the extent that wage developments in the private and public sector are coupled, modest
wage increases also lower the public sector wage bill (Hassel and Ebbinghaus 2000). As a
second-order effect, rising employment may contribute to lowering the costs of social
security and broaden the revenue basis of the welfare state. Moreover, there is some empirical
evidence that wage restraint allows for a smoother interplay among incomes, monetary, and
fiscal policy, thus stimulating economic growth while keeping inflation low.
For much of the 1980s there was a strong tendency towards the decentralization of collective
wage bargaining, suggesting that national incomes policies would give way to less
disciplined combinations of sectoral and company bargaining. More recently, however, we
observe a remarkable resurgence of corporatist forms of social pacts and policy co-ordination
in a number of countries, notably Ireland, the Netherlands, Denmark, Italy, Finland, Ireland,
Spain, and Portugal - all of which, to one degreee or another have involved income co-
ordination (Rhodes 1998; Schmitter and Grote 1999). The shift to a hard currency regime in
Denmark and the Netherlands during the early 1980s brought the social partners closer
together, while the completion of the single market and the EMU entrance exam provided the
47
key impetus for recent social pacts in Ireland, Italy, Portugal, and Spain based on general
wage guidelines. It seems that the effects of economic internationalization helped to rekindle
the urge to find co-operative, positive-sum solutions to the predicament of adjustment. We
return to the importance of such solutions for wider welfare policy reform below.
Employment-friendly and Efficient Taxation and Social Protection
Since, as we argue, redistribution through egalitarian wage policy leads to non-market-
conforming wages and thus can have negative consequences for employment, the goal of
redistribution nowadays is best pursued by social and tax policy. Capacities for expanding
welfare spending, however, are severely restricted by international tax competition,
taxpayer resistance and constraints on deficit spending. Although certain countries will be
able to enjoy budgetary surpluses, there is now and will continue to be greater emphasis
on redistributing available public revenues in a more targeted manner while reducing
organizational slack. Moreover, making welfare states employment-friendly also means
modifying the ways in which taxation and social protection impact on job creation
especially in private sector services. We can differentiate between optimal and sub-optimal
policies in this regard by first examining benefits and spending and second modes of finance.
Social spending levels per se are no predictor of employment performance. In contrast to the
United Kingdom, countries like Denmark and the Netherlands have done well in employment
terms without a radical dismantling of the welfare state. It is the structure of financing and
spending, rather than the expenditure level that affects the welfare states impact on economic
and employment performance. The Danish mix of intensive spending on social services and
active labour market policies is arguably more productive in terms of employment than mere
income maintenance programmes concentrating on the aged (such as one finds, above all, in
Italy).
By contrast, the continental strategy of labour supply reduction, mainly through early
retirement and disability pensions, comes at a high price. They are ineffective in creating new
job opportunities for the young (France and Italy have relied heavily on early exit from the
labour market, but have very high levels of youth unemployment) and tend to aggravate the
financial burden imposed on the active part of the population and further boost labour costs.
Strategies that expand labour force participation also help to broaden the revenue basis of the
welfare state, this is also likely to reduce the financial pressure to cut benefits. Denmark has
traditionally high levels of workforce participation and did not, by and large, fall into the
continental pattern of workforce shedding. The Netherlands has recently been able to reverse
this vicious cycle and increase labour force participation mainly by restricting access to (and
curtailing heavy misuse of) their disability schemes. Temporary reductions in labour supply
might be necessary during economic crises. However, as empirical evidence suggests, such
solutions have a tendency to become permanent. In a period of low economic growth,
Denmarks schemes for sabbatical, educational, and parental leave are more appropriate
measures for temporary labour supply reduction than is the continental strategy of permanent
labour shedding. As in certain other areas, policies aimed to expand the active share of the
working age population are likely to be more successful if they are supported by the social
partners.
Second, the financing structure of the welfare state is equally important in terms of its effects
on employment. The financing structure of the welfare state has an immediate impact on
48
employment levels at the lower end of the earnings scale. Social security systems that are
financed out of payroll taxes tend to increase labour costs for low-paid employment above the
corresponding productivity levels if wages are downwardly sticky. Since Denmark, but also
Ireland, mainly finances its welfare states out of general tax revenues, the tax wedge at the
lower end of the labour market is relatively low in these countries. The Netherlands, whose
welfare state is primarily financed out of payroll taxes, have reduced the tax wedge for low-
paid workers by integrating general social insurance contributions into the tax system. This
means that the general basic income tax exemption is extended to some branches of the social
insurance system. Moreover, a special cut in employer contributions for low-paid workers has
been implemented.
The design of systems of social security and taxation also matters in terms of cost efficiency:
The welfare state has different redistributive functions, such as reducing poverty, limiting
income inequality and providing a certain level of income protection against social risks.
While the fulfilment of these goals is severely limited by fiscal constraints, there is a range of
policies, which effectively moderate this dilemma. Here, again, an analytical distinction
between the revenue and the benefit side of the welfare system is helpful. On the revenue
side, there is a number of instruments to finance social security which do not increase the
overall tax burden on the various factors of production (which tends to hamper employment
growth). An option widely used in the Anglo-Saxon welfare states, is the strong reliance on
user charges and co-payments for the financing of public social services (health, elderly and
child care, as well as education). This does not necessarily impinge on social equity, as
economically vulnerable groups might be (partly) exempted from the payment of theses fees.
Another financing option, particularly with regard to pensions, which has little detrimental
effects on employment, are private mandatory contributions. Ireland, Denmark, and the
Netherlands all have made occupational pensions mandatory in recent years (either by the
state or via collective agreements; Gern 1998). Those countries have thus adopted a
combination of a pay-as-you-go financed basic pension and fully funded and income-related
pension on an occupational basis. This mix is superior in two respects: First, this combination
allows for a higher degree of risk diversification. Due to their high degree of pre-funding,
such pension systems are likely to be comparatively robust against demographic changes.
Moreover, the advantage of private and occupational pensions vis--vis public pensions lies
in the fact that contributions are perceived as part of private consumption rather than as part
of the tax wedge and thus are likely to generate fewer work disincentives than contributions
to public social insurance schemes. By the same token, pension systems which display an
institutional separation between a pay-as-you-go financed basic pension and a fully funded
private mandatory insurance, also allow for a more targeted assignment of the various
redistributive and insurance functions of the welfare state and are thus less likely to generate
distributive conflicts than is the case for pension systems which combine these functions
within one tier.
Flexicurity: Secured Flexible Employment
Growing international competition, technological progress, and changed family patterns have
tremendously altered the conditions under which national employment systems operate.
Generally, these developments require more flexibility in labour markets with respect to
working patterns, wages, and working time. While there is a broad range of possible
strategies for increasing labour market flexibility, they are often regarded as
49
counterproductive in terms of equity and social security. Flexibility is often associated with
the deregulation of employment protection and social security. The basic challenge for
effective employment policy thus lies in reconciling labour market flexibility with measures
to counter growing social exclusion and the emergence of a class of working poor. There is
no inherent contradiction between these objectives. To the contrary, the general acceptance of
flexible arrangements in the labour market is likely to be increased if flexibility is matched by
a decent standard of social protection.
Denmark and the Netherlands in particular are telling examples of how both excluding large
parts of the work force from the labour market (a pressing problem in many continental and
especially southern welfare states) and marginalizing vulnerable groups within the labour
market (typical for Anglo-Saxon welfare states) can be avoided (Barrell and Genre 1999).
The successful policy mixes adopted in Denmark and the Netherlands, but also to some
extent in Spain, can be subsumed under the label of flexicurity a concept developed in the
Netherlands.
The Dutch are the pioneers of flexicurity (Visser and Hemerijck 1997). In addition to wage
moderation, successful policy concertation in the Netherlands has also produced agreements
on social security contributions, work sharing and industrial policy, training, job enrichment,
low wage levels for low skilled workers, the development of entry-level wages and, most
recently, the 1995 flexicurity accord in which rights for temporary workers have been
strengthened in return for a loosening of dismissal protection for core workers. Low-income
workers have been compensated for low wages by targeted tax breaks. Trade unions
rescinded their opposition to the creation of part-time and temporary jobs and became the
champions of such workers, bridging the gap that usually divides the insider from the
outsider workforce. Hourly wages for such workers have subsequently been bargained to
the levels enjoyed by full-time workers: thus, employers can recruit such workers to bolster
flexibility, but not as a means of following a low-price production strategy. The 1995-1996
flexicurity accords pension and social security benefits to all part-time and temporary
employees.
The flexicurity debate is inherently related to the feminization of the labour market and the
changing status of part-time work in Europe. A new model of employment relations is in the
making whereby both men and women share working time, which enable them to keep
enough time for catering after their families. If part-time work is recognised as a normal job,
supported by access to basis social security and allows for normal career development and
basic economic independence dependence, part-time jobs can generate gender equality and
active security of working families. In the Netherlands, where part-time work is most
widespread, contrary to other countries, it corresponds to female preferences. By and large,
Dutch part-time jobs are stable and well paid with access to basic social security.
The generalisation if flexicurity as a formula for secured but flexible employment
throughout the EU would be linked to a number of different, though mutually reinforcing,
policy strategies. There are six dimensions:
increasing the demand for low-skilled work.
expanding part-time work and making working hours more flexible
labour market desegmentation
increasing use of activation policy and tightening eligibility for unemployment benefits.
reconciling work and family life and
the introduction of social drawing rights.
50
Increasing the demand for low-skilled work. Mainly as a result of technological change, all
advanced welfare states have to cope with the problem of declining demand for low-skill
work in the industrial sectors. But they differ in the degree to which they have been able to
compensate for this development by promoting demand for low-skill jobs in the service
sector. Generally, the demand for low-skill work is related to the level of female labour force
participation. Higher employment of women typically raises the demand for regular jobs in
the areas of care for children and other dependants as well as for consumer-oriented services
in general. Thus, demand and supply in service employment are mutually reinforcing (EU
Commission, 1998). By the same token, it should not come as a surprise that the rapid
increase of employment in these service-areas we observe in the Netherlands since the mid-
1980s, occurred simultaneously with the quick expansion of female labour force
participation.
Increasing demand for low-skilled workers has typically been achieved by forms of wage
subsidy, either using tax credits (following the logic of a negative income tax as in Ireland
and to the greatest extent in the UKs New Contract for Welfare) or, as in the
Netherlands, France, and Belgium, by exempting low-skilled workers from social
contributions. In the Netherlands, employment subsidy schemes have significantly reduced
employers' wage costs, through reductions in taxes and social security contributions,
instigating a decline in the tax wedge for employers who hire long-term unemployed.
Employment subsidies can add up to as much as 25 percent of the annual wage.
In Belgium, France and Germany subsidies have also used to promote jobs for the long-term
unemployed. The work include tasks that would otherwise not be done, such as caring for the
elderly, gardening, child care, volunteer work, and the like. In France, social security and tax
advantages have also encouraged the development of personal services, whereas is Germany
subsidies for recruiting inactive workers is also targeted at the non-business sector. In Spain,
subsidies are given to those companies that takes on its first employee or makes temporary
workers into permanent employees. As a result of the increasing use of employment subsidies
of the two kinds outlined above, the number of subsidized jobs has grown dramatically in the
European Union. These strategies are, however, of minor importance in mainly tax-financed
welfare states such as Denmark, where the tax wedge at the lower end of the income scale is
already rather low
17
.
Expanding part-time work and making working hours more flexible. The changing socio-
economic environment also requires more flexibility in worktime patterns. This allows not
only for a better use of resources at the level of the firm, but also for a better fit between the
firm and employees needs, which are increasingly deviating from the traditional pattern of
lifelong full-time employment. By and large, a voluntary reduction of individual worktime is
likely to have fewer negative side-effects than a general reduction in worktime. Uniform,
across-the-board, worktime reduction can lead to evasion strategies by employees and firms,
thereby expanding the grey economy. Moreover, if general worktime reductions are linked to
compensatory hourly wage increases, the resulting jump in unit labour costs might even be
counterproductive in terms of employment. (This is basically the same problem that emerges
if early retirement and disability pensions are used to reduce the supply of labour).

17
Moreover, in Denmark (as well as in Sweden) the state is an important employer as a provider of social
services.
51
In contrast, the expansion of part-time work seems to be a more advantageous strategy. As
empirical evidence shows, high levels of employment are usually connected with above-
average part-time ratios. The tremendous job growth in the Netherlands we have observed in
recent years is partly the product of a rising share of part-time employees. For young people
in particular, part-time contracts may serve as a bridge leading to regular employment (Auer,
1999).
Again, there is no one best way: an appropriate country-specific policy mix is critically
important for setting the right incentive structure so that employers and employees will want
to expand both the demand and supply of part-time work. This policy mix can be based on a
broad range of instruments: Cutting individual worktime is more attractive in those countries
that have a basic-pension system and partial individualization of social security entitlements.
By contrast, in countries (such as Germany) that combine a system of complete tax splitting
between spouses with a strictly earnings-related pension system, part-time employment is
punished not only by unfavourable tax treatment but also by more or less proportional cuts in
pension entitlements. The propensity for individual working time reduction can be enhanced
by lowering the tax burden at the lower end of the labour market to compensate partly for any
loss in gross wages. Finally, the standard of social and job protection for part-time workers
should not substantially deviate from the level of protection provided for full-time workers
(see Walwei 1998). This points to the central importance of labour market desegmentation
18
as another essential cornerstone of the flexicurity concept.
Labour market desegmentation is geared towards negotiating a relaxation of employment
protection for the stable, full-time, core workforce and linking these new standards to
increased protection for the peripheral, unstable, part-time, and temporarily employed in the
rest of the economy. This helps to contain the growth of precarious jobs, which we have seen,
among others, on the French labour market. While a lower standard of protection against
dismissal might affect overall employment levels only a little (since a more rapid rise in
employment during an economic upswing is likely to be outweighed by a faster cutback in
jobs during a downturn), long-term unemployment with its highly undesirable hysteresis
effects might well be kept at a more modest level than in countries with high and rigid
standards of employment protection. This assumption is also empirically supported by a
recent study from the OECD (Employment Outlook 1999).
As a consequence, systems combining restrictive dismissal protection with meagre
unemployment benefits essentially cater to the interests of insiders, whereas systems based on
minimal job protection but offering decent standards of social protection for the unemployed
bridge the gap between insiders and outsiders more easily. In this respect the Danish strategy
is clearly superior to its functional equivalent in the Mediterranean countries. The
Netherlands has also followed a strategy of labour market desegmentation, albeit with
different means. As already pointed out above, the legal status of part-time workers has been
raised. The same is true for employees in temporary job agencies, which experienced a
massive boom in recent years. This also meets the interests of employers, whose demand for
labour is often subject to considerable fluctuations. Insofar, the increased use of temporary
work agencies in the Netherlands is functionally equivalent to low levels of employment
protection in Denmark and the Anglo-Saxon countries.

18
The concept of labour market desegmentation has been suggested to us by Jonathan Zeitlin.
52
In the Southern group, Spain has also been following a promising strategy of de-segmentation
in recent years. Since 1997 two new laws allow a reduction of firing costs for certain
categories of newly hired workers and for cases of conversion of a temporary contract into a
permanent one. In the wake of these provisions, this country has witnessed a remarkable
increase of new permanent hirings (from 135,000 in 1997 to 300,000 in 1999). The Spanish
solution is regarded with great interest by Italian policy makers, with a view to de-
segmenting one of the most rigid labour market of Europe.
Increasing use of activation policy and tightening eligibility for unemployment benefits.
Ireland, Denmark, the Netherlands, and Portugal have substantially increased spending on
active labour market policy in recent years, thereby emphasizing the activation content of
labour market policy instead of relying on passive transfers. Finally, as already mentioned,
the impact of activation programmes has been strengthened by stronger pressure on the
unemployed to accept suitable job offers or participate in education programmes.
Reconciling work and family life is another strategy that has been applied so as to increase
labour market flexibility. As quantitative data show, there is considerable cross-country
variation in the level of female labour force participation reaching from about 44 percent in
Italy to about 75 percent in Denmark and Sweden (Daly, 2000). In the Netherlands, female
labour force participation has increased rapidly, displaying a doubling of participation rates
since the early 1970s. Clearly, this went in hand with rising part-time opportunities allowing
women to combine child raising and participation in the labour market. As a consequence, in
many Dutch households the low wage increases that result from long-term wage restraint are
compensated (or even overcompensated) for by an additional family income that comes from
womens growing job opportunities.
Reconciling work and family life is also the driving force behind the Danish (and Swedish)
strategy to massively expand childcare facilities and parental leave arrangements. In Sweden,
law stipulates that parental leave, education and training do not interrupt employment.
Parents are entitled to a 450-day parental leave and receive a stipend of 75 percent of their
mean salary. Similar but less generous provisions now apply to France and Belgium. In the
United Kingdom, by contrast, workers must reach an individual agreement with their
employers if they wish to interrupt their career for parental or care leave, except in the case of
maternity absence.
Social drawing rights are likely to play an important future role in expanding opportunities
for flexible employment across the life cycle in line with individual wishes (Supiot 1999a,
1999b). Drawing rights are based on the notion of a saving account and autonomous decision
by the holder of these drawing right to make use of their reserve. They are social drawing
rights as they are social both in the way they are established (different ways of building up
the reserve through the state, the social security or by workers themselves) and in their aims
(social usefulness, childrearing, care for elderly family members, training and education).
The further advancement of flexicurity and social drawing right, relies to a great on public
policy and receptiveness of key labour market actors. Especially, the trade unions and
employers organisations must open up their organizations to the new realities and new risks
and needs of the flexibilization and tertiarization of the labour, especially with respect to the
gender and family dimensions of these developments.
53
New Forms of Fighting Poverty and Social Exclusion
The global and European market places and the emergence of a knowledge-based economy
create new opportunities for economic progress and social inclusion, but also novel risks of
poverty and social exclusion. Moreover, endogenous social change reinforces the growing
inequalities between dual and single income families, mostly led by women. Recent figures
of EUROSTAT, excluding Finland and Sweden, suggest that in the EU 18 per cent of the
population, approximately 65 million citizens, live in poverty, defined as the percentage of
the population under a low income threshold, set at 60 percent of the median equivalent
income per person in each member state. Official poverty thresholds, as well as the
proportion of the population, vary quite markedly across the EUs member states. While in
the Denmark and the Netherlands income disparities are the smallest and low-income
population is only about 10 percent, Ireland, Italy, and Spain about 20 percent of the
population live below low-income thresholds (European Commission, 2000).
