Comparing Welfare Capitalism

Bernhard Ebbinghaus, Philip Manow

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134521531
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book challenges the popular thesis of a downward trend in the viability of welfare states in competitive market economies.
With approaches ranging from historical case studies to cross-national analyses, the contributors explore various aspects of the relationships between welfare states, industrial relations, financial government and production systems. Building upon and combining comparative studies of both the varieties of capitalism and the worlds of welfare state regimes, the book considers issues such as:
*the role of employers and unions in social policy
*the interdependencies between financial markets and pension systems
* the current welfare reform process.
It sheds new light on the tenuous relationship between social policies and market economies and provides thought-provoking reading for students and scholars of Comparative Politics, Public Policy, the Welfare State and Political Economy.

1 Introduction

Studying varieties of welfare capitalism

Bernhard Ebbinghaus and Philip Manow

Despite claims to convergence, modern capitalism still comes in a limited variety. While the neo-liberal doctrine gained in currency in the 1980s and led to deregulatory reforms advanced by the United States and the United Kingdom, many economic observers were struck by the resilience of ‘Rhenish’ (coordinated) capitalism in Continental Europe and Japan (Albert 1993). The same holds true for the area of social policy: Welfare retrenchment has been propagated with some success in Anglo-American liberal welfare states, yet the more generous and expensive social security systems of Continental and Northern Europe have proven to be more entrenched (Pierson 1996). Although there are pressures towards convergence due to economic internationalisation and socioeconomic changes, cross-national diversity both in economic and social policy still dominates the political landscape (Berger and Dore 1996; Crouch and Streeck 1997; Kitschelt et al. 1999).

Over the last decade, two strands of research have underlined the importance of institutional variations for economic activities and social policy. In comparative political economy, the Varieties of Capitalism approach (Hall and Soskice, forthcoming) claims that coordinated market economies operate differently from ‘free market’ economies.¹ And cross-national welfare-state research, most prominently Esping-Andersen’s Three Worlds of Welfare Capitalism (1990), has detected different welfare regimes with significant variations in redistribution and market compatibility.² Both approaches focus on the cross-national institutional variations in their respective policy field, but the links between particular forms of social protection and specific economic systems have yet to be adequately examined. This volume begins to bridge the two fields of research and ventures to unravel some of these linkages on both the analytical and the empirical level.

Let us consider investment into skills as an example that may exemplify how the production system and the system of social protection can be interlinked. Assuming rational behaviour, we would expect industrial workers to be willing to acquire particular skills only if such investment pays off in the long run. If the skills are not firm-specific and if they are sought after on the labour market, workers can expect to find employment with another firm at the current pay level if they lose their current job. However, in the case of firm-specific skills, skilled workers would either need credible employer commitments for long-term employment or even better external reassurances. Thus, strong employment protection through labour law and collective agreements may convince them that they will remain employed even in hard times, and that their wages will keep in line with pay trends in other firms. And if they are laid off, they would expect to be compensated fairly and long enough to seek a similar job or be adequately retrained (Estevez-Abe et al. 1999).

This example indicates that there are certain ‘institutional complementarities’ between different production regimes, industrial relations practices and social protection systems. Moreover, we would expect these to vary systematically across production systems and protection regimes. For instance, American workers with general skills receive premium market wages when there is high demand for their skills, but have no statutory employment protection; Japanese workers are willing to obtain firm-specific skills since they trust the commitment of large firms to guarantee ‘lifelong’ employment and occupational benefits; German skilled workers expect to be compensated during unemployment and retrained if they have been laid off. In a comparative empirical study, Huber and Stephens ‘contend that within a given country, different aspects of the welfare state “fit” together and “fit” with different aspects of the production regimes, in particular their labour market components’ (Huber and Stephens 1999: 3). Yet they warn that ‘this “fit”…is not a one-to-one correspondence between a whole configuration of welfare state and production regimes’ (Huber and Stephens 1999: 3).

