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
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
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.