European Distinctions

Fritz W. Scharpf

Robert Haveman sees Western Europe and North America responding to essentially identical economic pressures on two fundamentally different "tracks," both of which have serious negative repercussions--increasing inequality and poverty in the United States (Canada, I think, is still quite different), and high and rising levels of joblessness in European welfare states. He proposes a "third way," suitable for both America and Europe that would allow Europe to benefit from an American-type "job-creating machine" without having to accept American-style mass poverty, and combat poverty in the United States without destroying the dynamism and flexibility of its labor market.

My own view is shaped by a European perspective. I find myself in broad agreement with Haveman's comparative presentation of stylized facts, and I share the overall philosophy of his proposals. If adopted, these would surely be effective solutions under the conditions prevailing in the United States. For Europe, however, I see a need for a somewhat more differentiated view. To make that point, I need to go back to Haveman's factual premises.

1. To compare the employment performance of Haveman's two groups of countries--one including the United States, Canada, the United Kingdom, and Australia (labeled "North American"), the other comprising the Western European welfare states--the best available measure in my view is the "employment/population ratio." This ratio is defined by the number of persons actually working compared to the working-age population between 15 and 64. Taking the latest available OECD data for 1995, both groups of countries are quite heterogeneous. The United States, it is true, is doing very well indeed, providing jobs for 73.5 percent of the working-age population. But the other members of that club (which is defined by flexible labor markets, low levels of welfare support, and great inequality) are not nearly as successful in employment terms--69 percent in Australia, 67.8 percent in the UK, and 67.7 percent in Canada. On the other side, it is true that some European welfare states have still much lower employment/population ratios: 55.7 percent in Belgium, 59.5 percent in France, 64.3 percent in the Netherlands, 65.1 percent in Germany. However, the European group also includes Sweden, with an employment level of 71.1. percent; Denmark, which at 73.4 percent practically equals the U.S. record; and Norway, which at 74 percent is even ahead of the United States in terms of employment. (I leave aside exotic Iceland which manages to employ 81 percent of its working-age population.) Moreover, it is precisely in these high-performing countries where the factors are most manifest that, according to Haveman and others, should explain the European job deficit: extremely high taxes, very generous welfare states, strong unions, and highly regulated labor markets. So what gives? The answer is to be found in different structures of employment and in different types of generous welfare states.

As a consequence of economic "globalization," competition has greatly increased in the internationally exposed sectors of all advanced industrial economies. Because wages in these sectors (among which one should include not only agriculture and industry, but also an increasing range of services such as transport, communication, financial, and business services) could not be pushed down to the level of Third-World or Eastern European competitors even in the United States, competitiveness and hence jobs have come to depend primarily on product innovations and on increasing labor productivity--and thus on a highly skilled workforce. In other words, low-skilled jobs are rapidly disappearing in the exposed sectors of North American as well as European countries.

Still, one might expect that the greater flexibility of North American labor markets would also pay off in terms of greater international competitiveness. Remarkably, however, US employment in the exposed sectors amounted to only 32 percent of the working-age population in 1994--exactly the same level as was achieved by highly regulated Sweden. By contrast, Germany, a member of the low-employment European set, did much better, employing altogether 36 percent of its working-age population in the exposed sectors of the economy. Thus we must conclude that overall employment levels are not primarily determined by factors affecting competitiveness in the internationally exposed sectors of the economy.

But if we instead consider branches not exposed to international competition--i.e., services catering to domestic demand, such as wholesale and retail trade, restaurants and hotels, personal services (including health and education), and household services--the differences among countries become quite striking. In 1994, the United States employed altogether 41 percent of its working-age population in domestic services, and Sweden was not far behind at 38 percent. Germany, by contrast, was only able to provide employment for 28 percent of its potential workforce in the sheltered service sectors. The same is more or less true of practically all other continental welfare states.

Thus, it seems that the difference between high-employment and low-employment countries is to be located entirely in service sectors sheltered from international competition, and that in these sectors Sweden and other Scandinavian countries with very generous and expensive welfare states are doing just as well as the United States with its minimal welfare state, while Germany and other continental European welfare states are doing very poorly. Taking another cut at the data, it appears that public-sector employment dominates domestic services in Sweden, amounting to 24 percent of the working-age population, as compared to only 10 percent in the United States as well as in Germany. By contrast, in the United States service employment in the private sector amounts to an employment ratio of almost 31 percent, as compared to 19 percent in Germany and only 15 percent in Sweden.