Dynamics of mobility in and out of poverty also differ by country. Although reliable figures
are hard to find, comparative data for the period between 1990 and 1995, reveal that over 80
percent of the German and Dutch population never experienced poverty, while this figure
amounted to 69 percent of the British population. While most of the poor in Germany and the
Netherlands are poor for only a short period, poverty seems to be more persistent in the UK
where the proportion of long term poverty is 2.5 times higher. The probability of remaining
poor after a long spell of poverty is also significantly higher in UK, as compared Germany
and the Netherlands.
Although employment is best way out of poverty, approximately 12 percent of the employed
live in poverty. While the risk of low income is highest for households without earning, the
working poor still account for a considerable share of low-income individuals. EUROSTAT
has calculated that for the EU as a whole, 53 percent of low-income individuals live in
households with some employment.
Tackling poverty effectively requires integrated action across a broad range of policy areas,
from social assistance to housing, education, mobility and culture. During the 1990s, fighting
social exclusion has become a central priority for many governments. New forms of co-
operation and partnerships, including in some cases the socially excluded themselves, are
essential. In Ireland, the Sharing in progress national anti-poverty strategy (based on a
target to bring down long term poverty in the population from 9 to 15 percent to less than 5 to
10 percent) stands out in terms of its strong partnership approach at various levels of decision
making and implementation. The Portuguese policy initiatives have been embedded in
institutional arenas within which all the relevant stakeholder had a say. French legislation
requires public authorities and representatives of the citizens for whom these policies are
designed to participate in forums for policy implementation. Meanwhile, in the Netherlands,
Belgium and most recently in the United Kingdom, policy makers have launched an
integrated approach to social exclusion, to be implemented though specific mechanisms of
policy co-ordination and issue linkage across relevant policy areas.
These integrated approaches, based on co-operation and benchmarking, have created the
potential for Community action to foster the exchange of national experiences (European
Commission 2000). As poverty and social exclusion are increasingly dynamic phenomena, as
material needs and social risks change over time, so there is a clear need for commonly
understood data and analysis. This is an area where monitoring and benchmarking at the level
54
of the European Union should take the initiative to make possible this type of problem
diagnosis and policy evaluation.
(b) Institutional Co-ordination
Finding a new policy mix frequently also requires significant institutional innovation in
enhancing the co-ordinated and negotiated character of policy making and implementation
systems. Indeed, this is precisely what has been occurring over the last decade or so in many
member states and has underpinned the successful adjustment strategies of countries as
diverse as the Netherlands, Ireland, Portugal, Italy and Spain. Their experiences show how
reform has been closely related to the forging of new linkages across the policy areas
mentioned above.
Among these countries, the Netherlands has proven to be something of a model for advocates
of a third way between neo-liberal deregulation and the traditional solidaristic European
model, both in terms of its institutional rejuvenation and the imaginative reconfiguration of
its policy mix (Visser and Hemerijk 1997). After an interlude of industrial relations strife, the
mid-1980s saw a revival of Dutch corporatist policy making - again with flexible,
decentralized bargains within a co-ordinated structure. This has produced something of a
model In Ireland, a country which frequently tried but failed to put in place a workable
incomes policy in the 1970s (Hardiman 1988) has now developed a rather comprehensive
social pact. Negotiated in successive phases in 1987, 1990, 1993 and most recently in 1997
the Irish social partnership has addressed tax, education, health and social welfare issues in
addition to incomes.
The real surprises are Italy, Portugal and Spain where the institutional preconditions for
national pacts are particularly weak, and the potential for conflict over both labour market
and social policy reform especially high (Ferrera 1996; Rhodes 1997; Dornelas 2000).
Nevertheless, in all of these countries, incomes policies have been linked in recent years with
wider packages of negotiated reform to the labour market, social security and tax systems. In
Ireland, Denmark, Italy, the Netherlands, Finland, Spain and Portugal, governments rewarded
the willingness of unions to pursue wage restraint by delivering various kinds of side
payments ranging from work-time reduction, tax cuts, increased spending for active labour
market policy and vocational training. Mandatory contributions to occupational pensions paid
by the employers also gained in importance as a module of bi- or tripartite package deals.
Thus, wage bargaining is increasingly about the social wage in a broader sense rather than
about nominal gross wages. In the Netherlands during the 1980s organized wage restraint was
exchanged for work-time reduction first and tax concessions later. In Denmark a basic
agreement over paid leave schemes (highly subsidized by the state) helped to dampen the
wage demands of the countrys relatively well-organized unions.
With respect to the effectiveness of wage bargaining under the economic constraints of the
1980s and 1990s, it is important to underline that the conditions for successful adjustment
have changed considerably.
First, the revitalized corporatist bargains in the 1980s and 1990s, first of all, take place in the
context of high unemployment, internationalized capital markets, and non-accommodating
fiscal and monetary macroeconomic policies. Under these conditions, wage policy not only
has to be in line with price stability but also has to allow for profitability and competitiveness
55
(Iversen 1999). Under high levels of unemployment and increased exit options for employers,
the unions have become the weaker partner. Employers only agree to the new deals if they
support competitiveness and allow for greater flexibility of working conditions. For their
good behaviour unions receive work-time reduction and the promise of jobs and
apprenticeship places. However, the unions have had to shelve their earlier drive for a more
egalitarian income distribution.
Second, the state is often an important sponsor of these new accords, offering reductions in
taxes and social contributions or promising to maintain social benefits in case wage
moderation proves effective. The states capacity to intervene in order to overcome reform
blockages remains of crucial importance. The institutional anchoring of price stability and
fiscal consolidation by independent central banks and the EMU Stability Pact, has
empowered the state in this respect, while unions have seen the scope for exercising power
reduced. They can no longer expect that excessive wage increases will be accommodated by
expansionary macroeconomic policies. As a consequence, expansionary wage policy is likely
to backfire and trigger rising unemployment. Under the shadow of this imminent threat, the
institutional preconditions of the new social accords are indeed far less demanding than in the
case of Keynesian corporatism. Nevertheless, as modern social pacts aim not only at wage
restraint but also at structural welfare reforms the co-ordination of reform efforts across
various areas of social and economic regulation is crucial.
Third, in the 1990s industrial relations no longer revolved around the dichotomy of
centralization or decentralization. Increasingly important is the manner and extent to which
the social partners managed to combine decentralized bargaining autonomy with
macroeconomic considerations in wage setting. The Danish and Dutch (as well as the
Austrian) experiences suggest that two-level wage bargaining systems, placing sectoral or
decentralized negotiations within the confines of a broader national framework accord, are
comparatively successful in combining macroeconomic objectives with micro-level
adjustment. Profitability criteria, as well as the expansion of the service sector have put a
premium on wage flexibility at the meso- and micro-levels. Agreements in two-level systems
allow sectoral bargainers to strike decentralized deals over productivity, training, and job
opportunities for less productive workers within the framework of a longer-term commitment
to macroeconomic stability (Rhodes 1999). The Danish and Dutch systems of organised
decentralization (Crouch and Traxler 1995) involving high levels of trust, not only
between the social partners at the national level, but even more so between sectoral
negotiators and central leadership provide important lessons for other countries.
In the Dutch case, concertation has been the pre-requisite for innovation in flexicurity and
labour market de-segmentation. Recent reforms have shelved the differences between the
high levels of security for full-time core workers and the lower level of protection for
peripheral temporary and part-time workers. This policy promoted part-time work and
selective labour market deregulation, which subsequently paved the way for a virtual
paradigm shift in Dutch labour market regulation with the adoption of the flexicurity law in
1998. Since 1993 Dutch unions and employers have increasingly come to exchange shorter
working hours, an expansion of leave arrangements, the warranty of income stability
throughout the year and lower overtime rates against the annualization of working hours and
an expansion of work on evenings or on Saturdays. The social partners are also in agreement
that employers should honour workers' requests to work part-time unless there are compelling
firm-related reasons for rejection (Visser and Hemerijck, 1997).
56
In Ireland, the social partners hammered out their first tripartite response to the crisis in
public finances in 1987 in the form of the Programme for National Recovery (1987-1990).
Subsequent agreements renewing and extending that accord have been linked to a
centralization of wage bargaining and a growing willingness to address tax, education, health
and social welfare issues via central negotiation as well (ODonnell 1998). The emphasis of
all four agreements has been on macro-economic stability, greater equity in the tax system,
and enhanced social justice. Specific innovations include inflation-proof benefits, job creation
(in manufacturing and international services sectors) and the reform of labour legislation in
the areas of part-time work, employment equality and unfair dismissal. In the process,
Ireland has experienced a remarkable transformation of its industrial relations system over the
past ten years or so. It has made a transition from one bearing a strong resemblance to the
British adversarial system, to one with strong corporatist elements, capable of delivering low
inflation, a high rate of economic growth and widespread innovation in social security,
taxation and labour market policy. Partnership 2000 (1996-7) was negotiated with a larger
number of partners, including the Irish National Organisation of the Unemployed and other
groups addressing the problems of social exclusion, and includes a National Anti-Poverty
Strategy (see section (a) above).
In Italy characterised by extensive industrial relations strife until 1980s - social pacts since
1993 not only contributed to the fulfilment of EMU entry conditions by effectively taking
inflation out of the labour market, but also included agreements on negotiated flexibility and
job security. In 1997, the Treu package on labour market reform was adopted, which
legalized temporary work agencies (as well as fixed-term and part-time work contracts) and
simultaneously sought to protect or to improve the rights and entitlements of workers in these
kinds of jobs. In addition, improvements were adopted in training programs giving firms a
strong voice in training courses. In the process, Italian unions are moving away from their
strong defence of rigid labour market regulation at all costs to a policy of more flexible
bargaining practices seemingly better able to resolve the threat of deskilling and growing
segmentation. Thus, political actors in Italy seem to have recognized that Italy's very strict
system of employment protection is the root cause for the strong insider-outsider cleavage on
the labour market.
Meanwhile, in Portugal, the period until the mid-1980s saw attempts at incomes policy and
concertation but an inadequate institutional framework undermined them. Particularly
problematic - as in the Italian case - was the absence of strong authority on the part of the
trade unions and the need for a strengthened role for the state, making it more reliable and
consistent bargaining partner (Rocha Pimentel 1983). Also as in Italy, it was the commitment
to eventual EMU membership after 1990 (under an enlarged-majority PSD government) that
led to an emphasis on an anti-inflation, lower public debt strategy. At the same time there
developed a broad consensus on the need for a new distributional coalition linked to the
countrys aspiration for full EMU membership.
Reflecting this consensus - and regardless of the continuing fragility of trade union structures
(Stoleroff 1997) - there have been five tripartite pacts since 1987 - the latest was signed in
1996 - focusing on incomes and social policy and labour market measures. They have been
presented from the outset as critical for improving the competitiveness of the Portuguese
economy and for integration into EMU. The agreements have been very wide-ranging,
covering pay rise ceilings, levels of minimum wages, easing regulations on the organization
of work (rest, overtime and shift work) i.e., internal flexibility - and on the termination of
employment (external flexibility) and the regulation of working hours.
57
Under the 1996 short-term agreement (consolidated by a Strategic Social Pact in 1997),
income tax for those on low incomes have been reduced, a more favorable tax treatment has
been made of a variety of health and education benefits, and old age pensions. In mid-1998
the levels of state retirement and contributory pensions were raised, requiring significant
changes in the way the system is financed.
Recent developments in Spain reflect a general shift away from the pacts based on the
protection of insider rights that emerged from the Franco period (Rhodes 1996; Encarnacin
1997), towards a more broadly base pact mirroring those struck in Portugal and Ireland. This
reflects a commitment on the part of the state to reform in the labour market, demands from
employers for greater flexibility and the need of unions to strengthen their own organizational
base. Given low membership and a correspondingly low level of financial resources, and
their need for the legitimacy that bargaining with the state can confer on them, the incentives
for union involvement are high. Innovations in wage bargaining have also been important. As
in the Italian case, these reflects, as argued by Prez (1999), a recognition by employers,
unions and government that a new wage bargaining structure containing decentralized
flexibility within a national framework is essential for containing inflationary pressures
under EMU.
The 1994 Toledo Pact included a focus on the rationalization and consolidation of the
public social security systems. The pact has facilitated subsequent deals on labour market
flexibility and pensions, as well as - more recently - the first sectoral agreements on reduced
working hours (in savings banks) and talks on incentives to encourage part-time working).
The pensions reform deal, struck between the government and the social partners in October
1996, made major innovations. These included the reduction in the number of special regimes
(an equity increasing measure); an increase in the proportionality between contributions and
benefits; the financing of health care and social services through taxes; and the reduction of
employers contributions in order to foster job creation (Guilln 1998). The labour market
reform of April 1997 was also extensive, and saw the first major concession by Spanish
unions to labour market outsiders when they agreed to a decrease in high redundancy
payments in exchange for a reduction of insecurity for those working on temporary contracts.
Bolstered by such progress, Spain too appears to be working its way towards an
institutionalized pact, although the coalitional supports in this case remain rather weak.
Conclusion
In sum, an effective redesign of social security systems is required to prevent implicit or
explicit disentitlement in relation to two groups in particular: women workers (who are often
discriminated against by male breadwinner-oriented social security systems); and those not in
permanent, full-time employment. At the same time new forms of active social security
systems have to guarantee access to skill acquisition and social services at any point during
the life cycle. In terms of labour regulation, a shift away from legislated or rule-governed
labour market regulation to negotiated labour market regulation is to be preferred. A shift
away from adversarial industrial relations towards a more consensual model also at the
enterprise level, together with the joint implementation of training mechanisms and priorities,
is also desirable.
58
Finally, innovating across policy areas requires a long-term investment in negotiated
structures of governance. So far, such experimentation has focused on the traditional
bargaining partners the state and the representatives of employers and employees. There is
a pressing need, however, for the stimulation of the so-called civic dialogue, with the
extension of concertation on welfare reform to other concerned groups, including third sector
organizations and representatives of the unemployed and the anti-poverty lobby. The case of
Ireland where such broader experimentation has been conducted could provide useful
lessons (of both how and how not to proceed) in this respect.
59
5. WHAT ROLE FOR EU SOCIAL POLICY?
How can supranational influence can best assist welfare state adjustment
processes in an era of external constraints and domestic challenges? We
note the recent reorientation of EU policy towards elaborating new
combinations of labour market and social security reform, with a view to
reconciling competitiveness with equity, and consider (a) how these
compare to the 'best practice' policy mixes and sequences we have already
identified and (b) the most effective role for EU intervention via legislation,
social dialogue, or the shaping of domestic institutional design. (The many
options range from the passive to the more active, including benchmarking,
social pacts at the national or territorial levels, a new co-ordination role,
welfare spending floors etc.) Again, linkages between economic reform,
employment creation and sustaining social cohesion are central to this
project.
The Achievements of Social Europe
Much has been written on the sclerotic development of the European Social Dimension.
This literature tends to be divided between the cautious optimists and the Euro-pessimists.
The optimists point to the autonomy and purpose of key institutions in Europes multilevel
polity and the capacity of the latter and the member states to create a regulatory order that
bolsters Europes national social contracts. Meanwhile, the pessimists argue that integration
has contributed to the globalization of the European economy in breaking down the borders
of economic competition while contributing little to new institution building. The asymmetry
between market-making negative integration (easy and quick in political-institutional terms
under the existing constitutional framework) and market-correcting positive integration
(difficult and slow) is seen as conducive to perverse (in so far as they are not necessarily
intended) effects. These are often evoked in the debate in the persistence of notions of social
dumping, social devaluations or a race to the bottom in terms of welfare standards and
norms.
Despite the predominance of this pessimistic view, the optimists are almost certainly correct
to point to the advances made. A new, albeit loosely-structured regime has indeed been put in
place with:
important substantive elements (in the form of Community legislation and ECJ case law);
procedural rules and innovations (especially with the expansion of qualified majority
voting and the social partnership provisions of the Maastricht Social Protocol and
Agreement);
and methods of enforcement (strengthened by Maastrichts empowerment of the ECJ to
fine dilatory member states).
The result has been the creation of a multi-tiered policy system and a transition from
sovereign to semi-sovereign welfare states, with the institutional capacity for resisting
regression in the scope and functions of the European social model. EU social policy making
among Europes semi-sovereign states now displays the following features:
60
J oint decision-making driven by a complex combination of national interest, ideology
and practicability. Again, to counter the pessimistic view, these developments are not
simply the sum of compromises between the member states in pursuit of their own
material interests (the defence of domestic organized interests or of the short-term
electoral fortunes of government rather than ideological positions). Rich states do not
always (or even often) seek to sustain their competitive status by imposing their social
standards on others. The Germans, for example, have never attempted to export their
social costs to the rest of Europe but have rather sought a more communautaire
development of minimum and flexible standards, often reining in the maximalist ambitions
of the Commission and the French (Rhodes 1999). Nor do poorer states simply engage in
cheap talk in backing higher social standards or accept them only because of side-
payments through the structural funds (cf. Lange 1992; 1993): such interpretations
misunderstand the extent of high regulation already in place in these countries and their
genuine ideological commitment to stronger welfare states (cf. our discussion above in ch.
2)

The creation of a policy network above and beyond the nation-state. Domestic interests
do not only lobby governments that then forge bargains at the supranational level. They
also strike alliances with supranational actors, successfully bypassing the national sphere,
and when these relationships are institutionalized - as in the social dialogue provisions of
the Maastricht Social Agreement they create important elements of multi-level
governance. The EU has had an important impact on interest mobilization and
representation in the member states over the years. The ETUC (the European Trade Union
Confederation), backed up by the powerful German labour movement, has helped to
bolster union capacities at the EU level, overcome fragmentation (in spreading support for
integration among often hostile national unions) and institutionalize a social dialogue
with a reluctant European employers organization (UNICE). Linked to the influence of
other national union movements, this activity creates a network of interests and influence
on legislation and other policy developments beyond standard intergovernmental contacts
and exchanges (Falkner 1998; Rhodes 1999). The social dialogue has become increasingly
important since Maastricht in the definition of new policies.
