n PART ONE

Concepts

The chapters in Part 1 establish the concepts used throughout the book to assess

the existence and institutions of the welfare state, including relevant definitions

(Chapter 1), the historical backdrop (Chapter 2), political theory (Chapter 3), eco-

nomic theory (Chapters 4 and 5), and problems of defining and measuring poverty

and inequality (Chapter 6).

Readers with less technical background (or less time) can read the non-technical

summaries at the end of Chapters 3–6.

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Introduction

[The duties of the state are] . . . first . . . that of protecting the society from the violence and

invasion of other independent societies . . . second . . . that of protecting, as far as possible, every

member of the society from the injustice or oppression of every other member of it . . . third . . .

that of erecting and maintaining those publick institutions and those publick works which, though

they may be in the highest degree advantageous to a great society, are of such a nature, that the

profit could never repay the expence to any individual or small number of individuals.

(Adam Smith, 1776)

1. The approach

1.1. The central argument

One of the wellsprings of this book was the exuberant insistence of some of my studentsand colleagues that economics appeared largely irrelevant to the central concerns of social policy. They had a point, and this book, like previous editions, is an attempt to remedy their grievances and to assert the importance of economics. To address the concern about relevance, discussion relates economic theory to different notions of socialjustice and to the historical development of the welfare state. In stressing the importanceof economics, two results stand out. First, the welfare state is not a subject apart, but fitsnaturally into the framework of economic analysis. Secondly, the theoretical argumentssupport the existence of the welfare state not only for well-known equity reasons butalso—and powerfully—in ebciency terms. This is an area in which economic theory is capable of strong results that can justify the general idea of the welfare state and, to asurprising extent, can do so without resort to ideology.

To keep the subject manageable, the book is explicitly about economic theory and its application to the welfare state. It is not a book about comparative systems, since thewelfare state, though existing in all countries in the wider Europe and, more generally, inall advanced industrial countries, takes very different forms (Esping-Andersen et al. 2002;Neil Gilbert 2002). The book has a very brief institutional description, mainly of the UK, to motivate the theory, plus references to more detailed information and, where possible,wider European and US examples, but with no attempt at systematic coverage. A secondrestriction is that, though the book discusses in some detail how welfare-state services canbe financed, there is less detailed discussion of how they should be delivered. Economictheory has much to say about funding; in contrast, though economic fundamentals (for

1

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4 CONCEPTS

example, a sensible incentive structure) are important on the delivery side, institutionalorganization and institutional change are things about which economic theory has lessto say.

The book addresses two broad questions: what theoretical arguments justify the variousparts of the welfare state in an industrial economy; and, given these arguments of principle,how sensible (or otherwise) are arrangements in the UK1 and other countries?

The approach is best illustrated by two questions that permeate throughout.

1. What are the aims of policy?

2. By what methods are those aims best achieved?

Question 1 is broad ranging. There is general agreement that the major aims of policy inWestern societies include eBciency in the use of resources; their distribution in accordancewith equity or justice; and the preservation of individual freedom. These aims, however, canbe defined in different ways, and may be accorded different weights. To a utilitarian,2 theaim of policy is to maximize total welfare; to Rawls the aim is social justice, defined in aparticular way; libertarians make their main aim individual freedom, and socialists theirprime concern equality. The answer to question 1 is explicitly normative and largely ideological. The objectives of the welfare state are discussed in more detail in Section 2.2.

In contrast, once question 1 has been answered, question 2 should be treated not as ideological but as technical—that is, it raises a positive issue. Whether a given aim should bepursued by market allocation or by public provision depends on which of these methodsmore nearly achieves the chosen aim. Market allocation is neither ‘good’ nor ‘bad’—it isuseful in some instances—for example, private markets for food are generally effective in achieving the aim that people should not starve; in others, however (it is argued inChapter 12 that health care is one), the market mechanism works less well, and substantialstate intervention can contribute to ebciency and to justice. Similarly, public provisionis neither good nor bad, but useful in some cases, less so in others. One of the questionsthroughout is which method is more useful in different areas of the welfare state.

The distinction between aims and methods is fundamental, and bears reinforcement.Consider two central questions that all societies face.

