The future of the European “social model” in the global economy

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The future of the European“social model” in the globaleconomyMaurizio Ferrera a b , Anton Hemerijck c & Martin Rhodesd

a University of Pavia , Milanb Bocconi University , Milanc Leiden Universityd European University Institute , FlorencePublished online: 08 Nov 2007.

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tfJournal of Comparative Policy Analysis: Research and Practice 3:163-190, 2001© 2001 Kluwer Academic Publishers. Printed in The Netheriands.

The Future of the European "Social Model"in the Global Economy

MAURIZIO FERRERAUniversity of Pavia and Bocconi University, Milan

ANTON HEMERIJCKLeiden University

MARTIN RHODESEuropean University Institute, Florence

Key words: welfare state, Europe, social protection, globalization, employment, public policy,labour markets

Abstract

This article examines the prospects for European welfare states in the context of globalization. It be-gins with a critical review of the globalization arguments. While there is some evidence that externalconstraints make life harder for policymakers seeking positive-sum outcomes, it is the combina-tion of national debt and spending limits, plus domestic tax resistance, that really count in makingexpenditure-based social and employment policies more difficult in certain countries. In under-standing the constraints and opportunities that will shape Europe's welfare future, globalization—crudely understood—is therefore much less influential than many suppose. While EMU has radicallydiminished national autonomy in exchange rate, monetary policy, and fiscal policy, there are alsobeneficial consequences for social policy and broader economic management. On the employmentand social policy side, initiatives required to match greater "flexibility" with sustained security arenow at the top of the EU agenda, and mechanisms for diffusing best practice across Europe are be-ing put in place. Within this framework, European welfare states must place more emphasis on "dy-namic equality," being primarily attentive to the worst off, more hospitable to incentive-generatingdifferentiation, and actively vigilant with regard to the "openness" of opportunity structures.

Introduction

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 European states that managed to marryequity and efficiency with a reasonable degree of success in the past continueto find positive solutions to the challenges that confront them in the twenty-firstcentury? The pessimists would say no: globalization and the pace of socioe-conomic change have rendered the aspirations of the "golden age" welfarestates Utopian. Sustaining the ties that bind citizens to each other and to their

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164 FERRERA, HEMERIJCK, AND RHODES

communities within social contracts has become all but impossible as the pol-icymaking autonomy of national governments declines and their control overtheir borders disappears.

In this article, we take a different view. Although governments may no longerbe able to rely on their protective postwar policy profiles to achieve the objec-tives of full employment, social protection, and equality, the nation-state is stillthe principal site of policy change, and there remains ample scope for politicalchoice. Nation-states are not like markets—easily overrun by economic forces,global or otherwise. Rather, they are communities of fate. Policy changes haveto be endorsed by elected governments and parliament and must continue to bemediated by national political parties, bureaucracies, and systems of interest in-termediation. The nation-state ties together citizens whose material life chancesare bound by national economic performance and domestic arrangements ofsocial and employment policy. Social contracts in contemporary Europe remainan important component of democratic societies and contribute to their pros-perity. This situation does not mean that the status quo is sustainable in itspresent form, given the numerous challenges confronting it. But it does meanthat, if institutional arrangements and policy mixes are suitably modified, thenthe core principles of the European social model can be preserved and in manyrespects enhanced in their translation into the real worlds of European welfare.

In the first section below, we examine the challenges to European welfarestates, placing the so-called "globalization" threat in perspective. Taking themain elements of the globalization phenomenon, we argue that the threatsfrom financial market liberalization, tax competition, and the increased inter-national mobility have been exaggerated, as has the potential negative impacton national autonomy and welfare systems of Economic and Monetary Union(EMU). The real issue confronting European welfare states is how to ensure thattheir core commitments to social protection and equity can be met while alsoresolving their long-standing employment problems. Thus, in the second sec-tion, we examine at some length the joint influence of trade competition andtechnological change that may have more significant implications for welfarestates—in particular by affecting the ways in which welfare and work interact,and by altering the determinants of employment and income distribution. In thethird section, we sketch out the potential ways in which European-style welfaresystems may or may not make a positive contribution to employment creationin the "new" or "knowledge-based" economy. In the fourth section, we set outwhy, regardless of new constraints on welfare, the European social model isnevertheless compatible with developments in the international economy andthe emergence of a postindustrial society.

Globalization and other challenges to European welfare states

European welfare states face multiple challenges. Of all the forces influenc-ing the future of welfare, the external challenges are probably the least well

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THE FUTURE OF THE EUROPEAN "SOCIAL MODEL" IN THE GLOBAL ECONOMY 165

understood. Thus, the debate on globalization is often couched in terms ofthe misleading dichotomy of convergence versus divergence. In fact, sincethe pressures of economic internationalization affect different welfare states invarying ways and to differing degrees and at different points of time, a bluntjuxtaposition of this kind is not especially useful. Not only does it fail to cap-ture the full complexities of the economics and politics of national processesof policy adjustment, but also it provides little basis for genuine comparativeanalysis or for policy prescriptions.

Globalization also needs to be put in perspective. First, it is important to ac-knowledge that neither have national economies been wholly absorbed into anew global order nor have their governments been totally incapacitated. Non-tradables remain important in most European economies (allowing for shel-tered sector employment strategies), and, as has long been the case, nationalcomparative advantage and specialization remain critical for international com-petition. Good arguments can be made for the compatibility of large welfarestates with internationalization. Welfare states emerged in line with the growingopenness of economies and facilitated the consequent process of socioeco-nomic adjustment. Government consumption appears to play an insulating rolein economies subject to external shocks (Rodrik, 1996; Rieger and Leibfried,1998). Governments—and in Europe we need now to acknowledge that by gov-ernment we mean a multilevel system of political authority—retain the capacityto reform their welfare states and are far from being disempowered by globalforces. As we argue below, there is little evidence that policy choice has beenremoved by the various mechanisms that, together, constitute what is generallyunderstood as globalization.

Second, there has been a tendency in many policy debates to focus on theseless tangible forces of globalization and to downplay the overriding importanceof domestic challenges. In contrast with the impacts of demographic changes,of the dysfunctional nature of certain institutional arrangements, and of the fail-ure to respond to new needs and risks generated by socioeconomic change,there are many good reasons for believing that the overall impact of global-ization has been exaggerated, as have its potentially adverse consequencesfor employment and social standards. Moreover, welfare states have generatedmany of their own problems, and these would have created severe adjustmentdifficulties, even in the absence of greater exposure to flows of capital andgoods.

Thus, by helping improve living standards and life spans, welfare states havecreated new needs that social services were not originally designed to meet. Atthe same time, socioeconomic change, alongside institutional inertia, has meantthat certain new needs and risks are not being adequately covered. Some of thegreatest adjustment problems are precisely those related to the need to bringwelfare provision into line with these new demands. Sustainability also requiresthat new ways be found both to finance health and pensions amidst growingcost pressures and to change the incidence of the cost burden via changes

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to taxation or social insurance systems. Rising health care costs and pensionprovisions have contributed massively to welfare budgets and fiscal strains(Pierson, 1998). The maturation of governmental commitments and populationaging demand reforms to health care provisions and old age pensions (in 1992,these accounted for 80% of all social protection outlays in the European Union)if costs are not to escalate and employment creation prevented by higher directtaxation and/or payroll taxes.