Thus far, as Peter Hall observes, ‘we do not have a clear understanding of how…different kinds of welfare states interact with different models of the economy’ (Hall 1997: 196). This volume is an attempt to overcome the prevailing research gap in exploring the multiple interfaces between capitalist production and social protection. We believe that for a better understanding of modern welfare states, we need to consider social protection provided by social security systems, collective bargaining practices and employment regimes. Our knowledge of modern welfare states, and especially the sources of their current crises, remains limited until we reconsider the economic foundation on which they stand. Moreover, the productive function of social protection has often been overlooked due to the focus on redistribution as the main goal of welfare state policies. Hence, we also believe that for a better understanding of modern capitalism we ought to take into account the important impact of the welfare state on employment, skill acquisition, wage setting and investment. For instance, an analysis of the current problems of the German welfare state would be incomplete without considering its economic base, as would an assessment of Germany’s economic crisis without considering the consequences of the current welfare state (see Hemerijck and Manow, Chapter 10 in this volume). The German social insurance system supports an export-oriented, high-quality production model, but the contributions to social insurance have become so high that employment growth in services is thwarted. This low employment level in turn endangers social policy financing and increases payroll taxes, thus leading to a vicious circle of ‘welfare without work’ (Esping-Andersen 1996a,b; Scharpf, Chapter 12). Thus there are mutual interdependencies between social security and the production system which affect both economic performance and the vulnerability of a given welfare state.

That the production system–welfare regime nexus has gained little attention thus far is particularly surprising, given the similarities of the analytical approach between Hall and Soskice’s Varieties of Capitalism approach and Esping-Andersen’s Three Worlds of Welfare Capitalism. In this introduction, we will describe the approaches taken by comparative political economy and welfare state research. Then, we will briefly describe the different areas of mutual impact and interdependency between production and protection and present the contributions to this volume. Finally, we will discuss the importance of comparative and historical analysis for studying the welfare–economy linkages.

Varieties of capitalism

Proponents of the Varieties of Capitalism approach in comparative political economy study the ‘social systems of production’ (Hollingsworth and Boyer 1997b) which are at the basis of national capitalist economies. This approach builds on the work of Andrew Shonfield (1965) on post-war economic policy and the subsequent neo-corporatist studies of organised capitalism in the 1970s (Goldthorpe 1984; Lehmbruch and Schmitter 1982; Schmitter and Lehmbruch 1981), yet it also imports insights from institutional economics (Williamson 1975). Challenging the thesis of convergence, several comparative readers have looked at the resilience and specificity of national capitalist models, contrasting the uncoordinated Anglo-American market economies with the German, Japanese or Scandinavian coordinated market economies (Berger and Dore 1996; Crouch and Streeck 1997; Hollingsworth et al. 1994; Hollingsworth and Boyer 1997a; Kitschelt et al. 1999). In addition, several comparative studies include particular policy fields, such as the link between vocational training and production systems (Crouch et al. 1999; Culpepper and Finegold 1999) or the role of central banks on wage formation (Iversen et al. 2000). In our view, the Varieties of Capitalism approach is marked by three features (see Hall and Soskice 1999): (1) it is a systemic account of the functioning of the institutional components of economic systems, (2) it distinguishes national models of production and maps their comparative advantages, and (3) it seeks a micro-foundation of how institutions shape actors’ behaviour and reinforce existing institutional infrastructures.

Systemic accounts of contemporary capitalism

One major feature of the Varieties of Capitalism approach is the assumption that economic activity is socially embedded and that ‘institutions matter’ (Granovetter 1985). While the approach acknowledges the role of actors, it seeks a ‘systemic’ account of the institutional architecture of contemporary market economies, focusing on the ‘total cake of “institutions of governance” of the various ingredient institutions’ (Dore 1997: 24). Its proponents assume that institutions coalesce in the social system of production, ‘this occurs – in part – because institutions are embedded in a culture in which their logic is symbolically grounded, organisationally structured, technically and materially constrained, politically defended, and historically shaped by specific rules and norms’ (Hollingsworth and Boyer 1997b: 266). The institutional landscape is relatively inert: It provides constraints on the behaviour of economic agents and offers them specific opportunities, limits their strategic alternatives for individual and collective action, and encourages them to employ certain strategies rather than others.

In this view, particular institutions seem to hang together in a systemic way. Social practices as diverse as the Japanese lifelong employment and crossshareholding between firms within the same keiretsu (inter-firm groups) seem to be interrelated (Dore 1997). These linkages represent – in game-theoretic parlance – ‘strategic complementarities’ (Cooper 1999; Milgrom and Roberts 1994; Soskice 1999), that is, mutually reinforcing and enabling institutional configurations. Thus ‘two institutions can be said to be complementary if the presence (or efficiency) of one increases the returns (or efficiency) available from the other’ (Hall and Soskice 1999: 10). Although this perspective has the danger of assuming too much coherence and intentionality (Stinchcombe 1968), it is a useful heuristic for identifying particular institutional equilibria as they coexist and co-evolve in time and place. Since we cannot assume that institutions arose in the past for reasons of their current complementary functionality, we also need to explain how complementary practices have co-evolved historically and have reproduced and reinforced each other by positive feedback (Pierson 2000).