This, finally, provides us with a pattern that can be interpreted: High-employment countries are countries with a large number of jobs in service sectors that are sheltered from international competition. The most successful countries, however, seem to achieve their success in radically different ways: In America, low levels of taxation, weak or nonexistent unions, and low or nonexistent social assistance allow large numbers of rich consumers to buy in the private market the services of large numbers of poor workers who must offer their services at very low wages. The unsolved American problem, as Haveman points out, is poverty.

In Scandinavia, by contrast, very high levels of taxation, strong unions, and generous social assistance have prevented the expansion of private services. High levels of employment are nevertheless achieved because Scandinavian-type welfare states are service-intensive, providing large numbers of public-service jobs in child care, education, health care, care for the elderly, and other social services--including jobs that do not require very high levels of formal training. The unsolved problem, as Sweden has found out in the 1990s, is taxpayer resistance that leads to large public-sector deficits and to an increasing need for fiscal retrenchment--which in turn explains rising levels of unemployment.

The continental welfare states, then, have the worst of both worlds: Public sector employment is as low in Germany as it is in the United States, and employment in private services is almost as low as it is in Sweden. The reason is straightforward: While taxes are not quite as high in Germany as in Sweden (but still much higher than in the United States), the welfare state is mainly financed through payroll taxes, rather than from the general tax revenue. At the same time, unions are strong and wage inequality is nearly as low as it is in the Scandinavian countries. Thus, private service jobs with low skill requirements (and low labor productivity) are as effectively priced out of the market as they are in Sweden. But in contrast to Scandinavia, continental welfare states are "transfer intensive," rather than "service intensive"--providing generous levels of income support in case of sickness, old age, disability, and unemployment, but not much in the way of child care, family, and social services. The result is a very low level of service employment, high taxes and welfare burdens that are rising as unemployment increases, and a growing underclass of welfare recipients without any realistic prospect of ever finding gainful employment.

Thus, we have not two "tracks," as Haveman suggests, but three: American, Scandinavian, and continental European. All have their characteristic difficulties. So what does that suggest for Haveman's proposals?

2. As I said at the beginning, Haveman's Employment-Centered Social Policy fits the US situation perfectly. If the problem is poverty at high levels of employment in the private services, the combination of a family-oriented negative income tax providing basic income support with employment-oriented wage and income subsidies will effectively deal with the problem--provided that the program is politically feasible, which is not for me to judge (on this issue, see Benjamin Page's reply to Haveman).

For the Scandinavian welfare states, by contrast, Haveman's program makes little sense. It is focused on private sector employment, and to become effective, it would first require the destruction of the large volume of presently existing public-sector service employment. While perhaps appealing to dogmatic neoliberals, that would hardly be an efficient reform strategy. Instead, if the ability to tax is reduced by capital mobility and the political resistance of higher-income groups, the mode of financing of Scandinavian-type service employment might have to shift from general tax revenues to means-tested user charges. But that, again, is not for me to judge.

Continental welfare states are in much deeper trouble. Unlike the United States they do not presently have a market for low-wage private services, and unlike the Scandinavian countries they do not have a large public-service sector to defend. Given their relatively high levels of taxation, it is unlikely that they could move in the Scandinavian direction to increase service employment. But given strong unions and a political (and in some countries, constitutional) commitment to income support above the poverty line, they also cannot move in the American direction. Thus, Haveman's proposals are clearly relevant for continental welfare states--but they need to be modified to allow for the fact that any expansion of private service employment depends on the creation of new jobs in markets that do not presently exist, and under conditions in which relatively generous levels of income support will continue to be available.

As a consequence, Haveman's anti-poverty measures are likely to be of little practical relevance since the abolition of existing income-support programs seems politically unfeasible. Instead, the emphasis must be on the job-creating elements of the program. Since low-wage service jobs do not presently exist, temporary subsidies (such as Haveman's "Marginal Employment Subsidy") will not be effective. Instead, it is necessary to permanently change the cost and income structure at the lower end of the labor market. This implies that new jobs in the private sector must be created whose cost to the employer is significantly below the present lower tier, but which must still provide a net income to the worker that is significantly above accepted levels of social assistance. Haveman's "Wage Rate Subsidy Program" (which is similar to a program which I proposed for Germany) could do the job--provided unions are willing to allow for a reduction of wage rates in response to income subsidies. A more directly effective method, under the institutional conditions of continental welfare states, would be the (degressive) waiver of employer and employee contributions to social security insurance at the lowest end of the labor market.

At any rate, it is most gratifying to see that reform perspectives in the United States and Western Europe seem to be converging on similar problem definitions and similar types of non-neoliberal solutions.