But having relativized the globalization argument, it would be wrong to dis-miss it completely. Serious attention should be paid to claims that financialmarket globalization limits government policymaking autonomy and that mar-ket integration constrains fiscal policy and the capacity of states to engage inredistributive tax policies. There may also be a potential incompatibility betweencertain types of national welfare arrangements and increasingly integrated prod-uct markets (especially in Europe), compounding the effects of technologicalchange on patterns of employment.

To understand the nature of internationalization, we need to consider thedevelopments since the 1970s that have made stable macroeconomic man-agement and the progress of welfare societies increasingly problematic. Duringthe Golden Age of economic growth between 1945 and the early 1970s, mostadvanced industrial societies developed their own country-specific brands ofwelfare capitalism. These were built on relatively coherent policy mixes ofmacroeconomic policy, wage policy, taxation, industrial policy, social policy,and labor market regulation. The comparatively smooth interplay between thesepolicy domains contributed to growth, full employment, social protection, andnational solidarity, as well as political stability. At the level of the internationalpolitical economy, the postwar consensus was supported by the regime of"embedded liberalism" (Ruggie, 1982), central to which, next to capital con-trols and trade barriers, was the Bretton Woods monetary system of stableexchange rates. Although there were exceptions, this consensus gave nationalpolicymakers in most countries a substantial degree of freedom to pursuerelatively independent economic and social policies without under-mining either domestic or international stability (Scharpf and Schmidt,2000).

Already in the late 1960s, problems of labor discipline and accelerating in-flation were threatening to erode the historical settlement between capital andlabor that had helped underpin the development of social insurance and welfareprovision around the notion of the "social wage." But the virtuous dialectic be-tween economic growth and social policy.development was really brought to anend in the early 1970s. Since then, three important changes in the internationalpolitical economy have unsettled the relative "goodness of fit" across policy ar-eas and between the domestic and international political compromises. It con-sequently became increasingly difficult for advanced welfare states to deliveron their core commitments of full employment, social protection, and reducedinequality.

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First, after the first oil price shock of 1973, the problem of stagflation cameto haunt national economies. Second, the emergence of a very restrictive inter-national economic environment, with extremely high real interest rates, in thewake of the second oil crisis of 1979 pushed up unemployment to levels not seensince the 1930s. Low growth, rising social expenditures, and recurrent externaldisequilibria led to fiscal crises in many European countries. Third, since themid-1980s, the liberalization and deregulation of capital and product markets(most notably the creation of a single European market with a single currency)have further constrained national fiscal and monetary policy and exacerbatedpressures in favor of austerity.

Against this background, there are a series of interrelated pressures thatEuropean economies and their social protection systems have had to cometo terms with, although in each case there is considerable debate as to thelong-term consequences for welfare policies.

First, there is the changing nature of the European macroeconomy. Althoughthe international environment of the second half of the 1980s was relatively fa-vorable and helped many countries to bring inflation and public deficits backunder control, in Europe German unification prevented a soft landing. Becausethe Bundesbank feared that monetary unification and sharply rising budgetdeficits might endanger price stability, it switched to a highly restrictive mone-tary policy in 1991-1992. Pegged to the D-mark, in part via the EMS, the otherEuropean economies had to follow suit. However, some countries were not ablecredibly to abide by the constraints on monetary policy imposed by the EMS.As a consequence, Italy, Sweden, and the United Kingdom had to devalue theircurrencies substantially. Most European countries went into recession in theearly 1990s, marking another rise in unemployment which, combined with highinterest payments, led to a substantial increase in public debt in the majority ofcountires.

Whatever the original motive—the need for exchange rate stability by largetrading nations, or the need to tie domestic policy to a low inflation anchor—the European member states chose to adhere to a fixed exchange rate regimewithin EMU. Those with the most serious debt and debt servicing problems—e.g., Belgium and Italy—were required to run primary surpluses of over 5%for several years to comply with EMU convergence criteria. This decision hastranslated into savings in all areas of public expenditure, including the so-cial services. As we argue below, there may also be longer-term disadvan-tages (and the regime itself may suffer internal problems due to the absenceof optimal currency area criteria), but.a "sound money" constraint can alsofacilitate positive policies of welfare adjustment. In particular, as argued byNotermans (2000a, 2000b), it has provided an institutional framework in whichpro-welfare coalitions can govern without encountering the wage and priceinflation problems that made the crises of the 1970s and 1980s so damag-ing, both for European economies and for the social democratic welfare stateproject.

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Second, a more general international set of changes can arguably be linked tothe globalization of finance, although there is much debate as to the actual na-ture and implications of these changes. The Mundell-Fleming theorem—or the"unholy trinity"—states that in theory exchange rate stability, capital mobility,and domestic monetary independence cannot all be achieved simultaneously(Mundell, 1962). In an environment of international capital mobility, it may thusbecome increasingly costly for individual states to pursue an expansionarymonetary policy as part of an effort to stimulate growth and employment (Webb,1991 : Andrews, 1994). Second, the emergence in the 1970s of a new world mar-ket for capital has resulted in an explosion of global short-term flows, makingcapital restrictions more difficult to maintain. In the absence of relative capitalimmobility, domestic policy priorities—e.g., full employment—may have to besubordinated to defending the balance of payments, a priority to which bothfiscal and monetary policies have in certain cases been redirected. Third, it isfrequently argued that the international financial markets punish those coun-tries that refuse to conform with neoliberal policy orientations with capital flightto safer havens.

In reality, the impact of financial openness on domestic policy autonomy hasfrequently been exaggerated. Notermans (2000a, p. 232ff) makes a strong ar-gument about the centrality of inflation to our understanding of whether anexpansionary monetary policy is possible—regardless of the extent of financialmarket openness—while pointing out that exchange controls will prove futile ifthere is long-term distrust in the solidity of a domestic currency. Swank (2000)demonstrates the great rarity of financial market punishment, a phenomenonrestricted in fact to situations of considerable fiscal stress. Thus, when budgetdeficits become high—at 10% of GDP or more—then capital mobility can pro-duce welfare cuts via a loss of market confidence, currency depreciation, andan increase in the interest rate premium of the affected nation. But none of thisis inevitable if public accounts are well managed, nor does this situation ruleout the possibility of expansionary policies or progressive politics (e.g., Garrett,1998,2000).

Third, there is the issue of tax competition. This phenomenon is probably lessextensive or at least less pernicious in its effects than many have claimed (cf.Wachtel, 2000). Although it has been argued that international capital mobil-ity has generated a shift away from capital taxation, governments continue torely on corporate taxes for a significant and, in some cases, a growing shareof revenue. Changes in the structure and rates of taxation have coincided withattempts to make the overall changes revenue neutral or to protect the rev-enue needs of the state. Rate cuts have been offset by broadening the taxbase and by elimination of investment-related allowances, credits, and ex-emptions (Swank, 1992, 1998). However, even if corporate tax reforms havenot shifted the tax burden into labour, by eliminating taxes as a means ofboosting investment and employment, life may have become harder for gov-ernments wishing to use the tax code for expansionary welfare policy. Even

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if tax competition is not the main cause of the financing problems of thewelfare state, it may have constrained policy responses by making some formsof revenue-raising more costly at a time when pressures for increasedspending abound (Clayton and Pontusson, 1997; Ganghof and Genschel, 1999).

Nevertheless, the main problem in many European countries has been one of"growth to limits" in taxation, especially in those countries where specific newburdens (German unification) or EMU convergence criteria (Italian and Belgianpublic debt management) have forced tax rates already high by internationalstandards even higher. Downward adjustment in these cases will have less todo with tax competition than with domestic resistance to high tax rates and theneed to channel income into investment and purchasing power so as to bolsternational growth rates and employment creation. Recent reforms of both theItalian and German tax systems have been clearly focused on these objectives.

