Germany a midfielder: The labor market improved based on the Agenda 2010 although at the price of increasing wage inequality – Germany should have considerable scope to top up social investments such as in education or training – Southern European countries do worst due to high costs and an uneven income distribution
Researchers of the Kiel Institute for the World Economy (IfW) have scrutinized the performance of different welfare systems in Europe. They wanted to work out how to realize a more even income distribution and more even living standards without overburdening social systems or impeding economic growth. In doing so they have differentiated social systems of the Northern, Continental and Southern European type on the one hand and the Anglophone type on the other hand. Representatively, they analyzed social systems in Sweden, Germany, France, and Italy as well as in Great Britain. They concluded that Sweden best masters how to balance solid economic growth, high employment and a just distribution of income. “Especially with respect to women Sweden has achieved a high employment rate. This broadens the tax base, helps to maintain solid state budgets and allows to fully take advantage of the countries resources,” explains IfW researcher Christiane Krieger-Boden.
Sweden: High Employment Rate for Women
Key to labor market success in Sweden is first, that the state helps unemployed people to return to work quite quickly and, second, that in families usually both parents are working rather than one of them being compensated by the state for staying at home. Northern type welfare systems typically combine a highly flexible labor market, well embedded social civil rights and a high willingness on part of the population to support the welfare system by paying high income tax rates. In country comparison, Sweden realized the highest economic growth rates next to Great Britain. Hence, researchers conclude, the traditional assumption that distributional justice and economic growth were contradicting each other does no longer hold. Great Britain, in a typical Anglophone manner, relies on markets’ welfare maximizing properties along with individual responsibilities and offers only in a very basic coverage from public sources in case of emergencies. Subsequently, in Britain distributional justice is lowest and capital gains are biggest for high incomes.
Italy: Privileged Insiders Drive Uneven Distribution
Welfare systems in Southern Europe are inadequate according to IfW researchers. Italy displays the lowest economic growth and the second highest unemployment rate next to France which has the lowest employment rate in general and especially for women as well as the highest public debt ratio. In Italy, income distribution is the least equitable next to Great Britain. As in the Anglophone system this is due to the free play of markets, Italy lacks a social net for young adults, single mothers and long-term unemployed.
The most important reason is seen in privileged groups (state officials, entrepreneurs, middle classes) who all are able to defend their perks at the expense of less privileged groups. Only half of all employees in Italy are enjoying state pensions which turn out to be the lowest value by comparison. Although those who participate receive on average 52 percent of their former income which represents the highest in the countries analyzed.
Germany: Welfare Systems Tailored to Single-Breadwinner Families
Continental-type welfare systems in Germany and France tend to end up mid-range a far as an even post-tax income distribution is concerned. The share of the population who is at risk of poverty, i.e. whose income is below 60 percent of the median income, is quite low in France and Germany (14 resp. 15 percent) and highest in Italy (20 percent). Nevertheless, continental welfare systems continue to focus on maintaining social status and traditional family structures with a single (usually male) breadwinner. Safeguarding of employees in case of unemployment tends to be good, yet remains depending on previous income and family status. Only a shift in paradigm in the late 1990s led to higher social investment in families, education and labor market policy. Biggest drawback however is the only moderate economic growth achieved under continental welfare systems.
France turns out to be the only country in which low earners have enjoyed higher income increases than top earners. However, unemployment and public debt are quite high. Germany in contrast still benefits from the Agenda 2010 reforms which brought down real wages as well as the unemployment rate yet income gaps are still widening. Low earners experienced the lowest income increases in comparison. In the light of solid state budgets and beginning labor market bottlenecks, IfW researchers would recommend some degree of increasing income and realizing higher social investment such as in education and training.
The complete analysis can be found here.