• How much redistribution (of income, wealth, power, etc.) should there be?

• How should economic activity be organized, through markets, or central planning,or as a mixed economy?

The first question is clearly ideological and normative; it is an aims question and so prop-erly the subject of political debate. But, once that question has been answered, the secondquestion is largely one of method (i.e. a positive issue) and better treated as technical thanas political. The approach is explained in detail in Chapters 3 and 4, and summarized inthe concluding section of Chapter 4.

1 The United Kingdom (UK) is Great Britain and Northern Ireland (Act of Union with Ireland 1800;Government of Ireland Act 1920). Britain (or Great Britain) consists of England, with Wales and Scotland (Act ofUnion with Scotland 1706).

2 Utilitarianism and other theories of society, including those of Rawls and libertarian and socialist writers, arediscussed in Chapter 3.

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1. INTRODUCTION 5

1.2. Organization of the book

Part 1 sets the scene, starting in Chapter 2 with the historical development of the welfarestate in the UK, including some comparison with other countries, particularly the USA.The three chapters that follow are the theoretical heart of the book: Chapter 3 discussesdefinitions of social justice and their different implications for the welfare state; Chap-ter 4 sets out the economic theory of state intervention and Chapter 5 the theory of insurance. Chapter 6 discusses problems of definition and measurement, particularly ofpoverty and inequality. For readers who are dibdent about their theoretical background,each of the conceptual chapters (3, 4, 5, and 6) has a non-technical appendix summariz-ing the essential material; and technical terms are explained in the Glossary.

Three major threads developed in Part 1 run through the rest of the book: the social-welfare-maximization problem; alternative definitions of social justice; and measure-ment problems. The social-welfare-maximization problem (set out in Chapter 4) is theconventional starting point for economic theory. An important theorem states thatunder appropriate assumptions a competitive market equilibrium will allocate resourcesebciently. It is argued that, where these conditions hold, the role of the state, if any, islimited to redistribution; conversely, where these conditions fail, there may be ebciencygrounds for intervention in a variety of forms. The second major theme is social justice.The definition chosen will determine the weights assigned to different individuals, withmajor implications for the form and extent of intervention—for example, whether people with no income should be supported at subsistence or at a higher level. The thirdthread, discussed in Chapter 6, concerns problems of definition and measurement. Manyvariables are hard to define and, once defined, hard to measure. A crucial and recurrentdibculty is that utility3 is not measurable. This makes it hard both to measure living standards and to compare them. Costs or benefits—of health care or education, for example—may also be hard to measure.

As far as possible, each chapter in Parts 2 and 3 has a similar layout to clarify the structure of the argument. Each chapter discusses in turn: the aims of policy; the methodsby which they might be achieved—that is, the theoretical arguments about interventionfor reasons of ebciency and social justice; assessment in the light of this theoretical discussion of the appropriateness (or otherwise) of the UK and other systems, includingdiscussion of the empirical literature; and reform.

Part 2 analyses cash transfers. Chapter 7 briefly describes the finances of the welfarestate. Chapter 8 looks at unemployment and sickness benefits, whose primary purpose isinsurance; Chapter 9 discusses retirement pensions, whose main purpose is consumptionsmoothing;4 and Chapter 10 reviews non-contributory benefits, whose main purpose ispoverty relief. Each chapter starts with the theory and then assesses the practice. Chapter 11considers a variety of reform strategies. Part 3 discusses provision in kind. Chapter 12, onhealth, analyses the theoretical arguments for public production and allocation, assessesthe effectiveness of the UK National Health Service in comparison with systems in othercountries, and discusses alternative ways in which health care might be organized.Chapters 13 and 14 cover similar ground for school education and higher education.

3 See the Glossary. 4 See the Glossary.

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6 CONCEPTS

The conclusions of the book are summarized in Chapter 15, which picks up some of thequestions asked at the end of this chapter. Readers in a hurry can get an idea of the book’sapproach and its main conclusions by reading Chapter 15 and the concluding sections ofChapters 4 (economic and political theory), 11 (income support), and 12, 13, and 14(health care, school education, and higher education, respectively).