Fourth, there is a transformation of the political environment that may also belinked to globalization in certain respects. Thus, increased international financialintegration may have strengthened the social and political power of capital—inparticular for capitalists with mobile or diversified assets—even if the power ofmultinationals to force convergence across societies has been much exagger-ated (Ruigrok and Van Tulder, 1995). While the evidence shows that the bulkof foreign direct investment (FDI) continues to go to relatively high-wage andhigh-tax countries (Weiss, 1997), the relocation threat can exert a powerful in- •fluence on domestic policy and institutional arrangements. As shown in certainhigh-regulation European countries, this threat has been used by large firmsto weaken the power of unions and force concession bargaining. Meanwhile,powerful interests have also used the opportunities provided by capital marketand trade liberalization to strengthen their ideological opposition to generoussystems of social and employment protection—which we can refer to (followingSwank, 2000) as the political logic of globalization.

In reality though, it was the failure to manage the crises of the 1970s and1980s that was most important in producing the shift in the balance of politicalpower from left to right in Europe and that helped mobilize opposition to thewelfare status quo and flirtation with neo-liberal policy solutions. Moreover, aswe discuss below, there is an important opportunity to counter the simplisticequation "EMU plus globalization equals neoliberalism" in both policy discourseand practice.

Work and welfare in the New Economy

In sum, we would argue against the existence of a direct and inevitable "glob-alization equals neoliberalism" phenomenon in the welfare politics and policiesof European countries, stemming from the usual globalization suspects—theliberalization of financial markets, tax competition, and the movement of firmsacross borders. But in looking for hard evidence of globalization, the joint influ-ence of trade competition and technological change may have more significant

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implications for welfare states—in particular by affecting the ways in whichwelfare and work interact and in altering the determinants of employment andincome distribution.

Once again, there is little consensus in the literature. There is much uncer-tainty among economists as to whether the blame for the decline in demandfor certain skills and for income polarization should be attributed to trade ortechnological change—or perhaps to a combination of the two. The thesis thattrade with the South will lead to declining demand for unskilled labor and eitherlower wages or create higher unemployment in the North (see Wood, 1994) hasprovoked a series of counterarguments (Freeman, 1995; Burtless, 1995). Betterqualifications command a return to human capital and protect many workersin the North from competition, with low-cost developing nations. Specializationin different goods reduces the downward wage pressures stemming from tradecompetition in the developed countries. Most European trade is, in any case,conducted among the Europeans themselves rather than with third countries.Some argue that technological change is the real culprit in inducing a shift fromlower- to higher-skilled labor demand (e.g., Slaughter and Swagel, 1997). Stillothers would argue that domestic labor market regulations and poor educa-tional systems have been much more important than either trade or technologyin generating unemployment problems among particular groups of workers,especially the young.

Nevertheless, it is unlikely that trade and competition in increasingly deregu-lated and less protected product markets have nothing to do with employmentproblems. Given evidence that most of the inequality generated in the U.S.and the United Kingdom appears to be due to the liberalization of the salariesof higher earners, rather than downward compression of wages at the lowerend of the market, the real issue appears to be the disappearance of low- andmedium-skilled manufacturing jobs. In one way or another, there appears tobe a relationship between international competition, technological change, anddeclining demand for certain types of workers.

We believe that the most important challenges to European welfare occurprecisely at this point—at the intersection of the international and domesticeconomies in the area of employment. In order to clarify this point, it is worthconsidering the ways in which trade pressures and technological, or postin-dustrial, changes may interact in changing the nature of employment, its rolein the life cycle, and its impact on welfare states. We argue that unemploy-ment problems and the need for the modernization of social protection sys-tems should, on the whole, be attributed mainly to the postindustrializationof advanced economies to which globalization (e.g., greater trade competitionacross a growing range of sectors) may make some contribution but cannoton its own explain.

Taking the postindustrial change argument first, Freeman and Soete (1994),among others, have argued that the advanced economies are experiencinga shift from an older Fordist "techno-economic paradigm" based on

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energy-intensive production systems and services to a new techno-economicparadigm based on information-intensive production systems and services. Therapid growth of e-commerce is just its latest manifestation, but one with po-tentially enormous implications for employment, the organization of work andskills, and competitiveness. As Soete (1999) stresses, the information and com-munication technologies (ICTs) "can to some extent be considered as the firsttruly 'global' technology." The consequence is far-reaching managerial, orga-nizational, and distributive changes that will create unemployment—or at leastdisrupted employment patterns—among particular categories of workers tiedto traditional sectors and skills but also new opportunities for others.

Snower (1997) identifies four critical associated developments responsiblefor the greater dispersion of incomes—and a shift in labor demand—betweenversatile and well-educated workers on the one hand and nonversatile workersand poorly educated workers on the other:

• the reorganization of firms into flatter hierarchies with a large number of spe-cialized teams reporting directly to central management;

• radical changes in the organization of both manufacturing and services linkedto the introduction of flexible machine tools and programmable equipment,allowing a decentralization 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 meantby "skilled" versus "unskilled" workers when employees are given multiple re-sponsibilities, often spanning production, development, finance, accounting,administration, training, and customer relations.

By making some jobs less secure and by rendering certain skills and workersredundant, these developments are creating greater reliance on unemploymentinsurance, public support for education and training, and a wide variety of wel-fare state services. The risk is that this situation can generate what Snowercalls the quicksand effect—the phenomenon whereby welfare structures de-signed for a different era become bogged down and unmoveable, generatingnegative effects, destroying incentives, and making redistributive policies inef-ficient, while the productivity of welfare services themselves declines and theircost increases.

But as already intimated, competitive issues are also important in understand-ing the scale of the employment problem". Here it is useful to make a distinctionbetween the internationally exposed and the sheltered sectors of the economy(Scharpf, 1997). The exposed sector includes not only agriculture and industrybut also those services exposed to international competition, such as trans-port and communication and financing, insurance, and business services. Thesheltered sector includes locally consumed service activities in the wholesaleand retail trades, restaurants, and hotels, and the heterogeneous category of

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Table 1. Labor market structure and skills.

Exposed sector Sheltered sector

High-skill employment Expanding (small numbers) Public sector stagnant; expandingin private sector

Low-skill employment Declining Opportunities?

community, social, and personal services, including public education, healthcare, and social services, but also a wide variety of privately financed house-hold and personal services. If we further distinguish between high-skill andlow-skill employment, we get the 2 x 2 matrix shown in Table 1.

In the exposed sectors, competition has become more intense. This is notonly because lowcost producers in Southeast Asia and Eastern Europe haveentered the markets for advanced industrial goods and services. More impor-tantly (given the fact that trade with the rest of the world accounts for onlya small proportion of European trade), it is due to the removal of remainingregional barriers to the free movement of capital, firms, goods, and servicesby the completion of the European internal market. This situation has requiredthe economies of Sweden, Germany, and the Netherlands, for instance, wherewages, nonwage labor costs, other taxes, and regulatory costs are high by inter-national standards, to exploit all the opportunities for increasing the efficiencyof production and the quality of innovation. Bringing the technology argumentback in, in combination with the availability of new information technologies,the outcome has been a significant increase in the demand for highly skilledworkers in the exposed sectors. Even if the overall levels of employment in theexposed sectors could be maintained, the exposed sectors are precisely wherethe employment opportunities for low-skilled workers is falling.

