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

Jacob Keegan
9 min readJun 26, 2021

Today, we’ll be continuing the summary of this book by discussing the welfare state in the employment structure. In the previous parts, we categorized three welfare regime types, and looked at what political powers may have caused them. But how do these regimes influence other economic variables?

“The core idea of social policy was always to safeguard persons against the exigencies and risks that confront them in their life-cycle, especially when their working capacities fail”. Since welfare is mainly needed by non-workers, it’s easier to maintain a welfare state with higher employment. At the same time, welfare may disincentivize work to some extent: social democratic welfare states especially offer a serious alternative to working. It is of crucial importance how the welfare regimes navigate this contradiction.

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 numbers for absenteeism in Sweden are particularly shocking. On any given day, 15% of workers are absent from work, yet paid. Numbers like this go beyond just a useful benefit. Fundamentally, an employee sells control of their time in return for a wage. Paid leave this generous gives control of time back to laborers: labor time itself becomes decommodified to some extent. Compare this to places like the US, where there isn’t even a legal framework to guarantees any paid leave.

In one group, the effect of these policies is particularly evident: women with young children. Labor force participation rates for women with kids aged 0–2 in Sweden was 43% in 1970. Over the next 15 years, Sweden expanded many paid leave policies, and adopted maximum female participation as a social policy goal. The results were dramatic: in 1985, that rate moved from 43% to 82.4%! However, of those employed mothers, 47.5% were absent on any given day. Importantly, the high cost of this paid leave was borne by the government: if it was employer-funded instead, employers would lower costs by hiring less folks who may become pregnant.

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.”

This is especially true of employment in healthcare, education, and welfare service (HEW). Below, the data is grouped into social democratic, conservative, and liberal categories respectively.

Most notable about this data is how well-developed HEW is among social democratic countries, and how it’s absolutely dominated by public employment. Other countries have much lower HEW, and conservative countries generally have significantly more public employment that liberal ones. The exception is the United Kingdom, no doubt due to the NHS.

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.

Because of this difficulty, full employment is rare. Only Norway and Sweden have maintained unemployment rates under 3% throughout the post-war era [until the publishing of this book in 1990, of course]. Even when full employment has been temporary, it’s mostly been confined to years between 1960 and 1974. But all is not well, even in these countries:

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.

In the UK, successful welfare programs and a high level of employment led to inflation pressures. The lack of union cohesion closed off many potential avenues to fighting this pressure. Instead, wage and price controls were established, alienating unions from the Labor government.

Next there’s Germany, whose “social market” model obtained price stability and high growth. This came at the cost of austerity (public spending wasn’t allowed to grow faster than GDP) and little upward pressure on wages, due to a weak union and social democratic movement. The Nordics, being small and open countries, faced unique problems here. High wages could hurt international competitiveness, severely weakening their economies. Each country responded differently. In Denmark, liberal farmers were particularly strong. They pushed for price stabilization and sometimes even austerity, preventing full employment in the first place. In Norway, the Labor party held an absolute majority in parliament from 1945–1961, making government particularly strong. Government boards worked with unions to set economic guidelines and growth targets, enforced through government control of investment.

Lastly is Sweden, with its highly unified and powerful labor movement. They embraced the Rehn-Meidner model, created by union economists Gösta Rehn and Rudolf Meidner. In short, this model greatly equalized wages across firms and industries. This had two effects. First, where a firm or a developing industry was performing exceedingly well, wages were moderated, and competitiveness maintained. But if firms or industries were performing poorly, they wouldn’t be able to keep up with these centrally-set wages, and would go under. Add in active labor market policies to help move workers laid off by failing firms into more productive ones, and full employment, competitiveness, and growth would all be maintained. Price stability, meanwhile, was obtained through budgetary restraint at full employment. But this required a very specific institutional setup: centralized, solidaristic unions in cooperation with government, employer confidence, and high investment were all needed.

The International Convergence of Full Employment

Significant wage pressures (in brief, when wages rise faster than productivity) mainly emerged in the 60’s and peaked in the early 70’s. This coincided with inflation, lowered profitability, and trade difficulties. Broadly, there were four responses to these difficulties.

The first was a deflationary policy response, attempting to cool the economy. Although this was attempted in many countries, it was mainly a one-shot measure, instead of a return to the political business cycle. Second, there’s incomes policy: redirecting wage demands into welfare expansion. Denmark led on this front with a package in 1963. Thirdly, new “neo-corporatist” institutions, which included unions in policy-making, were created to manage these pressures. In Sweden, this included union control of pensions and ALMP. In Norway, public investments were increased, allowing bargains that developed poorer areas. However, in countries like the UK and Germany, attempts to create these institutions weren’t successful. The last response was an attempt to bring new workers into the workforce, either women or folks from other countries.

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.

However, increased welfare benefits at full employment, when the economy grew slowly, were inflationary if deficit-funded. And if tax-funded, they cut into, and perhaps even lowered, worker’s real wages. Clearly, a problematic solution. Alternatively, pressures were put into industrial democracy, in the Nordics especially. In Sweden, “workers were given representation on company boards, job-tenure rights, a large degree of control over safety and health conditions, and even over technology decisions”. But this push against employer sovereignty in decision-making began breaking the social contract between capital and labor: simply put, class conflict heightened.

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.

The 80’s were a tumultuous time for Sweden. Though the Swedish Social Democratic Party (SAP) lost control of parliament in 1976, they regained it in 1982. That same year, they introduced wage earner funds. Originally proposed by Meidner, their goal was to transfer company ownership to employees over time. The funds would be controlled by union representatives, and used to fund pensions and invest in jobs. This faced massive employer opposition, as expected. The next year, business managed to break off steel workers, who composed a third of the LO, from their central union agreement, greatly weakening union power.

[Esping-Anderson was right: just a year after this book was published, in 1991, the new conservative government in Sweden ended the wage-earner funds].

Meanwhile, Germany was a different story. Austerity won out over social democracy, neo-corporatism, and expansionist fiscal policy. They attempted to increase productivity by inducing early retirement through various social programs, to dramatic effect. Labor force participation for folks aged 60–65 dropped from 75% to only 44% from 1970 to 1981. However, unemployment still rose throughout the period. So not only were a lot more folks on welfare, but there were less people employed to fund it, which greatly restricted welfare 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.

In the final article, we look at how post-industrial development has affected welfare states.