2. The welfare state and its objectives

2.1. Defining the welfare state

This section defines the welfare state in three ways: in principle, for the purposes of thisbook, and in practice.

the welfare state in principle. We shall see in Chapter 6 that important concepts suchas poverty and equality of opportunity are hard, if not impossible, to define in principle,and even harder to measure. The concept of the welfare state similarly defies precisedefinition, and I make no serious attempt to offer one. Even Richard Titmuss (1958)ducked the problem—that book is called Essays on ‘The Welfare State’ (his quotes). As helater put it, ‘I am no more enamoured today of the indefinable abstraction “The WelfareState” than I was some twenty years ago when . . . the term acquired an international aswell as a national popularity’ (Titmuss 1968: 124). Three areas of complication stand out(for fuller discussion, see Glennerster 2003a: ch. 1).

1. Welfare derives from many sources in addition to state activity. Individual welfare derivesfrom at least four sources.

• The labour market is arguably the most important, first through wage income. Full employment is a major component of welfare broadly defined. High levels of employment and rising labour productivity over the 1950s and 1960s were at least as much an equalizing force as redistribution.5 In addition to wage income, firms (individually or on an industry-wide basis, voluntarily or under legal compulsion)provide occupational welfare in the face of sickness, injury, and retirement.

• Private provision includes voluntary private insurance and individual saving.

• Voluntary welfare arises both within the family and outside, where people give timefree or at a below-market price, or make voluntary charitable donations in other forms.

• The state intervenes by providing cash benefits and benefits in kind. It also contri-butes through tax concessions to the finance of occupational and private provision.

2. Modes of delivery are also diverse. A service may be funded by the state, but it does not follow that it must necessarily be publicly produced. The state can produce a service itself and supply it to recipients at no charge (e.g. health care under the National HealthService); or it can pay for goods produced in the private sector (e.g. free pharmaceutical

5 As discussed in Chapter 2, Section 5.1, full employment was one of Beveridge’s central assumptions.

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1. INTRODUCTION 7

drugs under the National Health Service); or it can give individuals money (either explicitlyor in the form of tax relief) to make their own purchases (e.g. tax relief in some countriesfor private medical insurance premiums). The issue of ‘privatization’, as we shall see inChapter 4, Section 6, is more complex than is often recognized in public discussion.

3. The boundaries of the welfare state are not well defined. Though the state’s role shouldnot be exaggerated, neither should it be understated. Some typically excluded activitiessuch as public health and environmental policies are very similar in purpose to ones thatare included.

Welfare is thus a mosaic, with diversity both in its source and in the manner of its delivery. Nevertheless the state, through various levels of government, is much the mostimportant single agency involved in most industrialized countries. Throughout the bookthe term ‘welfare state’ is used as a shorthand for the state’s activities in four broad areas:cash benefits; health care; education; and food, housing, and other welfare services.

In broad terms the modern welfare state comprises cash benefits and benefits in kind.The latter embrace a wide range of activities that can include education, medical care, andmore general forms of care for the infirm, the mentally and physically handicapped, andchildren in need of protection. Cash benefits have two major components.

1. Social insurance is awarded without an income or wealth test, generally on the basisof (a) previous contributions and (b) the occurrence of a specified contingency, suchas becoming unemployed or reaching a specified age.

2. Non-contributory benefits are of two sorts. So-called universal benefits are awarded onthe basis of a specified contingency, without either contributions or an income test. Major examples in the UK are child benefit and the National Health Service (dis-cussed in Chapters 10 and 12, respectively). Social assistance is awarded on the basisof an income test. It is generally a benefit of last resort, designed to help individualsand families who are in poverty, whether as an exceptional emergency, or becausethey are not covered by social insurance, or as a supplement to social insurance.

the welfare state for the purposes of this book. The welfare state exists to enhance thewelfare of people who (a) are weak and vulnerable, largely by providing social care, (b) arepoor, largely through redistributive income transfers, or (c) are neither vulnerable norpoor, by organizing cash benefits to provide insurance and consumption smoothing, andby providing medical insurance and school education.

