Welfare states are having to run harder to stand still. They need to act in mutual support to win the race against inequality and poverty.
The pandemic has alerted us to the vital symbiotic relationship between the social state and the economy. Yet it has hit the welfare state at a critical moment in its history.
Since the second half of the 1990s, rich welfare states have seen a fairly universal and enduring trend towards greater inequality and poverty. Because the welfare state is thus failing to deliver on its own mission, today—while we are on the eve of the ‘normalisation’ of our lives—in the midst of ageing, climate change and digitalisation it finds itself in a systemic crisis.
Since the 2000 Lisbon Strategy, poverty reduction has been one of the European Union’s main social goals. In southern European societies, however, the bottom fell out. The new member states from 2004 did relatively well, but mainly due to a reduction in material deprivation among non-poor households. Meanwhile, the old welfare states redistributed increasingly less effectively—hence the growing inequality and poverty. In most countries social floors are inadequate, which is worrying, especially in the poorest member states, where minimum incomes are too low even to allow poor households to aﬀord both adequate housing and adequate food.
And yet, looking back into the good times before the crisis, in nearly all member states incomes were rising. Employment increased while in many countries social spending remained high and even kept growing.
So why did the rising tide not lift all boats? Why did the welfare state fail to reconcile work and poverty reduction?
To find the answers we need first to go back to the foundations of the welfare state and the postwar social deals on growth, full employment and social protection. In the golden age, welfare states successfully reduced inequalities and poverty through full employment (for men), wage increases in line with productivity growth and social protection based on work. At the beginning of the 1970s, the dream that capitalist growth and social protection would lead to better living conditions for all came into view.
But, just as the welfare state came to adulthood, social levelling began to slow and, sometime in the 90s, came to a halt. Poverty started to grow, especially among the low-skilled, the unemployed and their children, while incomes, employment and social spending increased. What went wrong?
For sure this is related to policy choices but there must also be deeper reasons: the rise in poverty is occurring almost everywhere in the world’s welfare states; the trends are slow but they are longstanding. Three major structural mechanisms explain why welfare states started to run harder to stand still, at best.
Dual labour market
First, postwar full employment for men evolved into a dual labour market, in which full employment for higher-skilled men and women went together with structural under-employment for low-skilled men and women. Secondly, because of shifting demand for labour toward higher-skilled and higher-wage occupations, from the 90s low wages lagged behind productivity growth and median incomes—and so offered increasingly poor protection against in-work poverty, especially among families with children.
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Thirdly, declining or sluggish growth in earnings for low-wage workers contributed to pressures on minimum-income protections for jobless households. Minimum wages serve as a glass ceiling to the social floor of the welfare state. When they drop below the poverty line, so does social protection.
These trends created a social trilemma: in today’s welfare state it has become structurally difficult to achieve decent incomes for all, while preserving sufficient work incentives, without greater efforts in terms of the extent and quality of social intervention.
In the hope of finding a way out of the trilemma, to return to the postwar virtuous circle of growth, employment and poverty reduction, the focus shifted from social protection to social investment, activation and work-related welfare reforms. Sadly, however, this ‘social-investment turn’ proved illusory in that progress could not be attained with a one-sided focus on activation, investment and promotion alone. Social redistribution and social investment must be viewed as twin pillars of the modern welfare state.
Fixing only what failed in the past will not be enough to remedy the flaws in a post-pandemic society. Poverty reduction necessitates big efforts, on many levels. Adequate minimum wages, minimum income protection, meaningful work for all, lifelong learning and affordable social services—all are equally essential. And, though certainly true, it is not enough to say these efforts also have paybacks: the inconvenient truth is that eradication of poverty is neither cheap nor easy.
Therefore we must think more ambitiously, beyond the strategies employed today, with new ideas, including on the functioning of the market economy itself. Crucially, to deliver on their mission welfare states will have to work harder, together. They must support each other and act as part of what the EU in essence is—a ‘union of European welfare states’.
The Porto Social Summit sent out encouraging signals. The European Pillar of Social Rights Action Plan is a stronger and a more concrete guide than the previous attempts at convergence on overly vague objectives. A directive on minimum wages and a strong recommendation on minimum incomes would create much-needed level playing-fields. And the €88 billion European Social Fund Plus can become a tool that helps the member states to effectuate social rights. As such, the Porto Social Commitment deserves greater attention.