“The Three Worlds of Welfare Capitalism”, part 3: Welfare, Work, and Full Employment

Chapter 6: Welfare State and Labor Market Regimes

We’ll focus on three ways welfare interacts with labor markets. First is the exit from work into welfare, like retiring. Second are paid leave programs, and last is direct employment of workers.

Exit and Labor Supply

Conservative welfare states like Germany and France led in creating early retirement programs in the 1970’s, on the basis that they let companies shed less productive workers. The social democratic approach was different: states chose to keep labor demand high through public policy, such as expansionary fiscal policy. Even in the presence of generous benefits, workers would often not retire early in a strong labor market. To bring in some data: in 1985, the labor force participation rates of males aged 55–64 was 58% and 50% in Germany and France, respectively. Compare this to Sweden and Norway’s numbers of 76% and 80%. This higher employment meant better labor utilization, and also freed up welfare state resources to be spent elsewhere.

Paid Work Absence

Benefits for paid leave can be very generous, sometimes replacing 100% of previous income. Social democratic regimes were especially generous, with many categories of leave, like sickness, maternity, parenthood, education, vacation, and union activities. Additionally, there were less restrictions on taking this time off: think about paperwork or doctor’s notes needed to take sick leave, for example. This serves the goal of full employment: instead of leaving their jobs, sick workers or new parents can take time off and simply return to work after.

The Welfare State As Employer

“State employment is, in itself, nothing new. But its expansion begs a re-examination of its significance. The public sector may pay wages’ and offer labor contracts like any other employer, but it is not a genuine market, and conventional market principles operate only marginally.”

Chapter 7: Institutional Accommodation to Full Employment

Institutional Problems of Full Employment

Full employment comes with many benefits, like a more productive economy, higher wages, and more worker power. But there are many obstacles to obtaining it. First, per economist Micheal Kalecki’s famous “Political Aspects of Full Employment”, business leaders will likely resist such efforts. They prefer disciplining workers through unemployment and the business cycle. Second, there’s the Phillips curve, which hypothesizes a tradeoff between inflation and unemployment rates. The idea is that as employment gets high enough, wages get pushed upwards as labor becomes more scarce. These wages make end products more expensive. Workers need higher wages to afford those prices, so they demand even higher wages. And so on, into an inflationary spiral. New institutions would be needed to manage these wage demands.

The Crystallization of Institutional Arrangements in the Post-War Era

How the conflicts brought about by full employment were managed varied greatly by nation. In the US, the New Deal coalition made large progressive gains. But progress was fundamentally held back by the South rejecting welfare and employment programs that helped black folks. By the end of World War 2, price stability had become the dominant concern in the US, not full employment.

The International Convergence of Full Employment

The Incompatibilities of Sustained Full Employment

In brief: though most developed nations had experienced at least spells of full employment, a stable equilibrium involving full employment had yet to be found. There were unresolved conflicts involving unions and government, inflation, and between workers (better off workers were less effected by attempted wage restraint, and were often given higher benefits to compensate). Returning to the focus of this book, a lot of these pressures were put into welfare expansion.

The Re-Emergence of Employment as the Quid Pro Quo for Wage Restraint

The early 1970’s brought serious pain to Western economies. The international monetary system of Bretton Woods broke down, and inflation rose with the infamous oil shortages starting in 1973. The shift began away from full employment, and towards counter-inflationary policies. Somewhat higher employment was maintained in the US through large deficits. Sweden and Norway managed to keep unemployment below 3% until recessions in the 80’s. But the cost of this was high. First, some data on Norway, where oil revenues helped fund increased spending. Production subsidies as a percentage of GDP ranged from 5.3% in 1972, to 7.7% in 1978, to 6.1% in 1983. Meanwhile, with strong opposition to cutting wages or benefits, Sweden’s only recourse was deficit spending to finance employment. By 1980, their deficits were 10.4% of GDP, up to 12% three years later. This, plus taxes and profits from state-owned wealth, added up to over 60% of GDP as government spending.


Per Kalecki’s arguments, everyone agrees new institutions are needed to sustain equality, efficiency, and full employment. Different existing regimes led to different attempts at these institutions. However, they all failed. The question, then, is if these new institutions require severe weakening of private ownership.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store