This book is mainly about (b) and (c), covering cash benefits, health care, and education.Two omissions are deliberate. There is little discussion of element (a)—for example, pro-tection of vulnerable children, the frail elderly and people with emotional and physicaldisabilities. This is not because they are unimportant (absolutely not the case), but be-cause they are topics about which economics has relatively little to say. Secondly, welfaredepends also on access to food and housing. These topics do not figure prominently fordifferent reasons: each raises economic issues that are largely settled territory: markets, itwill be argued, work well for these two vitally important goods. Both sets of markets needregulation; but in both cases, the poor are best protected by income transfers, allowingthem to buy food and shelter. Thus food is discussed in the following chapters mainly in terms of regulation to ensure it is safe, and housing largely in terms of income transfers

EOTC01 14/4/04 17:12 Page 7

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1. INTRODUCTION 9

to poor people to support their housing needs. Other, equally important aspects of housing—such as unsafe neighbourhoods—raise issues more usefully tackled by discip-lines other than economics.

the welfare state in practice. The UK welfare state can be taken to comprise, at a minimum,the publicly provided benefits (representing about 23.5 per cent of gross domestic product)shown in Figure 1.1, together with the contributions that pay for them. Cash benefits follow the pattern described above. National insurance is payable to people with an adequate contributions record; benefits cover, inter alia, unemployment, sickness (short-and long-term), and retirement, of which the last (about 18 per cent of social spending) is much the largest. Non-contributory benefits include child benefit (a weekly cash pay-ment to the parent or guardian of every child), and income support (i.e. social assistancefor people with little or no other income). The major benefits in kind are the NationalHealth Service (29 per cent of total social spending) and education (22.5 per cent).

As Figure 1.2 shows, the UK is by no means unusual. The data show 1998 figures forpublic social spending, which the OECD define to include all cash benefits, health care, andsocial services, but to exclude spending on education. Spending was highest in the Nordic

2020 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 16 18

Sweden (31.0)Denmark (29.8)

France (28.8)Switzerland (28.1)

Norway (27.0)Austria (26.8)Finland (26.5)Germany (26)

Italy (25.1)Belgium (24.5)

Netherlands (24.5)EU (24.2)a

Poland (22.8) Greece (22.7)

Luxembourg (22.1)New Zealand (21.0)

OECD (20.8)a

United Kingdom (20.8)Spain (19.7)

Czech Republic (19.4)Iceland (18.4)

Portugal (18.2)Canada (18.0)

Australia (17.8)Ireland (15.8)Japan (14.7)

United States (14.6)Slovak Republic (13.6)b

Turkey (11.6)Mexico (8.2)Korea (5.9)

Cash benefits Services

Income support to the working age populationPensions (old age and survivors)

HealthOther social services

Fig. 1.2. Public social expenditure by broad social policy area, OECD 1998 (% of GDP)

Note: Countries are ranked by decreasing order of total public social expenditure as a percentage of GDP.a OECD and EU are unweighted averages.b Slovak Republic: data for total are underestimated because data about health are not available yet.Source: OECD (2003c: 55).

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10 CONCEPTS

countries and, among the richer countries, lowest in Japan and the USA. UK spending wasequal to the OECD average, somewhat below the average for the EU.

2.2. The objectives of the welfare state

The objectives of social institutions, as in any other area of economic policy, areebciency, equity, and administrative feasibility. In this context, however, it is useful toadopt a more refined categorization.

efficiency has at least three aspects.

1. Macro-eBciency. The ebcient fraction of GDP should be devoted to the totality ofwelfare-state institutions—for example, policy should avoid distortions leading tocost explosions.

2. Micro-eBciency. Policy should ensure the ebcient division of total welfare-stateresources between the different cash benefits, different types of medical treatment,and different kinds of educational activity.

3. Incentives. Where institutions are publicly funded, their finance and the structureof benefits should minimize adverse effects on labour supply, employment, and saving.

Objectives 1–3 are different aspects of allocative eBciency, sometimes—particularly inthe context of health care and education—referred to as external eBciency. As an example,if the objective of health policy is to maximize the health of the population, externalebciency is concerned with producing the quantity, quality, and mix of health inter-ventions (including preventive care and education about diet and lifestyle) that bringabout the greatest improvement in health.

supporting living standards, the second strategic aim, has at least three components.

