Is There a Trade-Off between Economic Efficiency and a Generous Welfare State? A Comparison of Best Cases of 'The Three Worlds of Welfare Capitalism’

Abstract

A crucial debate in policy-making as well as academic circles is whether there is a trade-off between economic efficiency and the size/generosity of the welfare state. One way to contribute to this debate is to compare the performance of "best cases" of different types of state. Arguably, in the decade 1985-94, the US, West Germany and the Netherlands were "best cases" - best economic performers" in what Esping-Andersen (1990) calls "the three worlds of welfare capitalism". The US is a liberal welfare-capitalist state, West Germany a corporatist state, and the Netherlands is social democratic in its tax-transfer system, although not its labor market policies. These three countries had rates of economic growth per capita as high or higher than other rich countries of their "type", and the lowest rates of unemployment.

At a normative or ideological level the three types of state have the same goals but prioritize them differently. The liberal state prioritizes economic growth and efficiency, avoids work disincentives, and targets welfare benefits only to those in greatest need. The corporatist state aims to give priority to social stability, especially household income stability, and social integration. The social democratic welfare state claims high priority for minimizing poverty, inequality and unemployment. Using ten years of panel data for each country, we assess indicators of their short (one year), medium(five year) and longer term (ten year) performance in achieving economic and welfare goals. Overall, in this time period, the Netherlands achieved the best performance on the welfare goals to which it gave priority, and equaled the other two states on most of the goals to which they gave priority. This result supports the view that there is no necessary trade-off between economic efficiency and a generous welfare state.

The three panel studies are the American Panel Study of Income Dynamics (PSID), the German Socio-EconomicPanel (GSOEP) and the Dutch Socio-Economic Panel(SEP). They all have samples of over 15,000 and are the only national panels to have run for ten consecutive years or more, so making it possible to assess the longer term performance of welfare-capitalist states.