The creation of a social policy regime no longer fully controlled by its member states.
Not only are there sunk-costs and institutional lock-in effects once original concessions
have been made; but the complexity of decision-making, the accommodation of diverse
positions and attempts to resolve Treaty anomalies create enormous potential for
unintended consequences and strengthen non-state actors, especially the Commission and
the Court of Justice. In addition to its important agenda setting and process management
roles, the actual and potential influence of the Commission in the legislative process was
amply demonstrated in the late 1980s and early 1990s when, in attempting to evade the
British veto facilitated by unanimous voting, it tried - sometimes successfully - to shift the
Treaty base of a number of directives to qualified majority voting (Rhodes 1995). The
Court of Justice has played an extensive role in interpreting EC law and, like the
Commission, has been innovative in expanding its own room for manoeuvre, although its
role in building positive social policy, including social citizenship rights, remains
constrained.
A reduction of the social policy autonomy of the member states through pan-European
regulations. Despite a noticeable shift towards neo-voluntarist regulation (e.g., the use of
non-binding recommendations instead of binding directives) in recent years, a gamut of
61
binding legislation (regulations and directives) is now in place. Although its
implementation and enforcement remains problematic, European health and safety
legislation has proliferated, especially since the adoption of QMV for health and safety
under article 118A of the Single European Act. Equal treatment and opportunity
directives, and ECJ case law deriving from them, have extended a binding set of rights
across member states. Binding directives and ECJ decisions in employment protection
have governed collective redundancies, the transfer of businesses and the rights of
employees of insolvent employers since the mid-1970s, while under the 1989 social action
programme, directives have been passed enforcing health and safety rights for atypical
workers, special treatment of pregnant women in the work place, protection for young
workers, core terms and conditions for posted workers, proof of employment contracts,
working time and rights to workers consultation in multinationals.
A reduction of member state social policy autonomy via market compatibility
requirements. The market compatibility requirements (largely relating to freedom of
movement) of the Treaty of Rome have resulted in an ECJ-led process of regulatory
innovation which has begun to break down the borders of welfare state development. The
implications of this process, are that member states may no longer limit social benefits to
their own citizens; they may no longer insist that their benefits are only consumed on their
own territories (except in the case of unemployment benefits which are exportable for only
three months); and, in a limited number of instances, they are losing control of how people
living within their borders should be protected (e.g. controlling entitlement to disability
and invalidity benefits established by an authority in another member state).
In sum, member states are now subject to a web of enforceable regulations resulting from EU
legislation, and this will help shape if not determine their approaches to welfare state reform.
For even if these systems remain nationally specific and under the control of national
authorities, critical areas of policy now fall outside the domain of unilateral member-state
action. Although, as discussed below, the principal site for welfare state adjustment and
adaptation remains the nation-state, the scope, scale and nature of reform is increasingly
constrained or influenced by supranational regulation (see Rhodes 1998).
The construction of Social Europe may have produced a less splendid edifice than many of
its proponents had aspired to, but nonetheless, the achievements of the last few decades have
helped reinforce significantly the basic underpinnings of the European social model i.e.,
extensive basic social security cover for all citizens; a high degree of interest organisation and
co-ordinated bargaining; and a more equal wage and income structure than in most non-
European countries. Their legacy now provides the basis for a new phase of development
based on a much more complex architecture of policy making, and with potentially greater
social policy ambitions, than in the past.
Shortfalls and New Orientations
In confirming the significant achievements in the construction of Social Europe during the
last twenty years, this should not blind us to the shortfalls of that process and the need both
for progress and consolidation. Many pieces of health and safety and equal opportunities
legislation have ratcheted up standards across member states, especially those of the 1988-
1993 health and safety action programme, with the help of QMV under Article 118A of the
Single European Act. But in other areas, intergovernmental bargaining has diluted major
62
directives. Notable in this regard has been the European Works Council directive which, far
from spreading the German co-determination system to the rest of Europe (the intention of its
unsuccessful predecessor, the 1970s Vredeling directive), has put in place minimal
requirements for the consultation of workers in transnational companies. More recent
initiatives on this front including the draft Directive on the information and consultation of
workers at national remain blocked.
Moreover, EU social citizenship rights remain under-developed, for much of the emphasis of
positive EU social policy has been on industrial citizenship rights, linked to employment
and freedom of movement. As we note below, an important but still missing component of
EU-level policy co-ordination is that of a European-wide definition (and Treaty
constitutionalization) of fundamental citizens rights. There has even been a growing
deadlock in the 1990s since Maastricht and the affirmation of the subsidiarity principle,
necessitating new instruments of intervention on the part of the supranational authorities.
Against this background one should recognize the sea change in thinking that has occurred in
both the Commission and the member states since around 1993. Having put in place at
Maastricht the prerequisite mechanisms for freeing blocked legislation, several major
developments then began to transform the policy agenda: the demise of the Mitterrand/Delors
axis and its replacement with a more centrist Commission President and a right-wing
(although paternalist) French president; a growing resistance to a further transfer of authority
to the EU, reflected more generally in the importance given to subsidiarity in the Maastricht
Treaty; and a recognition that high and rising rates of unemployment in Europe might require
a rather different approach to labour markets and social policy than in the past.
The result has been a shift in focus from employment protection (though this clearly remains
important) towards employment promotion (if necessary, through a more flexible re-
regulation of labour market rules), a questioning of cohesion policy priorities and plans to
link the structural funds more closely to employment imperatives. There have also been some
new alignments in EU policy making among the member states and innovations in the
instruments of social and employment policy, including the introduction of new policy
instruments (soft policies such as mainstreaming and management by objectives), to
which we return below.
Given these trends, the creation of a single European market has clearly failed to elevate the
level of logical social policy responses from the nation-state to Europe, beyond pressures to
facilitate the freedom of movement of workers and citizens and the creation of a minimum
floor of rights and entitlements for workers. We should find this neither surprising nor
necessarily lamentable. For as we have stressed in preceding chapters, not only do welfare
states and labour market systems remain nationally embedded, but economic integration is
helping make the national level an increasingly important site of conflict, innovation and
regulatory reform. If co-ordination and harder forms of regulation at the European level are
to proceed, then the reality and desirability of nationally-specific responses (albeit within
a strengthened European framework) must be taken into account.
Thus, whereas once the challenge for Europe was to produce an upward approximation of
social protection and entitlements as and when convergence permitted - installing elements of
a European social contract in the process - there is a pressing need now to reform national
social contracts, albeit within a framework which can and should be constructed at the
European level. Where once the priority appeared to be a harmonization of social end
63
employment rights across Europe, the priority now lies in finding effective policy responses
to persistent high levels of employment and in reconciling national systems of social
solidarity with economic growth. This demands new approaches to social and employment
protection in both the EUs member states and at the level of the supranational authoritires.
Strategies of EU Involvement
What specific role then can the EU play in this era of national welfare innovation and
change? Institutional innovations achieved in recent years, especially with the Maastricht
Social Protocol and Agreement, have begun to tackle the problems of the joint decision trap
(the clash between irreconcilable member state interests) and the corporatist decision gap
(the absence of effective bargaining between the European social partners). Important
advancements have been made on both fronts in recent years. But the member states have yet
to fully escape these constraints in the game of intergovernmental decision making. Indeed, it
may be the case that the closer the EU comes to resolving such problems in the decision-
making machinery, the more reluctant will the member states be to employ it, as suggested by
the post-Maastricht concern with subsidiarity. Moreover, the EU has yet to acquire the
legitimacy and capacity for intervention beyond certain boundaries.
But within these evident constraints, a number of propositions can be advanced for a future
EU role. Of course, a new consensus may emerge on advances in specific areas of social
policy, with new legislation developed either by the Commission and the Council of
Ministers or between the latter and the social partners, as allowed for under the Maastricht
Social Protocol and Agreement. The latters procedures will be strengthened by Britains
membership under the Blair government.
Although we orientated our discussion below very much towards the development of new
soft law instruments which may prove more apt than hard law in guiding member state
adjustments of broader social policies, directives and other traditional forms of European
regulation will remain important. Towards the end of 1999, the Commission released a
package of measures designed to combat discrimination, based on Article 13 of the Treaty,
including a draft framework Directive establishing equal treatment in employment, a draft
Directive implementing the principle of equal treatment irrespective of racial or ethnic origin
and a proposal for an EU anti-discrimination action programme. These measures will be
subject to unanimity in the Council and so their adoption will not be straightforward.
Nonetheless, putting in place new hard law innovations of this type will be important for
providing a strong legal underpinning for anti-discrimination across a wide range of areas. A
new Directive allowing member states to reduce VAT on an experimental basis in labour-
intensive areas as a means of job creation was also adopted by the social affairs Council in
1999
Recent advances have also shown that novel forms of decision-making outside the standard
inter-governmental forum can also be successful. Thus, although there was considerable
scepticism as to the workability of the new social protocol procedures adopted at Maastricht,
a number of agreements have emerged from the inter-professional dialogue that have now
been adopted as Directives. The most recent of these was that on fixed-term contracts, again
adopted in 1999. Other areas of progress such as the draft Directive on national worker
information and consultation issued by the Commission when UNICE refused accept the
offer of the ETUC and CEEP to negotiate on the issue have been much slower.
64
Nevertheless, an steady accumulation of advanced using the combined social
agreement/Directive track is giving legitimation to the process. Even the sectoral social
dialogue a much less consolidated process than the inter-professional dialogue has begun
to deliver results, with an agreement on extending the 1993 working time Director to
maritime sector achieved, again in 1999.
More ambitiously, there may yet also be agreement on the inclusion of a series of social
rights in the Treaty, as proposed by the 1996 Comit des Sages. Or even for the approval of
a fully-fledged Charter of Fundamental Rights of the European Union - although recent
divisions on this issue suggest it will be difficult to manage.
Equally fruitful, and more important in relation to Member State efforts to recast their own
welfare states, would be a new EU co-ordination role.
This could be achieved in two ways. The first would be to allow differential levels of social
protection, linked to varying levels of labour costs and social spending, preventing the poorer
member states from vetoing upward harmonization among the more prosperous. All
European welfare states could be underpinned by an explicit agreement on a threshold below
which welfare expenditure would not fall. Second, this floor could be supplemented by sub-
European co-ordination among groups of countries (i.e. welfare families) which have
similar institutions and policy mixes such as the wealthy corporatist group of Sweden,
Denmark, Germany and Austria. According to some commentators, co-ordinated reform
strategies among countries that share critical institutional preconditions may be more
promising, in principle, than unilateral coping strategies or attempts to harmonise across all
welfare clusters
19
.
However, such a strategy faces two predictable obstacles. The first is that the poorer member
states may resist the creation of a two-tier Europe in social policy. Pro-welfare elites in those
countries may fear that such a differentiation will consign them permanently to a second-
class club and reduce pressures for an implementation of EU legislation already on the statute
books. In fact, the EU needs to play a role in ensuring that an equitable balance in labour
market reregulation and social policy reform is achieved in these countries as much as in their
wealthier counterparts. For it is wrong to imagine that the poorer countries (especially those
in southern Europe) are simply low regulation countries. Indeed, as shown in chapter 3, one
of the main features of these countries is the peaks of generosity in social transfers
employment protection which exist alongside significant gaps in provision; and one aim of
their social policy reforms should be to eliminate these shortfalls in equity.
Second, the confinement of the southern and other member states to a lower level of
regulation would not necessarily make social policy innovation any easier among the
wealthy. While the inclusion of two Nordic countries and Austria in the EU bolsters
membership of the high regulation country club, their domestic arrangements remain quite
distinct. Moreover, Germany has been one of the principal opponents of further supranational
regulation in the area of social protection, as revealed in its resistance to the Europeanization
of poverty programmes. Once again, the complex nature of national trade-offs and social
bargains, as well as their legitimacy, is at stake.

19
For a discussion of both the welfare club and welfare floor ideas, see Scharpf (1997, 1997a, 1999)
65
On the other hand, the idea of an agreed welfare floor is a good one and much more in
keeping with EU tradition and practice than the creation of differentiated clubs. This could
be bolstered by the supranational reinforcement and encouragement of the national bargains
discussed in the preceding section which tackle existing inequities in welfare cover and
extend the natural constituency of the labour movement, as well as introduce new forms of
flexible work and social security and tax reform. One specific area where an EU role is
required is in helping ensure that both labour and capital remained linked in national social
pacts, given the low exit-costs for these organizations in those countries without a corporatist
tradition, such as Italy and Portugal. Advancement with the Directive on the information and
consultation of workers at national level could help consolidate the company level
foundations of national level bargaining and agreements on wider social policy issues. As for
capital, action by the Commission and member states at the EU level could ensure that the
new European Works Councils play a role in locking large firms, especially multinationals,
into national bargaining processes, and counter their tendency to break away.
As for the problem of trade union exit, additional incentives for continued participation must
be provided. At the national level this should be achieved by scheduling productivity-linked
wage increases and employment creation in line with a return to non-inflationary growth. At
the European level, the Commission and member states should also attempt to forge a link
between national pacts and the European social dialogue. This has already been done up to a
point with Commission requests that the European social partners the ETUC, UNICE and
CEEP take the Employment Guidelines stemming from the 1997 Luxembourg Employment
Summit into account in their framework agreements. This was achieved to some extent with
the framework agreements on part-time work and fixed-term employment.
Agreement on a European employment pact, stressing the importance of education and
training, and seeking new forms of EU-level co-ordination in areas such as minimum wage
and human capital standards could make an important contribution to the development of a
European strategy for reforming the welfare/work nexus. The Commission could also play a
role in diffusing notions of best-practice policy sequencing and linkages, as discussed above
in Chapter 4. Already, the Commission has called for more emphasis to be placed on the
reform of tax and benefit systems, the provision of life-long learning, the employment
creation potential of the services sector and an improved reconciliation of work and family
life in line with our definition of an optimal policy mix outlined in chapter 4.
Nevertheless, advancement on achieving a more balanced policy mix will also require further
investment in the policy architecture of social Europe.
Soft and Open Co-ordination: is This the Way Ahead?
In this respect, of central importance will be the development of new soft instruments for
European intervention in the member state economies and labour markets. These are essential
if the policy blockage encountered by more traditional European instruments (e.g. social and
employment policy directives) is to be avoided. Some important developments in this
direction have already taken place in recent years. The European Union, acting as a semi-
sovereign policy system, seems slowly but surely to be carving out for itself a distinct co-
ordinating role in a number of social policy areas a role that can work to rebalance softly
and from below the structural asymmetry between negative and positive integration.
66
This trend is clearly visible in the fields of gender policy and, since 1997, employment
policy. In the area of social protection proper, the relevance and involvement of the EU is less
marked and the logic of asymmetry between market-making negative integration and
market-correcting positive integration still predominates: but also on this front the situation
is perhaps less desolating and certainly less static than many believe.
As far as gender policy is concerned, the 1990s have witnessed a real blossoming of EU
initiatives addressing both gender equality (i.e. equal treatment of women and men in all its
forms) and gender equity (i.e. positive measures to integrate women into the labour market on
an equal footing with men). European law and policy have set new standards for equal
treatment in wages, social security, pensions and a wide array of EU programmes are now
available to promote womens integration into the labour market. These encourage an explicit
and deliberate connection between the sphere of employment and other social spheres and
exposing the relationship between paid and unpaid work (see Rees 1998). Facilitated by the
relative absence of pre-existing national policies in this field, the EU has been able to take the
lead on this front, introducing several wedges that have been slowly destabilizing the
institutional status quo not only as regards gender issues, but also other issues as well.
In the field of employment, the turning point has of course coincided with the launching of
the Luxembourg process in 1997 and the new employment chapter introduced in the new
ECT signed at Amsterdam (Art. 109n-s ECT or 125-130 after the renumbering) (Kenner
1999; Goetschy 1999). As is well known, this chapter provides for the co-ordination of
national employment policies using a management by objectives approach, whereby EU
institutions draw up guidelines and monitor their implementation through an articulated
procedure, resting on the following steps:
problem diagnosis and evaluation, based on the inputs of epistemic communities at
various levels;
EU-wide priority setting and political recognition of such priorities at the highest
institutional level (European Councils);
identification of good practices and reference indicators for benchmarking purposes;
involvement of national policy making systems through the preparation of national plans
and the setting of specific national targets;
process monitoring and policy evaluation through peer review mechanisms; and
the possibility of issuing recommendations.
Though specifically focused on employment issues, the Luxembourg process has crucial
implications for other social policies as well. This is so not only because boosting
employment performance is, per se, a way of securing the viability of established welfare
programmes, but also because of the close link between most recipes for employment
promotion and the modernization of social protection systems. Not surprisingly, many of
the employment guidelines drawn up so far in the new institutional framework call for an
adjustment of various institutional features of existing welfare arrangements.
With respect to both gender and employment, the area of social protection proper has
witnessed a lesser degree of institutional innovation in the 1990s. True, the Maastricht Treaty
included a Social Agreement between 11 (then 14) countries, extending Community
competencies to working conditions, the information and consultations of workers and the
integration of persons excluded from the labour market. With the end of the UK opt-out, this
agreement has now become an integral part of the new Amsterdam Treaty, opening a
promising window of opportunity for enhancing EU activism especially in the field of social
67
exclusion. But the historical and institutional core of social protection - i.e. social security
schemes - still remains largely a matter of national policy. National policy, however, is
increasingly constrained by the functional imperatives and the hard discipline of EMU,
creating the asymmetry trap mentioned above.
Yet, also in the field of social protection, a (very) soft process of co-ordination seems to be
gradually emerging, mainly thanks to efforts by the Commission and the European
Parliament (Kenner 1999). This process started in 1992 with two recommendations on
convergence of social protection objectives. It continued with the establishment of a
periodic system of reporting (the Social Protection in Europe reports) and the launching of a
framework initiative on the future of social protection and its modernization (a term
coined in a 1997 communication). It finally culminated in the recent proposal by the
Commission of a concerted strategy for modernising social protection. The latter calls for a
new institutionalised process for exchanging experience and monitoring developments,
based on three elements: a) the establishment of a group of high level senior officials as
focal point of the process; b) the improvement of the reporting system and c) a formal link
between this new process and the Luxembourg process itself. Timid as it may sound, this new
concerted strategy could serve as a promising wedge to break the institutional traps created
by both the logic of asymmetry and the logic of subsidiarity, which relegate social protection
policy inexorably within the preserve of national sovereignty.