Therefore the new comparative political economy literature attempts to trace chains of causation that run through different institutional subsystems and tries to reconstruct how strategic complementarities have emerged over long historical periods. By looking at the social system of production, this approach adopts an interdisciplinary perspective, taking insights from organisational theory, industrial sociology and industrial relations. Indeed scholars have shifted their focus. Having once concentrated on industrial governance in the narrow sense, they now study systems of corporatist bargaining and specific production systems, which enables them to analyse a broader ‘ensemble of institutions’ and more general governance structures in contemporary capitalism. Prima facie, most of these institutions seem to be only loosely coupled to the production system: legal traditions, standard setting, vocational training, financial systems, national ‘systems of innovation’ and monetary regimes. Much of the new comparative political economy literature shows how particular strategic complementarities between these institutional features and the economy can provide national systems with beneficial constraints (Streeck 1997) that could prove to be competitive advantages (Soskice 1991, 1999). That particular systems of social protection also shape the character of a ‘national system of production’ and thus have to be analysed in the same light as institutions mentioned above is the main claim motivating the different investigations into the welfare–economy nexus in this edited volume.

National models of capitalism

The current debate over economic globalisation and the competitiveness of national market economies has revitalised the ‘convergence or diversity’ controversy (Boyer 1996; Kitschelt et al. 1999; Rhodes and van Apeldoorn 1997). Studies in comparative political economy have shown that considerable diversity in national responses still prevails despite similar global and secular pressures on advanced industrialised countries and despite the diffusion of ‘best practices’ (Boyer 1996; Crouch 1996; Kastendiek 1990). National economies embody different mixes of social institutions, regulation and governance modes. ‘Since the nation-state has been the unit providing the legal regulation on which many forms of coordination depend and within which the institutions supporting coordination have developed, systematic differences in forms of coordination and firm behaviour tend to be found across nations’ (Hall 1997: 298).

‘Institutional isomorphism’ ( DiMaggio and Powell 1983), the copying of institutional features for the sake of legitimation, provides one of many social mechanisms by which nationally distinct modes of economic activity become widespread. In the same vein, Ronald Dore claims that the behaviour of individuals in ‘unstructured or weakly structured situations is determined by the behavioural dispositions they have acquired in the context of well-established institutions, and the way they behave determines the form that emerging or changing institutions take’ (Dore 1997: 28). Given vested interests to maintain current comparative advantages, the established institutional landscape is largely entrenched. Modern capitalism shows a variety of governance forms between market and hierarchy, ranging from less to highly ‘liquid’ markets, and from less to highly ‘negotiated’ hierarchies (Crouch and Streeck 1997). Moreover, markets and hierarchies are complemented by and supplemented with varying degrees of additional coordination and governance, such as formal associations and informal networks, and they are subject to varying degrees of state regulation (Streeck and Schmitter 1985a; Powell 1990). Thus, different state traditions also account for the nationally different modes of market making and ‘market breaking’ and, consequentially, for the differences in economic performance from country to country. This line of argument has led to a renaissance of earlier insights from industrial sociology, on the distinctiveness of ‘the’ British vs ‘the’ Japanese firm (Dore 1973), for example.

Today’s comparative political economy is marked by juxtapositions of two polar models of economic activities: Fordist vs specialised production (Piore and Sabel 1984); Anglo-Saxon vs Rhenish capitalism (Albert 1993); deregulated vs institutionalised political economies (Crouch and Streeck 1997); coordinated vs uncoordinated market economies (Soskice 1999). These converse concepts represent not only ideal-typical models of economic governance, they also serve as analytical devices to describe the dominant national models of economic governance in comparative empirical studies.³ These authors claim that it is possible to distinguish particular national models of capitalism that differ in their institutional setup across the main subsystems. If there are distinct national models competing in a world economy, and if these models remain distinct despite trade liberalisation and the internationalisation of markets, then we can infer that a particular institutional configuration represents a ‘viable’ mix of comparative advantages and disadvantages.

Case studies of national economies, most importantly of the United States and the United Kingdom in comparison with Germany and Japan, have been used to show the contrast between coordinated and uncoordinated market economies (Soskice 1991, 1999; see Table 1.1). Empirically, some political economies seem to be hybrid cases that are situated between or even depart from the two conceptual poles of coordinated vs uncoordinated market economies. A national economy may be considered as a mixed case if there are subsystems, regions or economic secto...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Series editors’ preface
• Preface
• Acknowledgements
• Abbreviations
• 1 Introduction
• Part I The origins and development of welfare capitalism
• Part II Industrial relations and welfare state regimes
• Part III Pension regimes and financial systems
• Part IV The political economy of welfare state reform
• Part V Conclusions