In the sheltered sector, the low level of employment in the European Unionstands in sharp contrast to the employment miracle in the service sector inthe U.S. Employment in the sheltered service sector in the European Unionas a whole accounts for only 39.2% of the working-age population, comparedwith 54.2% of the working-age population in the U.S. Higher employment in theUnited States in the sectors of wholesale and retail trade, restaurants and hotels,and community, social, and personal services is usually accounted for by lowand more flexible wages, easy hiring and firing, and low levels of social protec-tion. This accounting is in part confirmed by recent job growth in the U.K. whichin terms of its labor market regime increasingly resembles the United States(Crouch, Finegold, and Hemerijck, 1999; fthodes, 2000). The American employ-ment miracle, however, is not only confined the low-skill services. The risingdemand of affluent consumers for high-quality services was directly translatedinto additional employment opportunities for teachers, professors, doctors, andparamedical professionals. This outcome is in large part because education andhealth care in the United States are to a considerable extent financed from pri-vate sources.

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The U.S. situation contrasts with many European countries, where educa-tion and health care services depend primarily on taxes and sociaf-securitycontributions. Moreover, in the 1990s, most European countries had to copewith the rising costs of unemployment combined with political and economicpressures to reduce the tax burden and with the commitment to reduce publicdeficits. The launch of EMU, much more than the constraints on fiscal and mon-etary policy imposed by global financial markets, placed strong limits on thecapacity of individual European countries to stimulate employment growth inthe public sector. As a result, cutbacks have led to a reduction of employmentopportunities in education and health care and other state-funded services.

Thus, postindustrial change, combined with the decline of employment op-portunities in the public sector, has contributed to a "service sector trilemma" inwhich the goals of employment growth, wage equality, and budgetary constraintcome increasingly into conflict (Iversen and Wren, 1998). The creation of ser-vice sector employment in the private sector will entail adjustments to wage andnonwage costs for the less skilled and greater wage inequality (unless compen-sated for by tax credits or in-work benefits). Creating such employment throughthe public sector (the traditional Scandinavian solution) entails increased bud-getary pressure at a time when deficits and higher taxes are definitely out offashion. The alternative to doing neither would appear to be continuing, if notrising, unemployment.

The move towards a knowledge-based society, moreover, is likely to exac-erbate and increase the risks of social exclusion, affecting in particular low-skilled groups who have not acquired or cannot acquire the skills to succeed inthe knowledge-based economy (Lindley, 1999). They face stagnant or declin-ing wages in the United States and greater difficulties in finding employment inthe countries of the European Union. Highly educated workers, on the otherhand, are the winners; their jobs have become more secure and/or better re-warded as a consequence of trade openness and the advancement ofinformation technology. Job losses continue to be concentrated among peoplewho have not completed at least secondary education or who lack formal vo-cational qualifications. The average unemployment rate of low-skilled groupsis two to three times as high as that of skilled workers. Spells of unemploymentfor the low-skilled workers have increased in frequency and duration.

The pressing challenge for policy is therefore twofold. First, there is a needto upgrade low-skilled groups through extended schooling, vocational train-ing, and education, in particular with the view that lifelong learning is becom-ing vital if citizens wish to participate as full members of the knowledge andinformation society. Second, it is necessary to engage in a concerted pol-icy effort to increase job opportunities for low-skilled groups that, for what-ever reason, continue to lack marketable skills. Not all unemployed groupscan be made fit for high-skilled employment by retraining. It has to be ac-cepted that the number of low-skill content jobs has to be increased, while un-derpinning such low-income forms of employment with appropriate reform of

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social security and tax systems to prevent the proliferation of a mass of workingpoor.

Defending the European social model, or why the future is notnecessarily neoliberal

The policy conclusions to be drawn from the above are not all pessimistic. First,there is no inevitability about the emergence and victory of what the French calla pensée unique or convergence on a neoliberal set of values and solutions. Incontrast with the liberal welfare states, neoliberal-type plans for welfare staterestructuring have commonly been met in the Scandinavian and continentalEuropean countries by much greater degrees of cross-class solidarity, trust, andconfidence in the existing system, underpinned by inclusive electoral institu-tions and centralized welfare authority. Thus, institutions, norms, and values in-teract to render welfare systems resistant or vulnerable to the twin—political andeconomic—logics of internationalization (Swank, 2000). This is not to argue thatthe Scandinavian and continental welfare states are totally immune to pressuresfor change. However, the cushioning of these systems against what we can callnegative integration—i.e., the absorption of economies into a world economythat is destructive of national welfare distinctiveness—can also allow a processof adaptation in which the essence of the European social model is sustained.

The key features of that model are extensive basic social security coveragefor all citizens; a high degree of interest organization and coordinated bargain-ing; and a more equal wage and income structure than in many other parts ofthe world. Now each of these principles is institutionalized to differing degreesin the continental European economies, and Ireland and the U.K. are clearlyoutliers. Even excluding those two, differences in government spending acrossEurope are significant, accounting for almost twice the proportion of GDP inSweden, for example, as in Ireland. Nevertheless, it is important that Europecontinues to commit itself to the implicit guarantee that its citizens will not beabandoned to cope on their own in the marketplace, and resists pressures fora "race to the bottom." So far, there are few signs that this race to the bottomis occurring; rather, the race has been in the other direction, with the southerncountries {in particular, Portugal) upgrading to northern European levels of ex-penditure (Barnard, 2000). By the late 1990s, despite differences in spendingpriorities (e.g., in pensions as against families) or replacement rates (e.g., unem-ployment), all European countries spent between a quarter and a third of GDPon social security (see Table 2). The persistence of high levels of social spendingis not just because of the resistance of vested interests to any changes to thewelfare status quo; such resistance does occur and is a problem that Europeanwelfare state reformers have to contend with in their efforts to make the wel-fare state equitable, efficient, and sustainable. But high social spending alsocontinues because social protection can help promote the productive capacityof our economies, reconciling workers and citizens to difficult but unavoidable

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Table 2. Level of social security in the European Union.

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Average

Social expendi-tures in percent

of GDPa

28.4

27.5

30.

27.2

30.5

29.3

24.5

16.1

25.2

24.1

28.5

23.4

21.6

33.3

26.8

27.7

Net replacementrate of unemploy-

ment benefitsb

67

7

81

80

79

70

49

57

45

84

85

82

75

83

68

72

Old Age andSurvivors as

percent of GDPa

13.69

11.77

11.49

9.38

13.42

12.69

12.89

4.01

16.13

10.65

11.71

9.99

9.96

13.12

11.77

12.66

Family/Childrenas percentof GDPa

2.84

2.34

3.90

3.48

2.99

3.03

1.98

2.04

0.91

3.40

1.28

1.24

0.45

3.60

2.30

2.30

a1998.b1997.Notes: Net replacement rates after tax; average for four different family types (single, marriedcouple, couple with two children) and two earnings levels (APW-level and 66.7% 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.Sources: Eurostat. (2000). "Statistics in Focus: Social Protection in Europe," Theme 3-15/2000;OECD. (1999). Benefit Systems and Work Incentives. Paris: OECD; own calculations.

trends that, if channeled effectively, can enhance the efficiency and wealth ofnations.