What are the implications of all these policy developments? Do they possess an
eigendynamik capable of re-balancing in due course the gap between negative and
positive integration, or are they simply like empty shells, that can only be filled by
voluntaristic efforts of socially minded actors if and when they appear on the scene? We
believe in the plausibility of the first hypothesis. Soft and open co-ordination is a promising
institutional mechanism for advancing on all the grey areas of common concern though it
obviously needs improvements and fine tunings.
The reason of our relative optimism lies in the appreciation of the social and institutional
dynamics that can originate from soft co-ordination procedures. The iterative character of
these procedures helps crate trust and co-operative orientations among actors, encourages
learning and promotes a general dynamic of institutionalisation, whereby actors internalize
norms of conduct, stabilize expectations and start to behave according to a logic of
appropriateness. A continuous and predictable multi-level and multi-actor interaction, with
a repetitive calendar, also induces a de-politicization of the issues at stake, shielding them
from national political cycles and encouraging a problem solving style in their management.
The same purpose is served by the reference to standardized indicators and benchmarking.
The decentralized character of the implementation of the guidelines set by the supranational
authorities and the involvement of national bureaucracies (which have margins for
manoeuvre, but within temporal and substantive limits) work in turn to stimulate an
improvement of national policy structures and styles in terms of efficiency and
effectiveness. If it can be made to operate at its best the whole process can generate an
optimal mix of europeanization and nationalization of the policy areas concerned. At least
for certain countries, there is encouraging early evidence that this is exactly what is
happening with the Luxembourg process. In a longer run perspective, further progress with
harder forms of regulation could be coupled with the convergence or approximation
achieved under these softer modes of European governance.
68
Almost by definition, the effects of soft co-ordination are slow to come by: thus we should
not be too hasty in trying to determine its actual results in terms of institutional capacity. On
the other hand, it cannot be denied that there is also room for a number of immediate
improvements.
A first front for improvements is substantive and has to do with the objects of soft co-
ordination. As is known, so far three main processes exist: the Cologne process on macro-
economic policies, the Cardiff process on structural policies and the Luxembourg process on
employment. Through the practice of mainstreaming, other policy areas can be (and
already are) explicitly hooked to the existing processes (e.g. gender and more generally
anti-discrimination policies). Two additional policies that should be rapidly added to this
landscape are social exclusion and education and training. As mentioned in the previous
chapters of this report, these two policy areas are crucial for a re-calibration of the European
social model in line with the aims and needs of the knowledge-based economy and learning
society. A high level initiative to elevate the salience of these two fields within the emerging
EU co-ordinative regime is both desirable and legally feasible.
A second front of improvement is more procedural. Precisely because they are soft and open,
the co-ordination mechanisms of the various processes and initiatives launched in recent
years are always exposed to the risk of becoming too complex and baroque, leading not only
to output inefficiency, but also to actor frustration. This trend is further amplified by the
inevitable overlaps (substantive, temporal, personal) between the various processes
themselves. The macro-economic dialogue put in place in Cologne in 1999 begins to address
at the European level the more general issue of complex policy interdependencies mentioned
above. It specifically promotes relations between European employer and union
representatives, the Commission, Ministers of Finance and Employment, the European
Central Bank, governors of national central banks focusing on the interconnections between
wages, monetary, budgetary and fiscal policies (Goetschy 2000).
Thus a broad and incisive rationalization of the overall institutional framework for open co-
ordination is in order. A promising solution could be that of using the Cologne process (and
especially the Broad Economic Guidelines) as a sort of umbrella framework, under which
two distinct but interconnected tracks (with carefully set timetables) would run:
a track for the co-ordination of all structural policies, prioritizing the objective of a rapid
transition to the knowledge based economy; and
a track for the co-ordination of all social promotion policies, prioritizing not only the
creation of more flexicure employment, but also greater inclusion and human capital
enhancement for a cohesive learning society.
To a large extent, all these improvements have already been agreed upon at the extraordinary
Lisbon summit of March 2000. On the substantive front, a number of rather specific targets
have been identified for enhancing education and training systems and the Education Council
has been invited to undertake a strategic reflection on this field and to prepare a report by the
Spring of 2001. In its turn, social exclusion and the eradication of poverty have been
indicated as top priorities for public policy at all levels, with a commitment to set specific
targets by the end of 2000 and to monitor their achievement through soft co-ordination
procedures (including the preparation of national action plans). The High Level Working
Party on Social Protection established in the wake of the above-mentioned Commission
recommendation has also received a broad mandate to investigate the future evolution of
69
social protection. Its special brief will be social exclusion and the sustainability of pension
systems (a progress report is expected by the end of 2000).
On the procedural front, the Lisbon summit has also launched the much-needed
rationalization of the various processes, along the lines sketched above. The Broad
Economic Policy Guidelines have been identified as the overarching exercise of strategic
planning, with a greater involvement of Council ministerial groupings other than ECOFIN in
order to encourage a better management of policy interdependencies. More importantly, it has
been decided that the European Council will meet every Spring to address economic and
social questions. This promises to be a significant innovation, for the Spring EC, if
successful, could become the missing institutional kernel of Social Europe, around which all
the various processes and initiatives can effectively rotate. Inviting all the member state to
prepare each year in view of this institutionalized deadline a document illustrating their
own social policy agenda (with indicators and targets) could be a further element in firming
up the new institutional framework.
There can be little doubt that what has emerged from the Lisbon summit is to use the words
of the Portuguese Presidency a more coherent and systematic approach to respond to the
challenges of employment creation, economic reform and the promotion of social cohesion.
But it remains to be seen whether contextual contingencies will allow this new approach to
produce effective results and whether in practice the actors will follow its prescriptions.
70
6. THE FUTURE OF THE EUROPEAN WELFARE STATE
The future of the European welfare state can be construed in terms of
the pre-experimentation and re-calibration. Re-experimentation refers
to the process of reform that is already under way, based on learning,
well-informed debates and policy learning. Re-calibration refers rather
to the substantive content of reform. Re-calibration has functional,
distributive, normative and politico-institutional dimensions. Future
reform of Europes welfare states should proceed simultaneously along
all of these dimensions so as to ensure an adaptation of social systems to
new social needs while also rendering them less vulnerable and more
responsive at all levels to pressures for change.
The Twin Dimensions of Reform: Re-experimentation and Re-calibration
More than a century ago the welfare state emerged in Europe as a result of a slow process of
institutional experimentation and policy innovation. This process began with the liberal
break vis--vis conservative paternalism around the middle of the 19th century and ended
with the establishment of mass social insurance in most countries by the end of the 1920s.
Since World War II, together with liberal democracy and the market economy, social
protection has gradually imposed itself as a fundamental component of the European model
of society, offering concrete anchors to the widely shared values of social justice and
equality, security and positive freedoms. These anchors have played an essential role in
smoothing the strains created by economic cycles, demographic shifts, changing social and
political behaviour and, more generally, by the transition from agrarian to industrial and then
to post-industrial societies.
Yet, despite its unquestionable historical success, the welfare state has entered its second
century of life in a state of uncertainty. The strains are caused by a complex set of exogenous
and endogenous challenges that are throwing the inherited design of the welfare state into
question. The uncertainty has to do with the objective difficulties in diagnosing such
challenges, in identifying the possible solutions, and in actually bringing about policy change
which frequently impinges on the interests and expectations of the mass of citizens and
organised social groups.
The various chapters of this report have already illustrated and discussed both the sources and
the dynamics of these strains and uncertainty. While acknowledging the severity of problems
in certain critical areas of social protection and employment, we have also argued that this
scenario is far from static. Institutional change is in fact well under way. In the course of the
1990s, social protection has definitely entered a new phase of re-experimentation a sort of
historical parallel to the earlier phase of experimentation with new policies and institutions
that occurred during the modern welfare states early phase of emergence. Many of the
settings of traditional instruments (such as eligibility rules or benefit formulas) have been
changed; older instruments (automatic indexations, for example) have been scrapped while
new ones (e.g., dependency insurance) have been added. And in some sectors and/or
countries the very objectives of the welfare state are being re-defined, carving out in the
process the profile of a new policy paradigm (as in the development of flexicurity).
71
The metaphor of a re-experimentation is particularly useful we suggest - to capture the
fundamental logic that is now guiding the reform process. As shown in chapter 4, system-
wide searches for novel, economically viable, socially acceptable and politically feasible
policy solutions are underway. In certain cases, this search has become experimental in an
almost literal sense: think of the methods followed by Portugal and Italy, for example, in
introducing a minimum guaranteed income. While this sequence of institutional experiments
has primarily taken place at the national (in some cases sub-national) level, an increasingly
important role has been played by the supranational level as a catalyst of learning. As
discussed in chapter 6, EU institutions have been active promoters of change by channelling
information and facilitating the exchange of experiences, but above all by providing specific
incentives and focussing events and procedures (e.g. summitry, the EMU deadline, the
various social policy directives, or the Luxembourg process).
The adoption of an experimental approach, prompted by policy puzzles and based on
learning, is a positive sign not just because it indicates that policy innovation has begun. It
also reveals that innovation is taking place through a relatively new and promising
institutional approach, which is sensitive to empirical evidence and founded on well-informed
debates and lesson drawing.
But turning to the substantive direction of reform, the re-experimentation metaphor must be
complemented, however, with other notions. In the various institutional laboratories that
have opened in the 1990s, many different policies have been developed, with apparently
disparate orientations. Is there a summary expression for capturing this second, more
substantive aspect of change from both a descriptive and a prescriptive viewpoint?
Early debates on the new phase of austerity tended to use rather one-sided and often crude
notions such as retrenchment or roll-back (not to speak of dismantling) to characterise
change. These perceived (and accounted for) recent developments primarily in negative terms
- i.e. as steps backwards on a sort of linear trajectory with respect to golden age welfare
expansion. In more recent years, a new term - the modernization of social protection - has
emerged from the debate, mainly from within Commission circles. While having the
advantage of conveying a positive message about the reform and potentially
accommodating a wide range of specific measures and orientations, this notion remains
inherently vague about the substantive logic that is or ought to be guiding policy change.
This is why we would like to organise our conclusions around a different notion: that of re-
calibration. This concept is meant to suggest an act of institutional reconfiguration and re-
balancing characterised by:
1) the presence of a set of constraints conditioning developments, stemming from the
interaction of new external pressures and domestic challenges;
2) the interdependence between additions (or upgradings) and subtractions in the policy
menu under review, as a consequence of such constraints; and
3) a deliberate shift of weight and emphasis among the various instruments and objectives of
social policy.
As in all balancing acts, re-calibration is a delicate operation, which raises difficult dilemmas,
involves tough political choices and is inherently exposed to the twin risks of either excessive
or insufficient transformation. In the remainder of this chapter, we present the notion of re-
72
calibration in terms of its functional, distributive, normative and politico-institutional
dimensions.
20
From Old to New Risks
Functional re-calibration relates to the risks around which welfare provision has developed
over time. As is well known and documented, at the time of its inception and during its
consolidation (roughly until the early 1970s), social insurance displayed a good degree of
congruence with the population, family and labour market structures of European societies.
The traditional catalogue of standard risks tended to reflect quite closely the prevailing
pattern of social needs, as shaped by high fertility, a shorter life expectancy than today,
growing fordist employment, low rates of female employment, a male breadwinner model
of the family and a traditional form of gender relations. As shown in previous chapters of this
report, the goodness of fit between the welfare state and an evolving socio-economic reality
has been gradually eroded in the last couple of decades. More recently, the new, increasingly
rapid transition towards a post-industrial, knowledge-based economy is generating an
additional mismatch between the supply and demand for institutional goods.
Perhaps the best way to summarize the growing incongruence between social protection and
its wider context is to say that the standard risks on which institutionalized forms of solidarity
are based now correspond less than adequately to contemporary needs. Traditional social
insurance schemes still tend to concentrate benefits on risks which no longer - per se -
generate need, while they increasingly fail in many countries to protect new needs which are
either not formally recognized or insufficiently acknowledged as risks. Examples of new
needs include social exclusion, family break-ups, or, to take an example related to health, the
needs connected to long-term dependency in the case of chronic illness or disability.
Meanwhile, old risks continue to receive generous insurance protection, even if in many
instances they are no longer the source of real need among the prosperous middle classes.
Examples include short-term work absence due to mild sickness, the death of a spouse and
even old age at least in its traditional definition as life beyond 60 or 65. This type of
generous solidarity is not only increasingly outdated, but in some cases also perverse,
generating significant disincentives to work.
Functional re-calibration is designed to remedy this situation. It involves acts of re-balancing
both within and across the established functions of social protection. In employment, the
emphasis must shift as much as possible from passive compensation to secured activation.
But most importantly there must be a rethinking of old age protection and pension insurance,
particularly in the Continental and Southern European systems. In high-income societies
where considerable economic resources (both mobile and immobile) tend on average to
become available in later phases of the life cycle there is no longer compelling justification
for concentrating public protection at this point.
In the wake of the social and economic transformation of our societies, income insecurity is
increasingly spreading to earlier phases of the cycle. In many countries child poverty has
been growing, together with other worrying symptoms of social dislocation, including
crime, teenage pregnancies, homelessness, substance abuse, educational exclusion. In this

20
We are grateful to Jonathan Zeilin (University of Wisconsin, at Madison) for having brought this notion to our
attention during a conference at the Robert Schuman Centre at the European University Institute in Florence
73
new context, a re-calibration of social insurance from old age protection to societal
integration and human capital upgrading is urgently in order. As discussed at length in
chapter 3, another highly desirable development is the further expansion of family services
not only as a means to respond to new needs, but also as an employment multiplier.
Many steps forward have already been taken in these directions. We can point to new
schemes introduced in long-term care, innovations in public training, the improvement of
maternity, parental leave and family benefits and the consolidation of the safety net with
due regard paid to various traps that can emerge. Various reforms have also been introduced
in pensions. But on this front the record is still far from satisfactory, especially in view of
rapid demographic change. Completing the pension reform agenda remains the key for
solving the allocative dilemmas of the welfare state, especially in Continental Europe.
From Insiders to Outsiders
If functional re-calibration has to do with social risks, distributive re-calibration has to do
with social groups. There is obviously a certain degree of overlap between the two
dimensions, but they are far from identical. For example, if from a functional viewpoint the
main priority for old age as a risk is that of calibrating downwards, from a distributive point
there remains ample room for upwards-calibration within old age expenditure itself, in
order to protect weaker individuals and social categories.
The welfare state has never been evenly extended across the social structure. While this is
partly true even in the universalistic systems of Nordic Europe, social differentiation in terms
of welfare rights and entitlements have long been the norm in the conservative-corporatist
regimes of Continental Europe. In Southern Europe social rights have never succeeded in
crossing certain socio-economic fault lines, most notoriously into the black economy
understood not in terms of moonlighting on top of a first normal job, but in terms of
extensive unprotected work as a primary occupation for millions of people. Labour market
segmentation and the insider/outsider cleavage have been mentioned and discussed several
times in this report. In many countries there is evidence of an over-accumulation of insurance
benefits on the side of guaranteed workers, with quasi-tenured jobs (often two or more of
these jobs per household), alongside inadequate (if not total) lack of protection for those
employed in the outer, weaker sectors of the labour market.
In particular there seems to be a growing gap between the so-called DINK families (double
income, no kids; insider jobs) and the SIMK ones (single income, many kids or single
parent and one child in an outsider job or unemployed). Though less visible than in the US,
an American-style underclass consisting of workless households, lone parents, ethnic
minorities or (illegal) immigrants has already formed in some regions of Europe, falling
largely outside the reach of social insurance. And the emerging skill-based cleavages
associated with the new economy will certainly accelerate and reinforce this dynamic.
In certain countries marked distributive inequalities are evident not only between the insiders
and the outsiders, but also among the insiders themselves, i.e. between different categories of
insured. Overtime, social insurance systems have come to incorporate often in implicit
forms increasing doses of interpersonal redistribution, i.e. redistribution across economic
sectors, occupational categories or income groups. But many of these transfers have now lost
their original rationale and have become a source of growing inequity.
74
While the common direction of change in functional re-calibration is away from the
protection of old age (or better third age) to the protection of risks including the new risks
in other phases of the life cycle, it is more difficult to identify a common leitmotiv in
distributive re-calibration. This is because the specific agenda is likely to vary significantly
across countries, not only in terms of the social groups involved (e.g. public versus private
employees, or tenured versus precarious workers), but also in terms of dimensions. Thus, the
inter-generational and gender dimensions may be more salient for certain countries than the
occupational one. Moreover, while the reforms of the 1990s have already started
disentangling the distributive mazes of national welfare systems, re-calibration on this front is
far from complete and in some countries an open and evidence-based debate on this issue has
barely begun. To a large extent, the difficult politics of entrenched interests and sticky
institutions explains why progress is so slow. But another problem is that progress is hard to
define and justify in the first place from a value perspective. And this leads us necessarily
into the difficult and contested area - of normative re-calibration.
Equality through Mobility and Opportunity
Normative re-calibration has to do with values and discourses. On this front too an
incongruence can be noted in the European welfare state: the goodness of fit between the
broad value premises that inspired its construction and the policies we now observe in
practice has been gradually eroding through time, largely as a consequence of institutional
inertia.
Let us take the notion of equality definitely a cornerstone of the European welfare state as
an ideological project. The primacy of this notion can be sustained by powerful normative
arguments, some of which have very demanding implications in terms of public policy. For
example, according to one of the most influential contemporary theories of justice, that of
John Rawls (1971), departures from the principle of equi-distribution are admissible only if
they are to the greatest benefits of the least advantaged. The rawlsian test is primarily
pertinent for market inequalities: and one of the fundamental normative roots of social
protection is precisely to compensate for many of these inequalities, thus re-establishing
conditions of fairness. But are we sure that the institutions currently in place actually
achieve this outcome and are themselves internally fair?
Of course, real world institutions are always imperfect: but there are different degrees of
imperfection. And we are correct about the serious functional and distributive shortfalls of the
status quo, then the case for re-calibration acquires a normative dimension as well.
