Welfare State and Industrial Transformations: The Dynamics of Inequality and the Challenge of Policy Alignment.

This paper explores the effects on inequality of four complex inter-relations between a country’s welfare state and its industrial structure.  The first two are related to the interaction between transformations in industrial structures and changes in social welfare institutions (the diachronic relationship).  The second two focus on governments’ need to align industrial and social welfare policies that exhibit important complementarities (the synchronic relationship), to mitigate the dynamics of inequality. 

The first relationship we shall examine involves those situations where ‘relatively autonomous’ industrial transformation is the principle cause of changes in welfare institutions (and inequality).

The second relationship we shall discuss involves those situations where ‘relatively autonomous’ changes in welfare institutions (and inequality) are the primary cause of transformations in the industrial structure. 

To illustrate the difference between these two scenarios we will perform a comparative historical analysis focusing on two specific historical conjunctures.  To begin with we look at the creation of modern Welfare States in Europe as a response to the Great Depression, an event rooted in structural failures exacerbated by aggregate demand contraction (in the 1930s and 1940s).  After that, we look at the dramatic transformation of the European industrial structure due to the decomposition of the institutions of the welfare state class-compromise in the same region (in the 1970s and 1980s).

Of course in both these examples the causational mechanisms are neither unidirectional nor linear. However, as our diachronic analysis will demonstrate, in the case of the 1930s the crisis was ‘triggered’ by transformations to the economic and industrial structure while in the 1970s the ‘trigger’ was social and political. 

Building on these two sets of relationships with contrary causational emphasis, the paper moves on to draw lessons for synchronic analysis of the choices facing policy-makers at the present time.  We therefore examine the relationship between the design of industrial policy and the design of social welfare policy looking at the multiple complementarities that exist between the two, including their effect on inequality dynamics. 

Government officials need to find appropriate policy matches in order to harmonise two dynamics that are not spontaneously aligned (welfare state and industrial transformations). We will examine two different kinds of complementarities that exist between industrial and welfare policies which permit said alignment.   

The third relationship examined involves policy-makers using welfare state programmes (e.g. state education, a public health service and trades union legislation) to unblock a bottleneck in industrial system transformation (e.g. a lack of an educated, well-trained, cooperative and healthy workforce).

The fourth relationship examined involves the reverse situation where policy-makers use industrial transformation policy (tariff protection, subsidies, intermediate institutions etc.) to unblock bottlenecks in the welfare system (e.g. where a lack of quality employment creates structural inequalities).

In today’s context of Financial Crisis, countries have entered vicious circles of industrial contraction, welfare decline and spiralling inequality.  This can only be overcome by an integrated policy approach that exploits the complementarities discussed, allowing governments to better cope with current structural and institutional deterioration and more effectively reduce inequalities.