In short, using the language of the European Commission, social protectioncan be an effective productive factor. Although the persistently high level ofunemployment in the European Union seems to support the claim that a com-prehensive welfare state undermines economic efficiency, we should note thatsome European welfare states (Austria, the Netherlands, Denmark) practicallymatch the American job miracle, while sustaining adequate minimum standardsof income, health, work, education, and housing as distinct citizenship rights(see Table 3). This finding suggests that generous welfare policy does not neces-sarily inhibit economic progress. What matters is rather the way welfare statesare funded and how they spend their money.

We can catalogue some of the positive, efficiency-enhancing outcomes ofwelfare as follows:

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Table 3. Employment performance in the European Union (1999).

Austria

BelgiumDenmark

FinlandFranceGermany

GreeceIrelandItaly

LuxembourgNetherlandsPortugalSpain

SwedenU.K.

EU 15

Employmentrate3

68.2

58.976.567.560.464.8

55

62.552.561.670.967.4

52.370.670.662.1

Unemploy-ment rateb

3.7

9

5.2

10.2

11.38.7

11.75.7

11.32.3

3.3

4.5

15.97.2

6.1

9.2

Long-termunemployment0

1.2

5.5

1

2.3

4.4

4.5

6.5

6.9

1.4

1.9

7.4

2.1

1.8

4.3

Femaleemployment

rate

59.7

50.271.664.7

53.557.1

40.451.438.148.761.359.637.369

63.952.6

Youthunemploy-ment rated

2.9

8.4

7.1

10.98.2

4.6

12.4

4.2

12.42.2

4.8

4.3

12.46.1

8.8

8.4

Participationrate, men

aged 15-64

. 76.767.581.2

70.367.572.4

70.2

73.567.148.780.475.667.872.177.2

71.6aTotal employment/population 15-64 years.bStandardized ratio.cLong-term unemployed (12 months and over) as a percent of labor force.d Percent of population 15-24.Source: Employment in Europe 2000. (2000). European Commission.

adequate levels of social protection help reduce poverty: dire poverty not onlycontributes to wasting human capital but also can threaten social stability andcohesion;adequate social protection during periods of short-term unemployment mayreduce the search costs for new jobs, fostering efficient employmentmatches;universal social protection potentially enhances labor market flexibility: peo-ple change jobs more easily if they do not have to worry about losing theirpension or social insurance;active labor market policies contribute to curing unemployment by improvingthe matching of workers to jobs and keeping the unemployed in contact withthe labor market; andif successful, active labor market and vocational training and education poli-cies not only contribute to lowering unemployment and raising productivitylevels by upgrading skills but also also have a moderating effect on wageincreases.

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The arrival of the so-called "new" or knowledge-based economy makes thesefeatures of the European economies still more rather than less important.Unless social protection underpins and insures against the greater degree ofrisk involved in more flexible work patterns, people are not going to engage inlifelong learning processes or avail themselves of the new mobility that the neweconomy is deemed to require.

Similarly, despite evidence of a decline—or at least a reconfiguration—ofwage-setting systems as the shift towards a more postindustrial economy pro-ceeds, a comprehensive system of collective bargaining nonetheless remainsimportant for macroeconomically responsive wage adjustment. Institutions ofsocial partnership, in particular, channel strategies of flexible adjustment tochanges in world markets (Streeck, 1992):

• the institutions of collective bargaining, the legal extension of collective agree-ments, and works councils foster long-term trust, at both the enterprise leveland macrolevels;

• employment protection and legally sanctioned worker participation throughworks councils contribute to competitiveness by engaging workers in pro-duction processes;

• institutions of social partnership encourage employers and trade unions toinvest in vocational education and training programs, thereby contributing tocompetitiveness.

Our insistence on this latter point distances our analysis considerably fromthe policy mainstream, represented by the OECD's Jobs' Study, for example(see OECD, 1994, p. 22ff), which argued that the countries of Europe wouldsteadily have to deregulate and decentralize in labor market institutions if theywanted to create noninflationary, job-creating growth. Europe's experience overthe last decade has in fact illustrated the durability and even reinforcement incertain countries of social partnership and coordinated bargaining systems.Such arrangements differ greatly across European countries in their degreeof centralization and institutional embeddedness, while some countries haveeither been unwilling (the U.K.) or unable (France and Germany) to put national-level pacts in place, although in the latter two countries, works councils andsectoral bargaining structures remain important. Other countries have soughtto ensure wage stability, to innovate at the interface between employment andsocial insurance systems, and to bolster existing commitments to training, ei-ther via limited coordination exercises (Italy, Spain, the Netherlands, Belgium) ormore centralized, coordinated partnership systems (Ireland, Portugal, Austria,Denmark, Finland) (see Rhodes, 1998,2001, for surveys of these developments).

Finally, social protection and budgetary expenditures are powerful stabilizersof economic activity because they help to stabilize effective demand duringrecessions. This kind of Keynesianism through the back door is still operativetoday. Social expenditure tends to increase during economic downturns and todecrease during upswings.

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That said, social protection is not always productive. Not every social policyinitiative contributes to a high degree of goodness of fit between social cohesionand economic performance. Thus,

• excessively generous social security benefits of long duration do underminework incentives, contribute to a heavy tax burden, and lead to high grosslabor costs;

• high levels of expenditures on social protection may absorb capital and thuscrowd out private entrepreneurial initiative, investment, and consumption;

• moreover, poorly calibrated social security contributions raise productioncosts, and rigid forms of dismissal protection raise the costs of hiring andfiring; and

• poverty and inactivity traps linked to passive benefit systems can destroyhuman capital.

Neither the liberal nor the universal welfare states are immune to such prob-lems. Thus, the poverty traps in many means-tested welfare programs in theAnglo-Saxon welfare states represent clear disincentives for the partners of theunemployed to actively seek employment or to carry on working. The "compen-satory"—transfer-based—welfare states of Continental Europe seem trapped ina pathological vicious cycle of "welfare without work" (EspingAndersen, 1996).Because social security benefits are predominantly financed out of payroll con-tributions from workers and employers, under increased competitive pressure,firms in high-wage economies can only survive if they are able to increaseproductivity. This outcome has most commonly been achieved through labor-saving investment strategies, raising productivity levels of workers throughhigh-quality vocational training and education, and/or by laying off less pro-ductive or too expensive, mostly older, workers (see, e.g., on Germany, Manowand Seils, 2000).

Thus, high minimum wages and substantial nonwage labor costs serve as aproductivity whip. But they can also engender an inactivity trap, whereby a vir-tuous cycle of productivity growth runs into a vicious cycle of high wage costs,the exit of less productive workers, and rising social security contributions,requiring further productivity and eliciting another round of work force reduc-tions (Scharpf, 1997). Employment disappears in sectors where productivity in-creases stagnate and the prices of goods and services cannot be easily raised.Moreover, if service sector salaries are linked to exposed sector wage develop-ments, this logic frustrates job growth in the labor-intensive public and privateservice sectors, especially at the low end of the labor market. The inactivity trapof the continental welfare state also reinforces existing insider-outsider cleav-ages. Existing privileges of a diminishing group of insiders—highly productiveworkers with high wages and expansive social rights—will be safeguarded atthe expense of a growing population of inactive outsiders (the elderly, women,and youngsters), who remain financially dependent on either the state or tradi-tional breadwinners.