The service sector trilemma mentioned several times in this report offers a good illustration
of this point. The positive version of the argument is that given the characteristics of
services production and fiscal constraint, solidaristic incomes policies and high wage floors
in Continental systems tend to stifle employment creation, especially for the low skilled. The
policy implication is that these systems must move towards some form of flexicurity, under
the terms set out in chapter 4. The normative argument can be presented as follows: it is
morally fair to reduce the protection of the insiders and allow for more flexibility and greater
earnings dispersion if this delivers greater opportunities to the worst off. The security side of
the positive argument can itself be bolstered in normative terms: a rawlsian approach would
in fact prescribe the consolidation of a floor of equi-distributed primary goods, compatible
with economic constraints but meant to enable each individual to participate in society (see
75
also Lindley 1999 and Esping-Andersen 2000, both of whom adopt this Rawlesian view of
acceptable inequality). In the present context, this basket of minima moralia ought not only
to contain a minimum income guarantee and a health promotion guarantee, but also a
universal human capital guarantee.
Normative re-calibration is not only, however, about challenging the status quo from a value
perspective and offering justifications for reform. It is also about widening the agenda by
shifting emphasis within the value premises themselves. More particularly it involves shifting
from a static notion of equality, centred on material resources (typically income) and
compensation, to a more dynamic notion, centred on capacities and empowerment. In
knowledge-intensive economies, with increasingly flexible labour markets and more fluid
social fabrics, the equality that matters has to do with those resources which allow people to
keep pace and cope with change. This means focusing on how effectively (and equitably)
such resources are delivered by high quality education, health care and social services and
how successfully opportunities for mobility provide escape routes from permanent
entrapment in conditions of disadvantage.
Recent communications and reports from the European Union have emphasized the
importance of extensive access to new information technologies, cognitive problem solving
capacities, foreign languages and the development entrepreneurship. But this is not enough.
The knowledge based economy is likely to create a new cleavage line the between digitally
literate and illiterate. A truly positive-sum solution requires, in addition to human capital
investment in life-long training and education, a concerted policy effort to increase job
opportunities for low skilled groups who, for whatever reason, continue to lack marketable
skills as well as for better skilled younger workers, who for reasons often of professional
closure, are denied access to employment.
Again, we can cast our reasoning in Rawlsian terms. From this perspective, departures from
equality are subject to two provisos: as already mentioned, they must benefit the least
advantaged; but they must also be attached to offices and positions open to all in conditions
of equality of opportunity. This second proviso may sound rather trivial: surely, equality of
opportunity is already well established as a principle and reality in our societies? Actually, no
or at least not sufficiently so. The literature on social mobility shows that many sectors,
trades and occupations remain characterized (in Europe significantly more than in North
America) by a high degree of closure and that family backgrounds, rather than talent, is still
one of the most important determinants of peoples work and life chances. The literature on
poverty reveals the persistence in our societies of the greatest possible rawlsian tort (or
wrong): highly disadvantaged individuals and groups that are trapped in their circumstances
because of the perverse institutional design of both the labour market and the welfare system.
As shown in chapter 4, poverty immobility still exists in Europe today and its eradication
ought to be urgently prioritized in all the pertinent policy agendas.
In sum, the European social model must place more emphasis within its normative
framework on dynamic equality, being primarily attentive to the worst off, more hospitable to
incentive-generating differentiation and flexibility, actively vigilant with regard to the
openness of the opportunity structure and more interventionist on the mobility front - a front
that deserves to become the object of systematic cross-national monitoring and
benchmarking.
76
Upward, Downward and Eastward Re-calibration: The Difficult Choices Ahead
Last but not least, we come to politico-institutional re-calibration, which has to do with the
levels and actors that are or should be involved in the governance of the European social
model. In chapter 6 we have already discussed most of the dilemmas that are currently facing
Social Europe, in its widest sense. Three main conclusions were drawn from that
discussion:
first, if we observe its de facto functioning rather than its modest formal constitution,
Social Europe already appears more integrated and more de-nationalized than is normally
assumed;
second, soft coordination is a promising mechanism for mitigating the undesirable effects
of negative integration on social policies, and also for diverting tendencies for regime
competition into a possibly virtuous game;
and third, that there remains both a need and an opportunity for re-launching a hard
agenda, resting on more binding legal instruments and including, among other things, the
formal recognition of some fundamental social rights in the Treaties.
Three additional remarks can be added to this list, once again from a re-calibrative
perspective.
(1) The first concerns the sub-national (regional and local) dimension. Reasons of space have
prevented us from dealing explicitly with this dimension, but its salience is growing
(especially in the larger countries) in response to numerous pressures from increased
international competition to fiscal overload at the state level. In many respects, sub-national
policy arenas provide the best context for for fostering both competitiveness and social
solidarity. Cohesion policy is in itself an example par excellence of a virtuous combination of
both the supra- and sub-nationalization of certain policy functions. The Lisbon Summit of
March 2000 has promised a further consideration of the regional dimension in the overall
rationalization of existing procedures and processes. Provided that the hard agenda
succeeds in guaranteeing a common floor of rules and guarantees, a more precise
configuration of the European social model along the regional axis would be desirable, both a
functionally and normatively.
(2) The second remark has to do with the actors of social policy making in the new system of
governance. We have already discussed the merits of social dialogues and pacts at all
institutional levels and the desirability of widening the scope of negotiation and
coordination among actors. What needs to be recalibrated in this area is the circle of
negotiation, giving more opportunities to those social groups that are the losers in the existing
status quo. The EU has already played an important role on this front, encouraging civic
dialogues extended to NGOs and user associations; and interesting institutional experiments
have been made in some countries (e.g. Ireland, discussed in chapter 4). But more efforts
need to be done in order truly to strengthen the voice of the outsiders and to encourage
other-regarding stances on the part of established interest associations.
(3) The third remark has to do with EU enlargement. Again, we have not been able to discuss
the formidable challenges and dilemmas raised by the forthcoming EU accession of the
Central and Eastern European countries. But there can be little doubt that this process will
require its own dimension of re-calibration. From the politico-institutional viewpoint, the
issue is primarily cast in terms of deepening-for widening: a convoluted exercise currently
in the hands of the IGC negotiators. From the social policy point of view the stakes are even
77
greater and have to do with almost circumscribed issues such as the free movement of
workers from the applicant countries into the Union, the full adoption of the acquis on their
part and the reform of the EU budget, re-calibrating its internal structure and its geographical
targets. Again, all these stakes have functional, distributive but also normative aspects: as the
President of Poland has recently put it, the EU will have to fight against the virus of
selfishness while at the same time, we would add, safeguarding her own basic vital signs.
In conclusion: hard choices await the European Social Model choices that concern practices
and arrangements that are still taken for granted by social and political majorities in all
countries today. But the institutional reconstruction of the model has already begun, and
mostly in the right direction. At the Lisbon Summit, EU leaders have taken a commitment to
continue along this road. The agenda set at Lisbon needs fine-tuning and some additions, but
it is a solid and coherent one. The strains and uncertainties of the current scenario are likely
to stay with us for a long time, but our capacities to respond are definitely improving.
References
Adema, W. (1998) Uncovering Real Social Spending, The OECD Observer April/May 1998 (No.
211).
Andrews, D. M. (1994), Capital Mobility and State Autonomy, International Studies Quarterly 38:
193-218.
Auer, P. (1999) Europes Employment Revival: Four Small European Countries Compared, CEPR
Comparative Review, Paper presented at ILO Symposium Social Dialogue and Employment
Success, Geneva, 2-3 March, 1999.
Barnard, C. (2000), Social Dumping and the Race to the Bottom: Some Lessons for the European
Union from Delaware?, European law Review, 25, pp. 57-78.
Barrell, R. and V. Genre (1999), Employment Strategies for Europe: Lessons from Denmark and the
Netherlands, National Institute Economic Review, April, pp. 82-95.
Berger, S. and R. Dore (eds) (1996) National Diversity and Global Capitalism, Ithaca: Cornell
University Press.
Braun, D. and A. Busch (eds) (1999) Public Policy and Political Ideas, Cheltenham UK: Edward
Elgar.
Brombacher-Steiner, M. (1999), Das Schweizer Drei-Sulen-Modell, in Deutsches Institut fr
Altersvorsorgung, ed., Gesetzliche Alterssicherung. Reformerfahrungen im Ausland. Ein
systematischer Vergleich aus sechs Lndern. Kln: Deutsches Institut fr Altersvorsorge, 43-65.
Burtless, G. (1995), International Trade and the Rise in Earnings Inequality, Journal Of Economic
Literature 33, pp. 800-816.
Cameron, D. R. (2000), Unemployment, Job Creation and EMU, in N. Bermeo (ed.), Unemployment
in the New Europe. Cambridge: Cambridge University Press.
78
Clayton, R. and J. Pontusson (1997), Welfare State Retrenchment and Public Sector Restructuring in
Advanced Capitalist Societies, paper presented to the annual meeting of the American Political
Science Association, Washington D.C., August 28-31.
Cox, R. H. (1998), From Safety Net to Trampoline: Labour Market Activation in the Netherlands and
Denmark, Governance: An International Journal of Policy and Administration, 11, 4, pp. 397-414.
Crouch, C., D. Finegold and A. Hemerijck (1999), The Skill Predicament in the Open Economy,
mimeo, Robert Schuman Centre, European University Institute, Florence.
Crouch, C. (2000), A Third Way in Industrial Relations?, in S. White, ed., Labour in Government:
the Third Way and the Future of Social Democracy, London, Macmillan, pp.
Dingeldey, I. (1999) Begnstigungen und Belastungen familialer Erwerbs- und Arbeitszeitmuster in
Steuer- und Sozialversicherungssystemen - Ein Vergleich zehn europischer Lnder. Graue Reihe des
Instituts Arbeit und Technik, No. 4/1999.
Dornelas, A. (1999), Industrial Relations in Portugal Continuity or Controlled Change, Paper
presented at Conference Portugal; Strategic Options in a European Context, at Minda de Gunzburg
Center for European Studies, Harvard University, Cambirdge Massachussetts, Novermber, 20-21,
1999.
Eardley, T., J. Bradshaw, J. Ditch, I. Gough, P. Whiteford (1996), Social Assistance in OECD
Countries. Volume I: Synthesis Report, Volume II: Country Reports. London: HMSO (Department of
Social Security Research Report No. 46).
Ebbinghaus, B. and A. Hassel (1999), Striking Deals: Concertation in the Reform of Continental
European Welfare States, MPIfG Discussion Paper 99/3, Max Planck Institute for the Study of
Societies (MPIfG), Cologne.
Esping-Andersen, G. (1990), The Three Worlds of Welfare Capitalism. Cambridge: Polity.
Esping Andersen, G., ed. (1996), Welfare States in Transition, London, Sage
Esping Andersen, G. (1999), Social Foundations of Post-industrial Economies, Oxford, Oxford
University Press
Esping Andersen, G. (2000), A Welfare State for the 21
st
Century: Ageing Societies, Knowledge-
Based Economies and the Sustainability of European Welfare States, Report prepared for the
Portuguese Presidency of the European Union, Spring.
European Commission (1993), Social Protection in Europe, Luxembourg
European Commission (1999) Employment in Europe 1999, Brussels, DGV, Employment and Social
Affairs.
European Commission (2000) Building an Inclusive Europe, Communication from the Commission,
Brussels, DGV, Employment and Social Affairs.
Eurostat (1999) Sozialleistungen ohne Renten verringern die Armutsquote in der EU um ein Drittel,
Memo 8/99
Falkner, G. (1998), EU Social Policy in the 1990s: Towards a Corporatist Policy Community,
London: Routledge.
79
Fargion, V. (2000), Timing and Social Services in Europe, in M. Ferrera and M. Rhodes, 2000, pp.
58-88.
Ferrera, M. and M. Rhodes, eds (2000), Recasting the European Welfare State, special issue of West
European Politics, 23, 2, April.
Ferrera, M. (1996), The Southern Model of Welfare in Social Europe, Journal of European Social
Policy, 6, 1, pp. 17-37.
Freeman, C. and L. Soete (1994), Work for All or Mass Unemployment? Computerised Technical
Change into the 21
st
Century, London, New York: Pinter Publishers.
Freeman R, and M. Moran (2000), Reforming Health Care in Europe, in Ferrera and Rhodes, 2000,
pp. 34-57.
Freeman, R. B. (1995), Are Your Wages Set in Beijing?, Journal of Economic Perspectives, 9, 3,
pp. 15-32.
Garrett, G. (1998), Partisan Politics in the Global Economy, Cambridge: Cambridge University Press.
Ganghof, S. and P. Genschel (1999), National Tax Policy under International Constraints, Paper
presented at the Conference on Globalization, European Economic Integration and Social
Protection, European University Institute, Florence, 11-12 March.
Gern, K-J (1998) Recent Developments in Old-Age Pension Systems - an International Overview.
Kiel, Kieler Institut fr Weltwirtschaft.
Goetschy, J. (1999), The European Employment Strategy: Genesis and Development, European
Journal of Industrial Relations, 6, 2, pp. 117-137.
Goetschy, J. (2000) European Union and National Social Pacts: Employment and Social Protection
put to the Test of Joint Regulation in G. Fajertag and Ph. Pochet (eds.) Social Pacts in Europe,
European Trade Union Institute.
Guillen, A.M. (1999), Improving efficiency and containing costs: health care reform in Southern
Europe, Florence, European University Institute working paper EUF 99/16.
Guillen, A.M., and M. Matsaganis (2000), Testing the Social Dumping Hypothesis in Southern
Europe: Welfare Policies in Spain and Greece during the Last 20 years. Universities of Oviedo and
Crete, unpublished paper.
Gurumurthy, R. (1999), Tackling Poverty and Extending Opportunity, Political Quarterly, 70, 3, pp.
335-40.
Hall, P. A. (1993), Policy Paradigms, Social Learning, and the State. The Case of Economic Policy
Making in Britain, Comparative Politics 25, 3, pp. 275-296.
Hall, P. A., (ed.) (1989), The Political Power of Economic Ideas: Keynesianism Across Nations,
Princeton: Princeton University Press.
Heclo, H. (1974), Modern Social Politics in Britain and Sweden: From Relief to Income Maintenance,
New Haven: Yale University Press
80
Hemerijck A. and K. Van Kersbergen (1999), Negotiated Policy Change: Towards a Theory of
Institutional Learning in Tightly Coupled Welfare States, in D. Braun and A. Busch (eds), Public
Policy and Political Ideas, Cheltenham UK: Edward Elgar, pp. 168-185.
Hemerijck, A and M. Schludi (2000) Sequences of Policy Failures and Effective Policy Responses,
in F. W. Scharpf and V. Schmidt (eds), Welfare and Work in the Open Economy From Vulnerability
to Competitiveness, Oxford, Oxford University Press (forthcoming).
Hemerijck, A. P. Manow and K. Van Kersbergen (2000), Welfare Without Work? Divergent
Experiences of Reform in Germany and the Netherlands, S. Kuhle (ed.), The Survival of the Welfare
State, London and New York: Routledge, pp. 113-127.
Hirst, P. and G. Thompson (1997), Globalization in Question: the International Economy and the
Possibilities of Governance, Cambridge: Polity Press.
Huber, E., C. Ragin and J. D. Stephens (1998) Comparative Welfare States Data Set (Luxembourg
Income Study 1998), http://lissy.ceps.lu/compwsp.htm
Iversen, T. and A. Wren (1998), Equality, Employment and Budgetary Restraint: the Trilemma of the
Service Economy, World Politics, 50, 4, pp. 507-546.
Iversen, T. (1998), Wage Bargaining, Hard Money and Economic Performance: Theory and
Evidence for Organized Market Economies, British Journal of Political Science, 28, 1, pp. 31-61
Iversen, T. (1999) Contested Economic Institutions: The Politics of Macroeconomics and Wage
Bargaining in Advanced Democracies, Cambridge: Cambridge University Press.
Iversen, T. and A. Wren (1998), Equality, Employment and Budgetary Restraint: The Trilemma of
the Service Economy, World Politics 50, 507-546.
Johnson, P. (1996), The Assessment: Inequality, Oxford Review of Economic Policy, 12, 1, pp. 1-14.
Kenner, J. (1999), The EC Employment Title and the Third Way, Making Soft Law Work?, The
International Journal of Comparative Labour Law and Industrial Relations, Spring, pp. 34-60.
Kersbergen, K. van (1995), Social Capitalism: A Study Christian Democracy and the Welfare State,
London: Routledge.
Kohl, J. (1994) Alterssicherung im internationalen Vergleich. Analysen zu Strukturen und Wirkungen
der Alterssicherungssysteme in fnf westeuropischen Lndern, unpublished Habilitationsschrift
Kuhnle, S. (2000), Challanged, but Viable. The Scandinavian Welfare States in the 1990s, in Ferrera
and Rhodes, 2000, pp.
Lange, P. (1992), The Politics of the Social Dimension, in A. M. Sbragia (ed.), Euro-Politics:
Institutions and Policy Making in the New European Community, Washington D.C.: The Brookings
Institution, pp. 225-256.
Lange, P. (1993), Maastricht and the Social Protocol: Why Did They Do It?, Politics and Society,
21, 1, pp. 5-36.
Levy, J. (1999), Vice into Virtue?: Progressive Politics and Welfare Reform in Continental Europe,
Politics and Society, 27, 2, pp. 239-274.
81
Lindley, R. M. (1999), Knowledge-Based Economies: The European Employment Debate in a New
Context, Background Paper for the Portuguese Presidency of the European Union, December.
Manow, P. and E. Seils (2000), The Employment Crisis of the German Welfare State, in Ferrera and
Rhodes, Recasting the European Welfare State.
Ministerie van Sociale Zaken (no year) Benefit Dependency Rates (unpublished document)
Ministerie van Sociale Zaken en Werkgelegenheid 1995: Unemployment Benefits and Social
Assistance in Seven European Countries: a Comparative Study, LV Den Haag
Moreno, L. (2000), The Spanish Way to the Mediterranean Welfare State, in S. Kuhnle, ed. Survival
of the European Welfare State, London, Routledge.
Mundell, R. (1962) The Appropriate Use of Monetary and Fiscal Policy under Fixed Exchange
Rates, IMF Staff Papers 9, 70-77.
OECD (1996) Employment Outlook July, Paris: OECD.
OECD (1998) Labour Force Statistics, Paris: OECD.
OECD (1998) OECD Economic Surveys: United Kingdom, Paris, OECD.
OECD (1998) Income Distribution and Poverty in Selected OECD Countries, Economics Department
Working Paper 98, 2, Paris: OECD.
OECD (1999) A Caring World: The New Social Policy Agenda, Paris, OECD.
OECD 1999, Employment Outlook June, Paris, OECD.
OECD (1999) Social Expenditure Data Base 1980-1996, Paris, OECD.
OECD (1999) Statistical Compendium (Economic Outlook), Paris: OECD.
OECD (1999) Statistical Compendium (National Accounts I), Paris: OECD
Olsen, J. P. and B. Guy Peters, 1996, Lessons from Experience. Experiential Learning in
Administrative Reform in Eight Democracies, Oslo: Scandinavian University Press.
Orren, K. and S. Skowronek (1995) Order and Time in Institutional Study: a Brief for the Historical
Approach in J. Farr, J. S. Dryzek and S. T. Leonard (eds.), Political Science in History, pp. 296-317
Perez Diaz, V., E. Chiuli and B. Alvarez Miranda (1998), Family and Welfare Systems: the Spanish
Experience, Madrid, ASP-Gabinete de Estudios, working paper.
Pierson, P. (1994) Dismantling the Welfare State? Reagan, Thatcher, and the Politics of
Retrenchment, Cambridge: Cambridge University Press
Pierson, Paul 1996: The new politics of the welfare state, In: World Politics, 48/2, 143-179
Pierson, P. (1998), Irresistible Forces, Immovable Objects: Post-Industrial Welfare States Confront
Permanent Austerity, Journal of European Public Policy, 5, 4, pp. 539-560.
Rawls, J. (1971), A Theory of Justice, Cambridge, Belknap Press
82
Regini, M. (1997), Still Engaging in Corporatism? Recent Italian Experience in Comparative
Perspective, European Journal of Industrial Relations, 3, 3, pp. 259-278.
Rees, T. (1998), Mainstreaming Equality in the European Union: Education, Training and Labour
Market Policies, London: Routledge 1998
Reuschemeyer, D. and T. Skocpol (eds.), 1996, States, Social Knowledge, and the Origins of Modern
Social Policies, Princeton, NJ: Princeton University Press.
Rhodes, M. (1998a), Defending the Social Contract: The EU between Global Constraints and Domestic
Imperatives, in D. Hine and H. Kassim (eds.), Beyond the Market: the European Union and National
Social Policy, London: Routledge 1998, pp. 36-59
Rhodes, M (1998b), Globalisation, Labour Markets and Welfare States: A Future of Competitive
Corporatism? in M. Rhodes and Y. Mny, The Future of European Welfare: A New Social Contract?,
London: Macmillan 1998, pp. 178-203
Rhodes, M. (1999), An Awkward Alliance: France, Germany and Social Policy, in D. Webber (ed.),
The Franco-German Relationship in the European Union, London: Routledge, pp. 130-147.
Rhodes, M. (2000a), Desperately Seeking a Solution: Social Democracy, Thatcherism and the Third
Way in British Welfare, in Ferrera and Rhodes, pp. 161-187.
Rhodes, M. (2000b), Restructuring the British Welfare State: Between Domestic Constraints and
Global Imperatives, in Scharpf and Schmidt.
Rhodes, M. (2000c), The Political Economy of Social Pacts: Competitive Corporatism and
European Welfare Reform, in P. Pierson (ed.), The New Politics of the Welfare State, Oxford: Oxford
University Press.
Rieger, E. and S. Leibfried (1998), Welfare State Limits to Globalization Politics and Society. 26, 3,
pp. 363-390.
Rodrik, D. (1996), Why Do More Open Economies Have Bigger Governments? National Bureau of
Economic Research, Working Paper No. 5537.
Royo, S. (2000) Still the Century of Corporatism Corporatism in Southern Europe. Spain and
Portugal in Comparative Perspective, Paper presented at the Twelfth International Conference of
Europeanists, Chicago, March 20 April 1, 2000.
Ruggie, J. G. (1982), International Regimes, Transactions and Change: Embedded Liberalism in the
Postwar Economic Order, International Organization 36, 2, pp. 379-415.
Ruigrok, W. and R. Van Tulder (1995), The Logic of International Restructuring, London: Routledge.
Sabatier, P. A. and H. C. Jenkins-Smith (1993), Policy Change and Learning: An Advocacy Coalition
Approach, Boulder CO: Westview Press.
Sautter, C. (1982), France, in A. Boltho (ed.), The European Economy: Growth and Crisis, Oxford:
Oxford University Press, pp. 449-471.
Scharpf, F. W. (1991) Crisis and Choice in European Social Democracy, Ithaca: Cornell University
Press
Scharpf, F. W. (1997), Combating Unemployment in Continental Europe, Florence, EUI, PP no 97/3.
83
Scharpf, F. W. (1997a), Employment and the Welfare State: a Continental Dilemma, MPIfG
Working Paper 97/7, Max Planck Institute for the Study of Societies (MPIfG), Cologne.
Scharpf, F. W. (1997b), Games Real Actors Play, Boulder CO: Westview Press.
Scharpf, F. W. (1999) Governing in Europe: Effective and Democratic?, Oxford: Oxford University
Press 1999.
Scharpf, F. W. (2000), Economic Changes, Vulnerabilities and Institutional Capabilities, in
Scharpf and Schmidt (2000).
Scharpf, F. W. and V. Schmidt (2000b), Conclusions, in Scharpf and Schmidt (2000).
Scharpf, F. W. and V. Schmidt, eds. (2000a), Work and Welfare in Open Economies, Oxford, Oxford
University Press, 2 vols.
Schmitter, Ph. C. and J. Grote (1997), The Corporatist Sysiphus: Past, Present and Future, Nota di
Lavora, Fondazione Eni Enrico Mattei.
Siebert, H. (1997), Labor Market Rigidities: At the Root of Unemployment in Europe, Journal of
Economic Perspectives, 11, 3, pp. 37-45.
Simmons, B. A. (1999), The Internationalisation of Capital in H. Kitschelt, P. Lange, G. Marks and
J. D. Stephens (eds)., Continuity and Change in Contemporary Capitalism, Cambridge: Cambridge
University Press, 36-69
Sitkin, S. B. (1996), Learning Through Failure: The Strategy of Small Losses, in M. D. Cohen and
L. S. Sproull, (eds), Organizational Learning, Sage: Thousand Oaks, pp. 541-577.
Slaughter, M. J. and P. Swagel (1997), The Effect of Globalization on Wages in the Advanced
Economies, Working Paper of the International Monetary Fund, WP/97/43.
Snower, D. J. (1997), Challenges to Social Cohesion and Approaches to Policy Reform, in OECD,
Societal Cohesion and the Globalising Economy: What Does the Future Hold?, Paris: OECD, pp. 39-
60.
Soete, L. (1999), The Challenges and the Potential of the Knowledge-Based Economy in a
Globalised World, Background Paper for the Portuguese Presidency of the European Union: Action
Line Employment, economic reforms and social cohesion for a Europe of innovation and
knowledge.
Stephens, J. D. (1996), The Scandinavian Welfare States: Achievements, Crisis and Prospects, in G.
Esping-Andersen (ed.), Welfare States in Transition: National Adaptations in Global Economies,
London: Sage Publications, pp. 32-65
Streeck, W. (1992), Social Institutions and Economic Performance: Studies of Industrial Relations in
Advanced Industrial Economies, Newbury Park, Calif.: Sage.
Streeck, W. (1994), Pay Restraint without Incomes Policy: Institutionalized Monetarism and
Industrial Unions in Germany, in R. Dore, R. Boyer and Z. Mars (eds), The Return to Incomes
Policy, New York: Pinter.
Supiot, A. (1999a), The Transformation of Work and the Future of Labour Law in Europe: A Multi-
Disciplinary Perspective, International Labour Review, 138, 1, pp. 31-46.
84
Supiot, A. (ed.) (1999b), Au-dela de lemploi, Paris: Flammarion
Swank, D. (1992), Politics and the Structural Dependence of the State in Democratic Capitalist
Nations, American Political Science Review, 86, 1.
Swank, D. (1998), Funding the Welfare State: Global Taxation of Business in Advanced Market
Economies, Political Studies, 46, pp. 671-692.
Swank, D. (2000), Diminished Democracy? Global Capital, Political Institutions, and Policy Change
in Developed Welfare States, Cambridge: Cambridge University Press (forthcoming).
Teague, P. and J. Grahl (1998), Institutions and Labour Market Performance in Western Europe,
Political Studies, 46, pp. 1-18.
Traxler, F. (1999), The Social Pacts in Europe: A Comparative Perspective, Paper presented at
Workshop Social Pacts in Europe, ETUC, Brussels, 27-28 September 1999.
Treu, T. (1994) Procedures and Institutions of Incomes Policy in Italy, in R. Dore, R. Boyer and Z.
Mars (eds), The Return to Incomes Policy, New York: Pinter, pp. 161-174.
Trifiletti, R. (1999) Southern European Welfare Regimes and the Worsening Position of Women,
Journal of European Social Policy, 9, 1, pp.
Visser, J. and A, Hemerijck (1997) A Dutch Miracle Job Growth, Welfare Reform and Corporatism
in the Netherlands, Amsterdam: Amsterdam University Press.
Walwei, U. (1998) Beschftigung: Formenvielfalt als Perspektive? - Teil 2: Bestimmungsfaktoren fr
den Wandel der Erwerbsformen, IAB-Kurzbericht, No. 3
Webb, M. C. (1991), International Economic Structures, Government Interests and International
Coordination of Macroeconomic Adjustment Policies, International Organization 45, 3, pp. 309-338.
Weiss, L. (1997), The Myth of the Powerless State, New Left Review, September-October, pp. 3-27.
Wood, A. (1994), North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-
Driven World, Oxford: Clarendon Press.
85
APPENDIX I
Social policy reforms
in the European countries
in the 1990s
Institutional synopses for individual countries
86
DENMARK
1. Pensions
1994: introduction of income testing of basic old-age pensions
1996: employees over a certain age can now opt to reduce their hours of work progressively until they reach
retirement age in exchange for a partial pension
1998: increase of contributions by incorporating an extraordinary charge of 1 percent levied in 1997 on all
income from work and social transfers into the system for funding supplementary pensions on a long-term
basis
1999: increase of the years of contribution to an unemployed fund required to be eligible for an early
retirement and the amount of benefit reduced slightly; also payment has been cut if the person has a
supplementary pension
1999: introduction of tax allowances for those over 60 who have the option of retiring early but who decide
to remain in work and for those working part-time
2. Income security and work incentives
Unemployment protection and employment promotion
first half of 1990s: 1. restriction of entitlement to unemployment benefit and shortening of the period over
which contributions are paid; 2. measures to encourage those already in receipt of benefit to find a job: the
definition of what constitutes a suitable job for a person unemployed has been broadened; refusal to accept
a job considered suitable after being unemployed for three months can lead to a loss of benefit, as can an
unwillingness to participate in active labour market programs
reduction in the maximum duration of unemployment benefit period from 7 to 5 years since 1996
1996: recipients of unemployment benefits now activated during the last 3 years of benefits (out of 5);
young job-seekers without sufficient qualification immediately activated (offer of a 18 months
qualification/training programs)
1997: 1. all recipients of social benefits will be given offers of education and job training and they will be
expected to accept them in order to collect their benefits; 2. measures have been introduced to give the
people unable to find a job a second chance of acquiring a minimal level of education and some initial
vocational qualifications
1998: flexi-jobs were introduced as a response to the increasing difficulty of getting people off benefit or
social assistance and back into work. Such jobs are subsidized in relation to the estimated reduction in the
capacity of the person concerned to work
1999: the government and municipalities agreed to create 4,500 senior jobs in the public sector
specifically for those of 50 and over who are long-term unemployed
Disability benefits and sickness benefits
1999: the central government reimbursement of the expenditure on disability benefits by municipalities
which are responsible for paying these - was reduced from 50 percent to 35 percent in order to encourage
them to cut spending by increasing active measures
Family benefits and support to reconcile work and family
1998: introduction of an additional paternity leave entitlement of 2 weeks at the end of the period of
parental leave, on top of the two weeks entitlement immediately following the birth; in 1999, the benefit
payable during this period was increased to 100 percent of the persons wage
3. Social inclusion
from mid-1998 on receipt of income support has been made dependent on people participating in schemes
designed to increase their self-reliance
4. Health care and long-term care
no significant change
5. Organization/overall financing
1994: increase in the contribution to the ATP pension fund paid by persons on unemployment, sickness and
maternity benefits; introduction of ATP contributions for activated workers and social assistance benefit
recipients
87
FINLAND
1. Pensions
1995 pension reform. Main changes: less favourable indexing rules; reduction of the basic amount (gradual
abolishment of all supplements and introduction of a pension test; pensionable earnings determined based
on last 10 years (previously 4); higher contributions for the insured, lower for the employers
1995: abolition of national pension contributions for employees and pensioners
1996-1997 pension reform: pensions are more closely linked to work history; the minimum national
pension is restricted only to with employment-derived pensions below a certain limit
2. Income security and work incentives
Unemployment protection and employment promotion
no indexing of unemployment benefits in 1995, 1996 and 1997 (and none planned for 1998 and 1999)
1997: 1. vesting period for entitlement to unemployment period raised from 6 to 10 months; 2. the waiting
period for the unemployment allowance was extended from 5 to 7 days; 3. tax incentives to add earnings
from part-time or short-term work to unemployment benefits; 4. if a person refuses to take up employment,
education or training or withdraws from such activities without an acceptable reason, he/she will be subject
to harder sanctions than before; 5. introduction of an education allowance to encourage unemployed
persons to take up further training or re-training
Disability benefits and sickness benefits
1995: the temporary disability benefit in the national and occupational pension schemes has been
transformed into a re-habilitation benefit with incentives for recipients to return to work
1996: reduction of the replacement rates of earnings related sickness from 80 percent to 70 percent (higher
income brackets)
1996: introduction of an income test for flat rate universal sickness benefits
Family benefits and support to reconcile work and family
1995: reduction of the replacement rates of earnings related parental allowances from 80 percent to 70
percent
1997: starting from 1998 every child below the age of 4 will have a subjective right to either child care
services or a child home care allowance
3. Social inclusion
no significant change
4. Health care and long-term care
1996: examination and treatment of certain disease subject to notification have been free of charge
5. Organization/overall financing
1998: changes have been made to the arrangements for social support in order to improve the coordination
between national and local authorities and to try to ensure that everyone in need receives a minimum level
of income
88
SWEDEN
1. Pensions
1994 pension reform concerning qualifying conditions, indexing rules and the organization of the fully
funded part of the new pension system (first benefits with the new system expected to be paid out in 200)
1998-1999: a number of restrictive measures have been introduced to the old system: less favourable
indexing of current benefits; a reduction of the housing supplement for pensioners; a lower basic pension to
married pensioners even if spouse is not a pensioner; 6 percent reduction of early retirement benefits (with
compensations for lower income pensioners)
2. Income security and work incentives
Unemployment protection and employment promotion
1997: replacement rate for unemployment and parental leave raised from 75 percent to 80 percent
1993 and 1996: restriction of entitlement to unemployment benefit
Disability benefits and sickness benefits
1996: sick pay period extended by four weeks
1999: reform of the disability system is in the process of being introduced
establishment of a parliamentary committee on sickness-work injuries benefit reform (1997): closer co-
ordination of the two benefits recommended; option of privatizing the work accident component of the
work injury insurance considered; debate over the possibility of transferring the whole work
injuries/sickness cash benefits insurance to the social partners (option discarded)
1998: the benefit rate of sickness benefits was increased from 75 percent of previous salary to 80 percent,
while shortly after, the period of sick leave which employers have to pay was shortened from 28 weeks to
14
Family benefits and support to reconcile work and family
1996: introduction of stricter obligations on the side of non cohabiting parent concerning the maintenance
of child(ren) living with other parent and corresponding reduction of state responsibility (mantainance
allowance)
3. Social inclusion
1997: income-test of widow pensions for those below the standard age of retirement
1997: introduction of a national scale rate for guaranteed minimum income benefits
1998-1999: stricter rules for the income testing of housing allowance and reduction of allowance for
wealthier recipients
4. Health care and long-term care
1998: charges for health care treatment were abolished for all families with children
5. Organization/overall financing
1996-1998: changes have been made to the arrangements for social support in order to improve the
coordination between national and local authorities and to try to ensure that everyone in need receives a
minimum level of income
89
IRELAND
1. Pensions
the basic pension was increased in both 1998 and 1999 (by around 6,5 percent and 7 percent, respectively)
1999: first steps to encouraging personal responsibility for pensions
2. Income security and work incentives
Unemployment protection and employment promotion
1996: introduction of various benefit-to-work incentives
Disability benefits and sickness benefits
1997: disability scheme was extended to those in part-time residential care, who became eligible for part-
time payment of Disability Allowance
benefits were increased to couples who both have disabilities and the complete withdrawal of allowances
from someone whose spouse has income above a certain level was replaced by a progressive reduction, the
level being raised in both 1997 and 1999
Family benefits and support to reconcile work and family
1996: increase of child benefit
1996: special provision the protection of derived rights in case of divorce
1997: transformation of Lone Parents Allowance and Deserted Wifes Benefit Schemes into a new One
Parent Family Payment with the aim of ensuring equality of treatment between men and women in the area
of lone parenthood
1998: introduction of a measure enabling recipients of unemployment benefit to retain their dependent child
allowances for a period of 13 weeks after taking up employment, so increasing the net income they receive,
at least in the short-term, and providing an extra incentive to start working
3. Social inclusion
1996: means-tested Carers Allowance: conditions for entitlement eased and coverage expanded
National Anti-Poverty Strategy (NAPS) launched in 1997
all cash transfers have been raised to a level above the minimum suggested by the Commission on Social
Welfare and planned expenditure on inclusion measures have been increased substantially for the three
years from 1999
4. Health care and long-term care
1999: the 8 regional authorities became fully responsible for all operational decisions affecting health
services in their areas
5. Organization/overall financing
a Social Welfare Pension Fund Reserve was set up in mid-1998, using money from tax revenue and
privatization of telecommunications, to fund the future cost of the pension system
90
UNITED KINGDOM
1. Pensions
1995 pension reform: 1. strengthen of the safeguards on occupational pension funds; 2. introduction of a
new Occupational Pensions Regulatory Authority
1999: introduction of a Stakeholder Pension scheme to encourage people to take out private pensions
1999: legislation ensures equitable pension rights for both partners in cases of divorce or separation, while
the intended new second state pension will give recipients on low earnings around twice the amount they
receive under the existing scheme (SERPS); in addition, contributions will be credited to those caring for
children or people with disabilities
2. Income security and work incentives
Unemployment protection and employment promotion
1996: new job-seeker allowance and activation of unemployed through the new job-seeker agreement
1996: 1. introduction of benefit-to-work incentives; 2. back-to-work-bonus; 3. child maintenance bonus; 4.