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If these employment pathologies are to be tackled, and if income inequalitiesare not also to increase, a series of innovations is required. We refer to these asrecalibration rather than retrenchment, since in most cases they require a rede-ployment rather than withdrawal of social programs. Recalibration will includereforms to taxation (e.g., the introduction of negative income taxes) and to theway in which social security systems are financed and deliver benefits alongsideareregulation of the sheltered sectors of continental economies in order to pricepeople with low or nonexistent skills into work. At the same time, the informa-tion and communications technology revolution can be employment enhancingif Europe invests in a new form of flexibility for the work force (in which occupa-tional patterns and skills profiles are more important than inequality-increasingwage flexibility) and engages in extensive institutional reform.

Defining policies for a sustainable social Europe

Given the diversity of regime characteristics in Europe and the specific natureof many countries' particular problem constellation, we may be criticized forsuggesting a series of solutions applicable to all. Our aim in the following is not,however, to suggest a recipe applicable in an unvaried form in all countries.On the contrary, we are interested in setting out a broad agenda that accom-modates these differences while also stressing the desirability of a commonframework for policy that is intrinsically European in sustaining the core fea-tures of its traditional social model (see Hemerijck and Schludi, 2000, for anextended discussion). Indeed, there is already a degree of convergence acrossEuropean member states in the adoption of this policy mix, with key elementsadopted at the EU's Lisbon Summit in March 2000 as part of a New Europeanemployment.

A robust macroeconomic policy

As already argued above, price stability and budgetary discipline have becomekey elements of any sustainable macroeconomic policy. Persistently high publicdeficits and inflation rates are undesirable in themselves and are incompati-ble with globalized financial markets. Although the international price compet-itiveness of a national economy may be restored by strategic devaluations (asSweden did in the early 1980s), this strategy nowadays runs the risk of capitalflight. Moreover, high public deficits increase the debt burden of the state. Asa result, the room for fiscal maneuver may become seriously constrained asinterest payments on public debt rise. Italy and Belgium, which had to pay 10%or more of their GDP to service their public debts in the early 1990s, are casesin point. Furthermore, if fiscal imbalances drive up interest rates, this outcomemay crowd out investment in the business sector.

Consequently, we argue that the EMU fixed exchange rate regime is not nec-essarily incompatible with welfare state sustainability and may indeed enhance

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it. First, as Notermans (2000a, 2000b) strongly argues, far from being a threat,EMU has provided European countries with a favorable institutional setup foravoiding in the future the main problem that threw their welfare states intocrisis in the 1970s and 1980s—their inability to prevent inflation in tight labormarkets. In principle, this new capacity for effective governance allows socialdemocratic parties (back in power in most European countries at the time ofthis writing) to underpin a new growth-oriented macroeconomic policy with anew redistributive bargain, without the fear that this project will be underminedby an uncontrollable wages and price spiral. Second, a strict fiscal policy helpsto bring down interest rates, which (over time) may stimulate the economy, re-duce the public debt burden, and strengthen the confidence of consumers andpotential investors in the economy. This outcome has already been apparentin some of the most chronically indebted European states, of which Italy is theprime example. There, EMU has been critical in allowing a more rational andcontrolled management of the public accounts (Ferrera and Gualmini, 2000).

Finally, if the structural budget deficit is low on average, there will be someleeway with which to activate the stabilizing function of fiscal policy in periodsof low economic growth. The Danish tax reform of 1994 is a case in point,insofar as Denmark's comparatively low structural budget deficit allowed thetax reform to be temporarily underfinanced and a low-growth economy to bestimulated. As empirical evidence also suggests, countries that have been mostsuccessful in reconciling the goals of employment and social security, such asDenmark and the Netherlands, have pursued a policy of budgetary discipline inrecent years. The policy actors in these countries (including the trade unions)also accepted that monetary policy has to be geared primarily towards pricestability rather than towards full employment. Since Denmark (which is not amember of the EMU) also followed a course of macroeconomic stability, there isreason to believe that this recognition basically gained acceptance irrespectiveof the Maastricht criteria.

Wage moderation and flexibility

The general shift from full employment towards price stability as a primary policygoal in the 1980s meant that macroeconomic policy could no longer serve as abuffer shielding other areas of social and economic regulation from the burdenof external adjustment. In the more restrictive international economic environ-ment since the early 1980s, wage restraint remained an important requirementfor successful adjustment by facilitating competitiveness, profitability, and—asa second-order effect—employment. By lowering wage costs, wage restrainthelps to boost competitiveness in the exposed sector.

However, the beggar-my-neighbor argument, which suggests that modestwage increases—given a fixed exchange rate—lower unemployment merely atthe expense of trading partner countries, is misguided. A number of economistshave argued that sustained wage moderation is harmful to economic progress

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because it puts downward pressure on demand, slows down labor marketallocation, and, finally, undermines productivity increases through innovation.But, if wage restraint leads to higher employment and a concomitant growth indomestic demand, the overall effects of wage restraint on the current accountare unclear. Over the last decade, productivity levels in the Netherlands, for ex-ample have indeed come down slightly, but this outcome should be explainedby the increase in jobs for the low skilled. Finally, in the Netherlands new jobshave mainly been created in the service sector via part-time employment. Therapid expansion of new jobs has led to a concomitant growth in domestic de-mand. More generally, the extent that wage developments in the private andpublic sector are coupled, modest wage increases also lower the public sectorwage bill. Rising employment will also contribute to lowering the costs of socialsecurity and will broaden the revenue basis of the welfare state. Moreover, thereis some empirical evidence that wage restraint allows for a smoother interplayamong incomes, monetary policy, and fiscal policy, thus stimulating economicgrowth while keeping inflation low.

For much of the 1980s, there was a strong tendency towards the decentral-ization of collective wage bargaining, suggesting that national income policieswould give way to less disciplined combinations of sectoral and company bar-gaining. More recently, however, as already mentioned above, we observe aremarkable resurgence of corporatist forms of social pacts and policy coor-dination in a number of countries, notably Ireland, the Netherlands, Denmark,Italy, Finland, Ireland, Spain, and Portugal—all of which, to one degree or an-other, have involved income coordination (Rhodes, 1998, 2001). The shift to ahard currency regime in Denmark and the Netherlands during the early 1980sbrought the social partners closer together, while the completion of the sin-gle market and the EMU entrance exam provided the key impetus for recentsocial pacts in Ireland, Italy, Portugal, and Spain based on general wage guide-lines. It seems that the effects of economic internationalization helped to rekin-dle the urge to find cooperative, positive-sum solutions to the predicament ofadjustment—among which initiatives to make taxation and social protectionmore "employment friendly" have figured prominently.

Employment-friendly and taxation and social protection •

Since, as we argue, redistribution through egalitarian wage policy leads tononmarket-conforming wages and thus can have negative consequences foremployment, the goal of redistribution nowadays is best pursued by socialand tax policy. Capacities for expanding welfare spending, however, are re-stricted in many countries. Although certain other countries will be able to enjoybudgetary surpluses, there is now—and will continue to be—greater emphasison redistributing available public revenues in a more targeted manner whilereducing organizational slack. Moreover, making welfare states employmentfriendly also means modifying the ways in which taxation and social protection

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impact job creation, especially in private sector services. We can differenti-ate between optimal and suboptimal policies in this regard by first examiningbenefits and spending and then exploring modes of finance.

Social spending levels perse are no predictor of employment performance.In contrast to the United Kingdom, countries like Denmark and the Netherlandshave done well in employment terms without a radical dismantling of the welfarestate. It is the structure of financing and spending, rather than the expenditurelevel, that affects the welfare state's impact on economic and employment per-formance. The Danish mix of intensive spending on social services and on activelabor market policies is arguably more productive in terms of employment thanmere income maintenance programs concentrating on the aged (such as onefinds, above all, in Italy). Table 4 illustrates policy mix differences as reflectedin spending priorities.