extended housing benefit and council tax benefit payment scheme; 5. quicker procedures for the processing
of in-work-benefit claims
1997: pilot scheme offering help with job-search and training to lone parents on Income support
introduction of a national minimum wage for the first time
Employment Credit, a pilot scheme, has been launched for people over 50 who are unemployed, with the
aim of encouraging them to work, even if the only job they are able to get carries a much lower wage they
are accustomed to
Council Tax Benefit, the effect of which is similarly to increase the disposable income of those in poorly
paid jobs and to encourage them to remain in employment
Disability benefits and sickness benefits
1996: Disabled Persons Tax Credit, guaranteeing people with disabilities a minimum income if they take
up a job, irrespective of the rate of pay
1996: Introduction of a minimum income guarantee an in-work benefit for people with disabilities who
move off benefit into a paid job, so making such a move more attractive
changes to the rules for administering Statutory Sick Pay provide statutory time limits for employees to
notify sickness and for employers to provide information, and end the exclusion from SSP of employees
who are outside the EEA at the time sickness begins
Family benefits and support to reconcile work and family
pilot scheme for Nursery Vouchers experimented in 1996
1996: Family Credit has been replaced by a more extensive and generous scheme, the Working Families
Tax Credit, guaranteeing all people in employment with dependent families (including lone parents) a
minimum level of income (of 200 a week) and giving them an allowance to cover the costs of child care
the hours a week which someone can work if their spouse is unemployed and in receipt of means-tested
benefit have been increased from 18 to 24 hours
the minimum maternity leave entitlement has been increased from 14 to 18 weeks and those working part-
time, as well as the self-employed, have been brought into line with full-time employees
1999: introduction of a new child-care tax credit for low-income families claiming Working Families Tax
Credit, giving a maximum amount of 70 a week for one child and 150 a week for two
1999: measure to give entitlement to three months unpaid leave, with supplementary legislation to protect
employees who exercise this right
3. Social inclusion
1996: removal of access to most non-contributory benefits for people from abroad
1996: extension of the Housing Benefit to all people aged 25-29
1999: introduction of a Minimum Income Guarantee for pensioners, the income being higher than under
Income Support and increasing at the age of 75 and again at 80, in order to meet the additional costs of
covering possible caring needs; unlike Income Support, it will linked to increases in wages rather than
prices
91
4. Health care and long-term care
1991 reforms: 1. much clearer distinction between purchasers and providers; 2. more discretion over the
allocation of expenditure has been accorded to the District Health Authorities as well as to local
practitioners (GPs who were granted fund-holder status)
1999: a Royal Commissions recommendations included state funding for all personal care, continued
means testing for those providing care at home, increase of the income threshold to 60,000 a year instead
of the present 16,000, the establishment of a Care Commission and extra financial support for people
living at home with carers
5. Organization/overall financing
1996: anti-fraud and abuse activities strengthened
measures to reduce the burden on business of collecting tax and NI contributions
implementation of a Single Gateway approach, under which the individuals concerned have a single point
of contact with all the different agencies involved in providing assistance, both financial and practical
92
AUSTRIA
1. Pensions
1993 pension reform: 1. modification of the benefit indexation rule; 2. introduction of pensions credits for
mothers or fathers with children; 3. introduction of partial retirement; 4. modification of survivors pensions
1996/1997 pension reform: 1. tighter eligibility requirements (longer insurance periods) for early retirement
(since Jan. 1997); 2. modification of pension credits for school- and study-periods; 3. reduction of the
replacement rate; 4. change of old age pension formula, favouring longer insurance periods (considerable
transitional phase); 5. increase of contributions for the self-employed and for civil servants and (minor)
penalties introduced on the advantages enjoyed by civil servants
2. Income security and work incentives
Unemployment protection and employment promotion
tighter eligibility requirements for unemployment benefits (since 1996)
1996: introduction of a bonus-malus scheme in unemployment insurance to foster the recruitment of older
unemployed: lower contributions for the employers in case of hiring, penalty (lump sum to be paid to the
unemployment insurance scheme) in case of dismissal
1996: 1. the work availability requirement has been strengthened for recipients of unemployment benefits;
in case of refusal of an offer, benefits are cancelled for a longer period than before, 2. tightening of
eligibility criteria for specific means-tested benefits related to unemployment
1998: new forms of a-typical employment made subject to compulsory social insurance contributions
people can work in a job for a short period without losing their benefit providing they earn less than a given
amount (since 1998)
1998: National Action Plan for Employment, introduction of activation measures
Disability benefits and sickness benefits
1996: 1. reform of disability benefit according to the principle employment rehabilitation first, pension
second: benefits are paid only if re-integration into working life cannot be achieved by rehabilitation
measures; 2. the criteria for being eligible for disability benefits has been tightened (since 1998)
Family benefits and support to reconcile work and family
1996: maximum age for family allowances reduced from 27 to 26 years; universal birth supplement
(Geburtenbehilfe) replaced by means-tested baby supplement; parental leave supplement for low income
earners and single parents must be paid back in later years if the recipients income surpasses a certain
threshold
means-tested benefits for families with children introduced in provinces in the 1990s (eligibility criteria,
rates and duration of these payments differ)
1997: the duration of childcare leave benefits remains 24 months only if second parent takes up at least 3
months of leave; otherwise benefit duration reduced to 18 months
Childcare leave account: from January 2000 parents are free to consume 6 months of childcare leave until
the 7
th
birthday of the child (the overall limit for childcare leave remains with 18/24 months)
1999: introduction of a universal childcare allowance (up to three years) instead of the existing childcare
leave benefit following the insurance principle under consideration
3. Social inclusion
social inclusion is an issue, but there havent been very specific social inclusion measures; in 1999 there
was a debate on a scheme guaranteeing a minimum level of income
4. Health care and long-term care
1993: 1. introduction of a federal attendance allowance for frail persons in need of care, 2. treaty between
the state and the 9 provinces regarding the development of residential homes and social services
1996: 1. introduction of a diagnosis- related groups (DRG) financing and reduction of hospital beds; 2.
restriction of care benefits
1998: introduction of co-payments for visits to the doctor for the first time visit per three months (elderly
people, children and those with contagious diseases are excluded)
93
5. Organization/overall financing
1993: the new long-term care cash payments are tax financed (and hence not following the traditional
Austrian social insurance principle)
1998: people looking after those requiring extensive care became entitled to make social contributions
towards a pension, paying only the employees part with the employers part being credited
94
BELGIUM
1. Pensions
1996 pension system reform: 1. from 1997 gradual equalization of retirement age between men and women
(65 by 2009); 2. flexible retirement between 60-65 possible for those with at least 20 year of contributions:
from July 1997 this number will be gradually increased to 35 (by 2005); 3. introduction of part-time
retirement; access to minimum pensions made easier
2. Income security and work incentives
Unemployment protection and employment promotion
1997: 1. tightening of the entitlement to unemployment benefits for part-time workers (in order to avoid
abuse by voluntary part-time workers asking for these benefits); 2. the income of a working partner is not
taken into account for the calculation of the unemployment benefit, but for the minimex (minimum income
support); 3. early retirement is allowed at the age of 58 under the following conditions: a) it must be
explicitly stated in the collective agreement (of the branch or of the enterprise), b) 25 years of payments, c)
it is compulsory to substitute the prpensionn and assume someone else. After the age of 60, all these
conditions do not apply.
1997: introduction of the insurance against bankruptcy (self-employed are excluded from the
unemployment insurance and do not make any payments to this scheme)
1998: in the private sector subsidized jobs have taken the form of the direct activation of unemployment
benefits, in the sense that the transfers which would have been paid to the unemployed (especially the long-
term unemployed) are paid instead to companies providing employment to them (so-called SMET jobs) or
to employers in the service sector, who are also exempt from paying social contributions
1998: unemployment benefits and minimum subsistence allowances or, more specifically, the saving of
these have also been used to create additional jobs for the long-term unemployed in the public sector, in
cooperation with the regions and local authorities, in recreational, cultural and environmental activities
1999: increase of the rate of unemployment benefit for single people
Disability benefits and sickness benefits
1996: restrictive reform of work injury compensation
Family benefits and support to reconcile work and family
1997: reduction of family allowances only for the first child
1998: reform of the right to career-break (entitlement to leave a job from 3 months to 5 years with a
monthly allowance of 12.000 BEF
1999: right to interrupt their careers is given to more people (3 percent of private sector employees) than
before (1 percent). This applies in three different kinds of circumstance: 1) each parent is entitled to 6
months leave (previously three months) after the birth or adoption of a child; 2) one person in a household
has the right to leave to provide terminal care for relatives (two periods of one month); 3) they can also take
time off (one year full-time or two years part-time) to look after relatives in need of care. In each of these
cases, the monthly allowance was increased to around 500 Euros a month for full-time leave and half this
for part-time leave
3. Social inclusion
1996: extension of homeless people eligible for the settlement allowance
1998: some tapering of benefit withdrawal as the income earned increases has been introduced together
with increases in allowances and the provision of training for those on minimum income support
4. Health care and long-term care
1996: introduction of a package of various cost-containment measures
5. Organization/overall financing
1994: 1. separate scheme-by-scheme contributions replaced with a single comprehensive contribution,
subdivided among schemes according to their financial requirements; 2. a certain part of VAT revenues is
earmarked for financing social security (since 1995)
1995: introduction of a new solidarity contribution on the side of employers (5 percent) and employees (2.5
percent) on behalf of student working in the Summer as well as a contribution on the use of company cars
95
FRANCE
1. Pensions
1993: reform of the main scheme: 1. extension of the qualifying period from 37,5 to 40 years; 2. wage of
reference calculated on the best 25 years instead of the 10; 3. indexation of benefits on price instead of on
salaries; 4. creation of a fund for financing non-contributory benefits
1997: a fund has been created to consolidate the finance available for pensions by amalgamating the
surpluses of income from social solidarity contributions and in old-age solidarity funds
1998: employees of a certain age can opt to reduce their hours of work progressively until they reach
retirement age in exchange for a partial pension
2. Income security and work incentives
Unemployment protection and employment promotion
1992: creation of a new unemployment benefit: Allocation unique degressive
1992: measures have been introduced to give the people unable to find a job a second chance of acquiring a
minimal level of education and some initial vocational qualifications
1993: social contribution exemptions for low paid workers
1996: selective reductions of charges on labour if employers reduce working time
1998: creation of new jobs for young people in the public and third sector, paid at the minimum wage and
lasting for 5 years, and directed at meeting local needs which have so far not been met by the market,
especially in police, education, and cultural and recreational and environmental activities
1998: introduction of a tapered reduction alleviating the potential disincentive for people to find a job,
caused by the sudden withdrawal of integration, single parent and widows allowances
2000: 35 hours for all salaried people working in firms employing more than 20 persons
Disability benefits and sickness benefits
1996: increase of sickness insurance contributions for pensioners and the unemployed persons
Family benefits and support to reconcile work and family
1996: freezing of family allowances
1999: the maximum value of tax allowances for children was reduced from around FF16,400 a year to
FF11,000, although the age limits for children to give entitlement to the various benefits were raised by one
year (from 19 to 20 for a family with two children)
3. Social inclusion
1997: introduction of a dependent-specific benefit
1997: increase of housing allowances
1998: in order to minimize the extent of poverty a national observatory for poverty has been set up and a
commission established to improve coordination between different agencies
4. Health care and long-term care
1996: higher user charges for hospital stays
1996: introduction of new contractual relationships in the hospital sector, between newly established
regional hospital agencies and actual hospitals
1996: introduction of ceilings and rate of growth for health expenditure
1997: new procedures for setting national health priority and expenditure targets and for the making of
more cost-responsible contracts between health funds and the medical profession
1999: a detailed reform plan was presented by the health insurance funds. Among the proposals were
measures to improve hospital management and more treatment in the home
1999: 1. fees for some practitioners (dentists and masseurs, for example) were frozen and lowered for others
(such as radiologists) and generic drugs were introduced to reduce prescriptions costs; 2. basic health care
extended to another 150 thousand people through making membership of the social insurance system
compulsory; 3. free complementary health treatment granted to around 6 million people with monthly
income below 3500F (CMU)
96
5. Organization/overall financing
1995 Plan for the reform of social protection (Jupp Plan): most of the reforms have been introduced in
1996 and 1997
1996: thoroughgoing re-organization of the relationship between the state and social insurance funds and
constitutional amendment introducing a new annual Bill on the financing of social protection
1996: 1. reduction of employer charges for social security and exemption of contributions for family
allowance; 2. introduction of an exceptional contribution (0.5 percent) for the re-imbursement of the social
debt, to be levied for 13 years on all work and transfer incomes already subjected to the generalized social
contribution
1997: all social contribution paid by employees to health care funds are replaced by a specific tax levied on
all income (salary, social transfer and revenue from capital): CSG
97
GERMANY
1. Pensions
1989-1992 pension reform: pension indexation to net earnings growth and stabilization of the net
replacement ratio of the standard pension at the level of about 70 percent; gradual increase of the standard
pensionable age to 65 years from 2001; eligibility rules for early retirement and invalidity pensions are
tightened; flexible retirement at an earlier age remains possible but is made subject to actuarial adjustments,
i.e. early pensions are reduced by 3.6 percent; parents are credited 3 insurance years for child
1998: introduction of the correctional law suspending the demographic factor and the new pension
regulation on account of reduced capacity to work until the end of 2001
1997-1999 pension reform: 1. introduction of a demographic factor into the pension formula in order to take
into consideration the increase in life expectancy. However the co-called benchmark pension figure, i.e. the
proportion of the net pension based on 45 years of insurance on average salary to the current net average
earnings, does not fall below 64 percent once the demographic factor is introduced; 2. introduction of a new
pension regulation on account of reduced capacity to work; 3. the minimum age for eligibility for an early
retirement pension is being progressively raised to 63
2. Income security and work incentives
Unemployment protection and employment promotion
1994: private commercial employment agencies are allowed to operate for all kinds of employment and
occupations: abolishment of the monopoly of Federal Employment Agency over job placement
1996: activation of social assistance recipients
Employment Promotion Reform Act (1997): introduction of measures to give people unable to find a job a
second chance of acquiring a minimal level of education and some initial vocational qualifications
1998: 1. more autonomy has been given to municipalities and job creation associations to initiate
schemes, which have been extended to those unemployed for 6 out of the last 12 months; 2. the range of
Structural Adaptation Measures for which employers can receive subsidies if they create new jobs for the
unemployed has been extended and the period for which subsidies are payable lengthened to a maximum of
5 years in the new Lnder and in regions of high unemployment
1999: 1. introduction of a flat-rate benefit for people unemployed on means-tested assistance taking up
temporary jobs for less than 3 months; 2. a new provision allows people to work and earn a small amount
(up to 20 percent of their monthly unemployment benefit) without suffering any loss of benefit
Disability benefits and sickness benefits
reduction of short-term sickness benefits from 100 percent of net salary to 90 percent, but the rate was
increased back to 100 percent at the beginning of 1999
Family benefits and support to reconcile work and family
1996: family allowances for persons having to pay income tax are transformed into tax deductions
1999: increase of child benefits for the first and second children by almost 14 percent in 1999 (and by
another 8 percent in 2000 together with an increase in child tax-allowances); increase of tax-free income of
taxpayers to around 6,650 Euros a year for a single person and twice this level for a married couple
3. Social inclusion
1996: re-organization of social assistance
1998: the requirement that those entitled to benefit need to have worked for at least 12 months during the
preceding 3 years has been slackened in respect of those who have been caring for children or dependent
relatives
4. Health care and long-term care
1993 health care reform: 1. introduction of global budgeting of health expenditures in order to stabilize
the contribution rate; 2. introduction of some structural reforms in service delivery systems including a
better integration of outpatient and hospital care, lump-sum fees instead of daily rate in hospital care,
limitations on the number of licensed doctors, restrictions on drug prescriptions; 3. abolishing of the
traditional local or occupational monopolies of sickness funds and introduction of elements of fair
competition among them
98
1995: introduction of a long-term care insurance scheme (Pflegeversicherung); benefits for institutional care
added in 1996
1999: withdrawn of measures to increase the cost of treatment falling on patients; reduction of co-payment
for prescriptions, exemption from any co-payment after a year for chronically ill people
flat-rate contribution to hospital funding levied on every person insured suspended for 1998 and 1999
1999: several changes in the Long-term Care Insurance Act, including making it easier for informal carers
to obtain assistance from a professional replacement for short spells
a bill to reform the health insurance system is under discussion. Main points: improving coordination
between different providers and limiting patients freedom of choice, unifying the funding of hospitals,
restricting the drugs that can be prescribed and reducing their cost and imposing ceilings on expenditure not
only overall but also on that of different services as well as of general practitioners
5. Organization/overall financing
indexation of the rate to price inflation rather than to increases in wages for 2000-2001
99
LUXEMBOURG
1. Pensions
1996: 1. restrictive measures of public sector pensions in order to harmonize them with less generous
private sector pensions; 2. employees of a certain age can opt to reduce their hours of work progressively
until they reach retirement age in exchange for a partial pension
draft bill presented in December 1996 on the discipline of occupational pensions
2. Income security and work incentives
Unemployment protection and employment promotion
1997: an income tax bonus is accorded to each employer when hiring an unemployed person by means of a
work contract of indefinite duration or of a specific duration of over 24 months
Disability benefits and sickness benefits
1997: 1. introduction of measures of rationalization of the sickness insurance and increase of contributions;
2. possibility of enrolment in a voluntary accident scheme for agriculture and forestry sector
Family benefits and support to reconcile work and family
1997: 1. shift in the targeting of support towards low-income families with a reduction in child tax
allowances coupled with an increase in child benefits of an equivalent amount (some 300 Euros a year per
child); 2. the entitlement to parental leave provisions to take care of young children (24 months) was
extended to either parent
3. Social inclusion
draft bill presented for a reform of the RMG (October 1996). Main points: distinction between the insertion
benefit (for able bodied persons) and the supplementary benefit (for elderly and non able bodied persons);
more activation for able bodied recipients; age threshold for claiming benefits lowered from 30 to 25;
entitlement extended to the homeless
1999: introduction of a dependency insurance to help provide care for those in need by granting an
allowance to family members performing the task and covering their pension contributions
4. Health care and long-term care
1996: measures of financial rationalization of health insurance
1996: increase of insurance contributions and reduction in the reimbursement of the cost of certain
medications
1997: draft bill presented regarding the introduction of a log-term care insurance
5. Organization/overall financing
no significant change
100
NETHERLANDS
1. Pensions
1996 reform of survivors benefits: introduction of tighter qualifying conditions
2. Income security and work incentives
Unemployment protection and employment promotion
1996: over 65 thousand people who had previously been unemployed were employed in Melkert-jobs,
some two-thirds of them in the public sector
restriction of entitlement and reduction in rates of unemployment benefit (year )
1998: 1. the existing job creation schemes were integrated into the WIW for the unemployed and the REA
for people with disabilities in order to improve coordination and efficiency in managing the program; 2.
schemes were no longer confined to young people and long-term unemployed but became open to everyone
out of work unable to find a job
Disability benefits and sickness benefits
Sickness benefit act (1996): privatization of sickness cash-insurance: 1. responsibility to pay cash benefits
shifted to employers who are required to provide wage continuation (70 percent) for 52 weeks in case of
sickness; 2. employers can insure privately; 3. public scheme remains for a-typical workers and in case of
insolvency
reform of disability insurance (1996): old general disability benefits abolished; partial privatization of
disability insurance for employees: contribution rates are differentiated according to risk profiles of
enterprises and employers can opt out of the public scheme and insure privately (in this case they are
responsible for paying benefits for the first 5 years of disability of their employees); establishment of two
last resort schemes for the self-employed and for inactive persons, with only basic protection
Family benefits and support to reconcile work and family
1997: entitlement to 6 months unpaid part-time leave for each parent extended from children up to the age
of 4 to children up to the age of 8 and maximum number of hours which someone could take off during this
period increased to the number of hours normally worked in a 13-week period
1998: legislation on work and care is in the process of being prepared to combine the right to take time off
to look after a sick child and the right to maternity leave with the right to flexible working hours in a single,
coherent scheme
1999: lone parents looking for a job or undergoing training and in receipt of a social transfer are entitled to
reimbursement of after-(primary) school child-care costs if they have a low income
temporary measures are being taken to extend care places for children between 4 and 16, with extra
subsidies being paid to municipalities for these
3. Social inclusion
1996: introduction of a new Social Assistance Act: 1. municipalities have more responsibility regarding the
implementation of social assistance; 2. Introduction of more stringent procedures for claiming social
assistance payments; 3. social assistance recipients (except for lone parents with children under 5) are now
required to be actively seeking work and accept any suitable offer received
1997: introduction of an income test for survivors benefits (with some disregards for work earnings)
1997: asset-test accompanies the introduction of a new rent subsidy
4. Health care and long-term care
1997: introduction of a new patient charge for a number of health care services
since 1998 hospitals have been able to chose to become public foundations, giving them greater freedom to
manage their assets and adopt more flexible terms of employment, including the use of temporary contracts
and incentive payments
withdrawn of a 20 percent charge on all treatment and drugs, except visits to hospitals and GPs, levied in
order to encourage people to use services more prudently, at the beginning of 2000
5. Organization/overall financing
a ceiling on contributions for employees and self-employed of 16.5 percent of earnings has been imposed in
respect of the state pension and any additional funding required to cover expenditure will come directly
from government; introduction of a special fund, into which the Government contributes a
specified amount each year, the level being fixed according to the peak in expenditure; there has been an
effective shift of financing from contributions to taxes.
101
GREECE
1. Pensions
1992 pension reform: limits to supplementary pensions and to the lump sum received at retirement by wage
earners; reduction of replacement rates; gradual increase of retirement age; increase of both employers and
employees contributions. New, more uniform and less favorable pension rules for the new entrants into the
labour market
three pension funds for the self-employed have been merged into one, another 65 smaller funds have either
been wound down or amalgamated; the unions proposal to create a single pension fund for banking
employees out of the present five in principle accepted but its terms contested
1997: creation of a new contributory scheme for farmers and agricultural workers to improve the current
flat-rate tax-financed basic pension
2. Income security and work incentives
Unemployment protection and employment promotion
1990: duration of unemployment benefits extended from six to nine and subsequently twelve months
in 1997 the Government launched social dialogue on labour market reform, yielding a law in 1998
cautiously extending part-time work.
1998: Organization of Vocational Training founded to improve standards of professional training and
increase its impact on unemployment reduction
Disability benefits and sickness benefits
1997: introduction of active measures to help people with disabilities into employment
Family benefits and support to reconcile work and family
1993: cash benefits for large families introduced, subject from 1997 to income tests
1998: Pilot whole-day school scheme launched, to extend the time children stay at school until the end of
their mothers working day
3. Social inclusion
1996: introduction of income-tested supplement for low income pensioners allows the government to
escape earlier pledge to link minimum pensions to the minimum wage; new benefit targets limited
resources to the demonstrably least well-off pensioners, while across-the-board rises might favour better-off
pensioners perhaps drawing two or more minimum pensions from different funds.
1996: social insurance extended to migrant workers; hundreds of thousands of immigrants with a valid
work permit join the lower-contribution scheme for farmers and agricultural workers
4. Health care and long-term care
1997: health law provides for the introduction of a family doctor scheme and professional management of
hospitals. Its family doctor provisions were never implemented, while a call for applications for the position
of general manager at the 10 largest state hospitals was only issued in late 1999
Pilot home help scheme introduced in 102 municipalities in 1998, and then gradually extended to 270 in
1999. The scheme is to become nation-wide by the end of 2000. The scheme comprises of one health
visitor, one social worker and one domestic helper visiting regularly the homes of those elderly who are
considered most in need of home help
National Social Care Organization founded in 1998, aiming to bring disparate social care initiatives under a
common structure
5. Organization/overall financing
1997: the Spraos committee, set up by the Prime Minister, publishes its report on the future of the pension
system amidst great controversy; the government distances itself from the reports rather modest findings
Social dialogue for the reform of social insurance launched, leading to the mini-reform of 1998; major
reform postponed until political circumstances permit
102
SPAIN
1. Pensions
Universalization of the pension system (1991): non contributory pensions established for the elderly and
the disabled
1994: pensions indexed to the expected inflation for the subsequent year
1995: Toledo pact on the future viability of public pensions
1996: social pact on pension reform
1997: new incentives for the development of supplementary pension schemes
reform of the social security system (1997). Main points: 1. the determination of the amount (the basis for
calculating pension entitlement for all employees is progressively extended, by one year each year, from
salary in the best 8 years to that in the best 15 years); 2. automatic adjustment of pensions according to
variations in the consumer price index; 3. separation and clarification of the sources of financing; 4.
formation of reserves to mitigate the effects of economic cycles; 5. introduction of a greater proportionality
to contributory careers in the initial amount of pensions; 6. improvement of survivors benefits
2. Income security and work incentives
Unemployment protection and employment promotion
1992: restrictive reform of unemployment subsidies: replacement rates decreased and minimum
contributory period enlarged
1993: second wave of labour market flexibilization reforms starts to be implemented; part time jobs
fostered; private, non profit employment agencies allowed to be established
1997: social pact to amend labour legislation. Main points: 1. reduction of redundancy payments for new
contracts; 2. more protection for people without a qualifying degree; promotion of the standardization of
part-time labour contracts; 3. reform of collective bargaining; incentives for contracts of indefinite duration
and for stability of employment
1998-99: part-time and fixed-term jobs are granted the same social security rights as full-time indefinite
ones
Disability benefits and sickness benefits
1992: part of the cost of sickness benefits (derived from common illness) transferred to employers
1997-99: introduction of active measures to help people with disabilities into employment
Family benefits and support to reconcile work and family
1990: reform of family allowances, which become universal and means-tested
1995: reform of maternity benefits. Replacement rate increased to 100 percent of previous salaries. Parental
leave regulated
1998: tax exemptions for households increased; law on intensification of protection of large families (with 3
or more kids)
1999: law on conciliation of work and family life
3. Social inclusion
1989-1993: social services decentralized to all regions; regions establish minimum income schemes for
people in active age
4. Health care and long-term care
1990: powers on health care transferred to Galicia and Navarre. Catalan Health Law introduces managed
competition
1992: change in the criteria of payments for hospital stays (public and private): towards prospective funding
1993: a list of pharmaceuticals no longer financed publicly is established
1994: powers on health care transferred to the Canary Islands
1995: decree on health care services. A positive and a negative list of services provided by the NHS is
established. Positive list includes new services
1996: decree on management of public health care institutions allows new hospitals to adopt the form of a
public foundation or enterprise
103
1998: definition of a list of drugs which would not be available on prescription. Already existing public
hospitals in the whole territory are allowed to be turned into public foundations, which is to enhance their
managerial and contractual autonomy
1999: following the Toledo pact, health care becomes financed totally out of taxes. INSALUD-Direct
Management Area starts to implement a plan for the introduction of managed competition
1999: all immigrants (either legal or illegal) become entitled to the same health care services as any other
Spaniard.
5. Organization/overall financing
1996: Ministry of Social Affairs becomes part of the Ministry of Labour
1999: establishment of a reserve fund financed with annual exceeds from the contributory sector, to meet
future needs due to demography
clear financial separation to be introduced by 2000 between the contributory (social contributions) and non
contributory (general taxes on income) sectors of Spains social protection system
104
ITALY
1. Pensions
Amato reform (1992) includes the following elements: 1. elevation of the retirement age from 55 to 60 for
females and from 60 to 65 for males (private employees), with a gradual phasing in; 2. gradual elevation of
the minimum contribution requirement for old age benefits from 10 to 20 years; 3. gradual extension of the
reference period for pensionable earnings from the last 5 years to the last 10 years (and to the whole career
for new entrants in the labour market); 4. gradual elevation of the contribution requirement for seniority
(early retirement) pensions to 36 years for all workers (including civil servants); 5. an increase of
contribution rates
1993: new legislative framework on supplementary pensions
Dini reform (1995): 1. shift from the old earnings-related formula to a new contribution related formula,
to be phased in by 2013; 2. introduction of a flexible retirement age (57-65); 3. introduction of an age
threshold for seniority pensions (57 years) for all workers, to be phased in by 2008; 4. gradual
standardization of rules for public and private employees; 5. income testing of survivors benefits; 6. stricter
rules on the cumulability of disability benefits and incomes from work, as well as tighter controls on
beneficiaries
Prodi reform (1997): 1. more severe contributory/age requirements for receiving a seniority pensions
(with broad exemptions for blue collar workers); 2. harmonization of contributory and age requirement
between private and public employees; 3. a one year freeze (for 1998) of the indexing of all pensions above
3,481,550 lire per month (net) and less favourable indexing rule for such pensions for the years 1999-2001;
4. increase of contributions from 10 percent to 12 percent for self-employed workers not covered by an ad
hoc professional insurance fund (0,5 percent of such contributions earmarked for establishing maternity
benefits and family allowance for these workers); 5. increase of contributions rates (0,5 percent) for artisans
and traders; 6. cumulability of a seniority pension and income from work re-established; 7. increase of the
amount of social pensions and of minimum pensions, if recipient has no other source of income from Jan.
1999; 8. higher tax deductions for pensioners with lower incomes; 9. establishment of a new legislative
framework on occupational (supplementary) pensions, more articulated and more advantageous than that
introduced in 1993 and providing significant tax incentives for the transformation of the end-of-career
benefit (trattamento di fine rapporto) into proper funded schemes for the payment of supplementary
pensions
1998: introduction of a new compulsory pension contribution for all self-employed income earners not
covered by existing compulsory schemes
2. Income security and work incentives
Unemployment protection and employment promotion
1996: pact on work between government and the social partners and ensuing bill on employment
promotion. Main points: new rules for interim work; thorough reform of employment services; new
incentives for training and for labour market insertion of young job-seekers and the long term unemployed
1998: a social pact on development and employment opens a new phase of institutionalized tripartite
negotiation. Main points: reform of the employment services and offices, incentives for the launching of
new training programs
1998: public monopoly of employment services abolished: private agencies will be allowed to offer
employment services
1998: raise of contributions for overtime work and reduction of contributions for part time work;
experimental emersion contracts made between black enterprises and the social security administration,
allowing a gradual alignment to existing contributory obligations
Disability benefits and sickness benefits
1999: plan of controls on the recipients of invalidity pensions to verify their medical conditions
Family benefits and support to reconcile work and family
1998: maternity benefit extended, on a means-tested basis, to women who were not in the labour force
1999: a new means-tested benefit for all families with more than 3 children below 18, which provides
increased assistance to low income households
105
a draft bill is currently under discussion in Parliament to establish the right to 10 months leave for either
parent until the child is 8, together with benefits of 80 percent of earnings up to the age of 5 months and 30
percent up to the age of 3
3. Social inclusion
a pilot scheme for a new means-tested benefit to guarantee a national minimum income (defined in relation
to an estimate of absolute poverty and adjusted for the number of people in a household) was launched in
39 local communities (1999). The income against which the need for support is assessed is subject to an
earnings disregard of 25 percent in order to maintain a financial incentive to work, while recipients of
benefit who are not in work but capable of working are obliged to participate in a training course
a draft bill on the reform of social assistance and social services is currently before Parliament
4. Health care and long-term care
1992/1993 reform of the reform (managerialization of the NHS and new contractual relations between
purchasers and providers) through the introduction of new administrative rules
new system of rules on rates of co-payments and exemptions, based on a combination of medical and socio-
economic criteria has been experimented in some areas starting from the Fall of 1999
from 1998 health care contributions paid by the insured and their employers have been abolished and the
financing of the NHS has shifted totally on general revenues
the earmarked grant from the center to the regions will be gradually abolished and the regions will be
allowed to autonomously decide how much to spend on health care within 2001
various ceilings have been placed on regional expenditures during the 1990s
1999: introduction of a third health care reform which strengthens the operational autonomy of local health
enterprises and hospitals; increases the powers of the central government and the regions in determining
qualitative service standards and quality controls, provides a legislative framework for the establishment of
mutual integrative funds (a highly controversial point of the 1999 bill regards physicians employed by
NHS hospitals: if opting for a full time contractual relationships with their hospital, physicians will be
forbidden to practice for a fee outside the hospital itself; hospitals will however set up internal facilities for
fee-for service care supplied by doctors on top of their contractual obligations)
5. Organization/overall financing
a reform of the ministries dealing with social policy is expected to come into effect in the next legislative
term
106
PORTUGAL
1. Pensions
1997: low income self-employed exempted from compulsory social insurance; people starting a new self-
employed activity exempted from compulsory insurance for the first 12 months
1997: reduction of the minimum contribution base for workers whose incomes do not equal or go above the
minimum wage rate
approval of the Great Plan Option for 1998 concerning the reform of the social security system. Main
points: enlargement of the base of financing sources and the contribution ceiling; more flexibility in the
pension age; developing supplementary pension schemes; development of active pro-employment policies
1998: the possibility of early retirement has been extended
1999: introduction of a more flexible retirement system with people being able to take early retirement as
long as they are 55 or older and have 30 years of contributions
2. Income security and work incentives
Unemployment protection and employment promotion
introduction of some active employment measures (1994): exemptions from contributions, until 36 months,
for enterprises employing young unemployment persons who are looking for their very first employment;
financial support for each job newly created by enterprises and for workers presenting a feasible project for
the creation of new jobs; subsidies for setting up training actions; supplementary allowances for
unemployed persons receiving unemployment benefit if they participate in programs pursuing useful tasks
for the community
1998: introduction of a new partial unemployment benefit cumulable with part time work
1998: the period of entitlement to unemployment benefit has recently been lengthened for people in all age
groups (to 18 months for those age 30 to 40 and 24 months for those 40 to 45, for example)
Disability benefits and sickness benefits
1997: longer waiting period for sickness cash benefits introduced for the self employed (from 3 to 30 days,
except in cases of hospitalization when there is no waiting period); maximum duration of benefit lowered
from 1095 to 365 days
Family benefits and support to reconcile work and family
rationalization of family allowances (1996): family allowance, allowance for nursing mothers and birth
allowance have all been combined into a single benefit called family allowance for children and young
people; amount of benefits modulated according to family income, number of children and their age;
access to benefits has become more rigid with respect to the contribution period of the worker
1997: introduction of a benefit for parents forced to interrupt their job to care for their children who are
handicapped or suffer from chronic illnesses
maternity leave was raised to 110 days in 1999 and will be further increased to 120 days in 2000
1998: the network of nurseries has been expanded
3. Social inclusion
1996: introduction of a pilot scheme of guaranteed minimum income. The benefit is granted to persons who
are available to work, with the benefit amount corresponding to the difference between a minimum income,
established by law, and the earnings of the family dependent on the applicant
1997: transformation of the Rendimento Minimo Garantido into a national scheme
4. Health care and long-term care
since 1994 the improvement of the health care system is under way
5. Organization/overall financing
1994: employers contributions lowered by 0.75 percent
1994: introduction of a social VAT (1 percent)
1997: creation of the Ministry of Labour and Solidarity which will centralize the responsibilities formerly
assumed by the Ministry of Qualification and Employment and the Ministry of Solidarity and Social
Security
107