In contrast, the continental strategy of labor supply reduction, mainly throughearly retirement and disability pensions, comes at a high price. Such mea-sures are ineffective in creating new job opportunities for the young (France

Table 4. Public expenditure on selected programs as a percentage of GDP.

Denmark

Sweden

Finland

U.K.

Ireland

Austria

Belgium

Germany

France

Netherlands

Luxemburg

Italy

Spain

Portugal

Greece

EU 15

Old Age &Survivors,

1998

11.5

13.1

9.4

11.8

4.0

13.7

11.8

12.7

13.4

11.7

10.7

16.1

10.0

10.0

12.9

9.4

Education,1995

8

7.8

7.3

5.2

4.7

5.6

5.7

4.8

6

5.2

4.4

4.7

4.9

5.82.9

5.2

Family andelderly

services, 1998

3.9

3.6

3.48

2.3

2.04

2.84

2.34

3.03

2.99

1.28

3.4

.91

.45

1.24

1.98

1.57

Active labormarketpolicy0

1.89

2.01

1.23

0.42

1.66

0.44

1.29

1.27

1.37

1.76

0.30

1.08

0.72

0.87

0.35

1.2

Labormarket

training8

1.07

0.48

0.41

0.09

0.21

0.15

0.29

0.34

0.35

0.22

0.01

0.01

0.21

0.28

0.06

0.27

Socialexclusion13

1995

1.5

1.1

0.7

0.3

0.4

0.3

0.7

0.6

0.5

0.7

0.4

0.0

0.1

0.1

—

0.5

a1998 or latest year available.bSource: EC (there may be a slight overlap with the other categories of expenditure).cOr latest year available.Source: Eurostat. (2000). "Statistics in Focus: Social Protection in Europe," Theme 3-15/2000;Eurostat (2000). "The Social Situation in the European Union 2000"; OECD.

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and Italy have relied heavily on early exit from the labor market but have veryhigh levels of youth unemployment). They also tend to aggravate the finan-cial burden imposed on the active part of the population and further to boostlabor costs. Strategies that expand labor force participation help to broadenthe revenue basis of the welfare state and will also reduce the financial pres-sure to cut benefits. Denmark has traditionally high levels of work force par-ticipation and did not, by and large, fall into the continental pattern of workforce shedding. The Netherlands has recently been able to reverse this viciouscycle and increase labor force participation mainly by restricting access to (andcurtailing heavy misuse of) disability schemes. Denmark's schemes for sabbat-ical, educational, and parental leave are more appropriate measures for tempo-rary labor supply reduction than is the continental strategy of permanent laborshedding.

Second, the financing structure of the welfare state is equally important interms of its effects on employment. Social security systems that are financedout of payroll taxes tend to increase labor costs for low-paid employment abovethe corresponding productivity levels if wages are downwardly sticky. SinceDenmark mainly finances its welfare states out of general tax revenues, the taxwedge at the lower end of the labor market is relatively low. The Netherlands,whose welfare state is primarily financed out of payroll taxes, has reducedthe tax wedge for low-paid workers by integrating general social insurancecontributions into the tax system. This approach means that the general basicincome tax exemption is extended to some branches of the social insurancesystem. Moreover, a special cut in employer contributions for low-paid workershas been implemented.

The design of systems of social security and taxation also matters in terms ofcost efficiency. On the revenue side, there are instruments available forfinancingsocial security that do not increase the overall tax burden on the various factorsof production (and therefore do not hamper employment growth). An optionwidely used in the Anglo-Saxon welfare states is the strong reliance on usercharges and copayments for the financing of public social services (health,elderly, and child care, as well as education). This option does not necessarilyimpinge on social equity if economically vulnerable groups are fully or partlyexempted from the payment of these fees.

Another financing option, particularly with regard to pensions, that has fewdetrimental effects on employment is private mandatory contributions. Ireland,Denmark, and the Netherlands all have made occupational pensions mandatoryin recent years (either by the state or vja collective agreements) (Gem, 1998),thereby adopting a combination of a pay-as-you-go financed basic pension anda fully funded and income-related pension on an occupational basis. This mixhas several advantages. First, such a combination allows for a higher degreeof risk diversification, and due to their high degree of prefunding, such pensionsystems are likely to be comparatively robust against demographic changes.Pension systems with an institutional separation between a pay-as-you-go

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financed basic pension and fully funded private mandatory insurance alsoallow for a more targeted assignment of the various redistributive arid insur-ance functions of the welfare state and are less likely to generate distributiveconflicts.

Flexicurity: secured flexible employment

Denmark and the Netherlands, in particular, are telling examples of how both ex-cluding large parts of the work force from the labor market (a pressing problemin many continental and especially southern welfare states) and marginaliz-ing vulnerable groups within the labor market (typical for Anglo-Saxon welfarestates) can be avoided (Barrell and Genre, 1999). The successful policy mixesadopted in Denmark and the Netherlands can be subsumed under the label offlexicurity.

The Dutch are the pioneers of flexicurity (Visser and Hemerijck, 1997). In ad-dition to wage moderation, successful policy agreement in the Netherlands hasalso produced agreements on social security contributions, work sharing and in-dustrial policy, training, job enrichment, low wage levels for low-skilled workers,the development of entry-level wages, and, most recently, the 1995 flexicurityaccord, in which rights for temporary workers have been strengthened in returnfor a loosening of dismissal protection for core workers. Low-income workershave been compensated for low wages by targeted tax breaks. Trade unionsrescinded their opposition to the creation of part-time and temporary jobs andbecame the champions of such workers, bridging the gap that usually dividesthe insider from the outsider work force. Hourly wages for such workers havesubsequently been bargained to the levels enjoyed by full-time workers: thus,employers can recruit such workers to bolster flexibility, but not as a meansof following a low-price production strategy. The 1995-1996 flexicurity accordsextend pension and social security benefits to all part-time and temporary em-ployees.

The flexicurity debate is inherently related to the feminization of the labormarket and the changing status of part-time work in Europe. A new model ofemployment relations is in the making, whereby both men and women shareworking time, thus enabling them to have enough time to cater to their families.If part-time work is recognized as a normal job, supported by access to basissocial security and allows for normal career development and basic economicindependence, part-time jobs can generate gender equality and the security ofworking families.

The generalization of flexicurity as a formula for secured but flexible em-ployment throughout the EU would be linked to a number of different, thoughmutually reinforcing, policy strategies.

Increasing the demand for low-skilled work. Increasing demand for low-skilledworkers has typically been achieved by forms of wage subsidy, either usingtax credits (following the logic of a negative income tax as in Ireland and,

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to the greatest extent, in the U.K.'s "New Contract for Welfare") or, as in theNetherlands, France, and Belgium, by exempting low-skilled workers from so-cial contributions. In the Netherlands, employment subsidy schemes have sig-nificantly reduced employers' wage costs through reductions in taxes and socialsecurity contributions, instigating a decline in the tax wedge for employers whohire the long-term unemployed. Employment subsidies can add up to as muchas 25% of the annual wage.

In Belgium, France, and Germany, subsidies have also been used to pro-mote jobs for the long- term unemployed. The work include tasks that wouldotherwise not be done, such as caring for the elderly, gardening, child care,volunteer work, and the like. In France, social security and tax advantages havealso encouraged the development of personal services, whereas in Germany,subsidies for recruiting inactive workers are also targeted at the nonbusinesssector. In Spain, subsidies are given to those companies that turn temporaryworkers into permanent employees. As a result of the increasing use of em-ployment subsidies of the two kinds outlined above, the number of subsidizedjobs has grown dramatically in the European Union.

Expanding part-time work and making working hours more flexible. Thechanging socioeconomic environment also requires more flexibility in work-ing time patterns. This flexibility allows not only for a better use of resourcesat the level of the firm but also for a better fit between the firm and employees'needs. By and large, a voluntary reduction of individual working time is likely tohave fewer negative side effects than a general reduction in work time, whichcan lead to evasion strategies by employees and firms, thereby expanding thegrey economy. Moreover, if general working time reductions are linked to com-pensatory hourly wage increases, the resulting jump in unit labor costs mighteven be counterproductive in terms of employment.

In contrast, the expansion of part-time work seems to be a more advanta-geous strategy. As empirical evidence shows, high levels of employment areusually connected with above-average part-time ratios. The tremendous jobgrowth in the Netherlands that we have observed in recent years is partly theproduct 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. How-ever, the standard of social and job protection for part-time workers should notsubstantially deviate from the level of protection provided for full-time workers.This point underscores the central importance of labor market desegmentationas another essential cornerstone of flexicurity.

Labor market desegmentation is geared towards negotiating a relaxation ofemployment protection for the stable, full-time, core work force and linkingthese new standards to increased protection for the peripheral, unstable, part-time, and temporarily employed in the rest of the economy. This approach willhelp prevent the rapid growth of precarious jobs, as has occured in Franceand especially Spain, for example. While a lower standard of protection againstdismissal might affect overall employment levels only a little (since a more rapid

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rise in employment during an economic upswing is likely to be outweighed bya faster cutback in jobs during a downturn), long-term unemployment, with itshighly undersirable hysteresis effects, might well be kept at a more modestlevel than in countries with high and rigid standards of employment protection.This assumption is also empirically supported by a recent study from the OECD(1999).

As a consequence, while systems combining restrictive dismissal protectionwith meager unemployment benefits essentially cater to the interests of insid-ers, systems based on minimal job protection but offering decent standards ofsocial protection for the unemployed bridge the gap between insiders and out-siders more easily. In this respect, the Danish and Dutch strategies are clearlysuperior to their functional equivalent in the Mediterranean countries. Indeed,as a first step in reversing the trend, Spain has also been following a promisingstrategy of desegmentation in recent years. Since 1997, two new laws allow areduction of firing costs for certain categories of newly hired workers and forcases of conversion of a temporary contract into a permanent one. In the wakeof these provisions, Spain has witnessed an increase of new permanent hirings(from 135,000 in 1997 to 300,000 in 1999).

Increasing use of activation policy and tightening eligibility for unemploymentbenefits. Ireland, Denmark, the Netherlands, and Portugal have substantially in-creased spending on active labor market policy in recent years, thereby empha-sizing the activation content of labor market policy instead of relying on passivetransfers. Finally, as already mentioned, the impact of activation programs hasbeen strengthened by stronger pressure on the unemployed to accept suitablejob offers or to participate in education programs.

Reconciling work and family life is another strategy that has been appliedso as to increase labor market flexibility. As quantitative data show, there isconsiderable cross-country variation in the level of female labor force par-ticipation, reaching from about 44% in Italy to about 75% in Denmark andSweden (Daly, 2000). In the Netherlands, female labor force participation hasincreased rapidly, displaying a doubling of participation rates since the early1970s. Clearly, this shift went hand in hand with rising part-time opportunities,which allowed women to combine child raising and participation in the labormarket. As a consequence, in many Dutch households, the low wage increasesthat result from long-term wage restraint are compensated (or even overcom-pensated) for by an additional family income that comes from women's growingjob opportunities.

Reconciling work and family life is also the driving force behind the Danish(and Swedish) strategy to massively expand childcare facilities and parentalleave arrangements. In Sweden, law stipulates that parental leave, education,and training do not interrupt employment. Parents are entitled to a 450-dayparental leave and receive a stipend of 75% of their mean salary. Similar but lessgenerous provisions now apply to France and Belgium. In the United Kingdom,in contrast, workers must reach an individual agreement with their employers if

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they wish to interrupt their career for parental or care leave, except in the caseof maternity absence.

Conclusions

This article began with a critical review of the globalization arguments. Whilethere is some evidence that external constraints make life harder for policy-makers seeking positive-sum outcomes, it is the combination of national debtand spending limits, plus domestic tax resistance, that really counts in mak-ing expenditure-based social and employment policies more difficult in certaincountries. Financial constraints have been reinforced by the costs of aging andrising health care expenditures, and these require innovations in most Europeancountries to ensure welfare sustainability. Increased competition in productmarkets, in combination with rapid technological change, has led to a signi-ficant decline in the demand for low-skilled labor in the exposed sectors, andit is here that we perceive the major challenge to social and employment pol-icy. For given the characteristics of services production and fiscal constraintin Europe, poorly calibrated solidaristic income policies and high wage floorsin Continental systems tend to stifle employment creation, especially for theyoung and low skilled.

In understanding the constraints and opportunities that will shape Europe'swelfare future, globalization—crudely understood—is therefore much less in-fluential than many suppose. More critically, EMU has abolished or at leastradically diminished national autonomy in exchange rate, monetary and fis-cal policy. But as we have argued above, the consequences for social pol-icy and broader economic management are far from deleterious. Indeed, EMUhas encouraged the search for new, coordinated solutions for the euro-zone'semployment problems in terms of both micro supply-side policies of the typediscussed above and, potentially, a controlled, low-inflationary, pan-Europeanpolicy of expansion. Much will depend on tolerance for fiscal expansion on thepart of the European Central Bank and on the capacity of European countries togenerate noninflationary growth, allowing in turn a more accommodating mon-etary policy. And both fiscal expansion and a growth-oriented monetary policywill depend, in turn, on the success of the member states in implementing anumber of the elements of the policy mix outlined above—especially those re-lating to efficient taxation and social protection in the first instance, and wagemoderation and flexibility in the second.

On the employment and social policy side, initiatives required to match greaterflexibility with sustained security are now at the top of the EU agenda, andmechanisms for diffusing best practice across Europe are being put in place.The open method of coordination experimented with under the Luxembourgemployment strategy, and further refined under the 2000 EU Portuguese pres-idency, will translate European guidelines into national and regional policiesby setting specific targets and measures and establishing periodic monitoring,

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evaluation, and peer review as mutual learning processes. Within this frame-work, European welfare states must place more emphasis on dynamic equality,being primarily attentive to the worst off, more hospitable to incentive-generatingdifferentiation, and actively vigilant with regard to the openness of opportunitystructures. The basket of requisite policies for sustaining the European socialmodel and ensuring an equitable trade-off between growth and social justiceought also to include not only a minimum income guarantee and a health pro-motion guarantee, but also a universal human capital guarantee, providing ac-cess to high-quality education and training. In the latter areas, the Scandinavianand Continental countries do well (though adaptation to the new economy isrequired), but their U.K. and Southern counterparts perform much less ade-quately.

In sum, European states have not lost their capacity to improve in the balancebetween competitiveness and solidarity. The range of political choices for strik-ing this balance remains wide and will be enhanced by European cooperation.Despite much gloom concerning globalization and the more tangible effects ofEMU, Europeans remain free to determine their future.

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Documents

The future of the European “social model” in the global economy