4. Poverty relief. No individual or household should fall below a minimum standard of living. The aim could be to eliminate poverty or to alleviate it. As discussed inChapter 6, there is no analytically satisfactory way of defining a poverty line, so the definition of the minimum standard is largely normative. Once the poverty linehas been decided, the effectiveness of the system is measured by statistics relating tohow many people are below the poverty line (‘headcount’ measures), by how much(‘poverty-gap’ measures), and for how long (life-cycle and intergenerational matters).

5. Insurance. No one should face an unexpected and unacceptably large drop in her living standard. This is a major objective of unemployment benefits and mosthealth-related benefits. Its success is measured by the replacement ratio, whichshows a person’s income when on benefit in comparison with her previous income.

6. Consumption smoothing. Institutions should enable individuals to reallocate con-sumption over their lifetime. As discussed in Chapter 9, individuals can redistributefrom their younger to their older selves (an actuarial private pension scheme); orsuch redistribution could be notional (an unfunded state pension (Samuelson 1958)).Alternatively, there could be tax-funded provision, with no pretence of individual

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1. INTRODUCTION 11

contributions, to groups whose stage in the life cycle suggests that they are likely tobe financially constrained (e.g. benefits for families with young children). Analog-ously, student loans, discussed in Chapter 14, allow people to redistribute from theirmiddle years to their younger self.

These three objectives largely shape the rest of the book. The simple Fisher model dis-cussed in Chapter 4, Section 3.2 and illustrated in Figure 4.5 illustrates a person’s choicesbetween consuming now (period 1) or later (period 2)—that is, his or her options for consumption smoothing. A person can consume less in period 1 and save, so as to be ableto consume more in period 2; similarly, someone who wants to consume more earlier canborrow, thus consuming more in period 1.

The simple model assumes rational behaviour in a world of certainty and competitivemarkets. In that world, the welfare state is largely unnecessary: there is no risk, and henceno need for insurance; people provide for their old age through voluntary saving; andtemporary poverty is dealt with by borrowing or saving. Thus the only role for the welfarestate is to provide poverty relief for someone who is lifetime poor.

The rest of the book is largely about the effects of relaxing the certainty assumption. Acentral argument is that imperfect information, risk, and uncertainty give the state (orparastatal agencies) a key role, not only in providing poverty relief, but also in ensuringthat people have access to insurance and consumption smoothing that the private market would provide ineffectively or not at all.

Figure 1.3 shows the broad division of cash benefits into spending on the three object-ives. Just over one-third of spending on cash benefits is directly redistributive from rich topoor, the remaining two-thirds, involving insurance and consumption smoothing, beinglife-cycle redistribution. Though the task of poverty relief is central, it is clear that the welfare state exists also for much wider reasons.

the reduction of inequality, in contrast, is almost entirely an equity issue.

7. Vertical equity. The system should redistribute towards individuals or families withlower incomes. This aim is contentious. All income-tested benefits contribute to it;

Anti-povertybenefits

36%

Insurancebenefits

21%

Life-cyclebenefits

43%

Fig. 1.3. Spending on cash benefits by type of benefit

Source: UK DWP (2002a: table 7).

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12 CONCEPTS

so, secondly, do non-means-tested benefits whose recipients disproportionatelyhave lower incomes (e.g. the UK flat-rate pension). A third form of redistributionarises where the benefit formula favours lower-income individuals. ‘Free’ provisionof a tax-funded service (e.g. health care in the UK) is also generally redistributive.The success or otherwise of benefits in reducing inequality is assessed by inspectionover time of aggregate inequality measures, though with all the caveats noted inChapter 6.

8. Horizontal equity. Differences in benefits should take account of age, family size, etc.,and differences in medical treatment should reflect only factors that are regarded asrelevant (e.g. whether or not the patient has dependent relatives), but not irrelevantfactors like ethnic background.

social inclusion. So far the objectives have been conventional economic ones. Somecommentators also include broader goals.

9. Dignity. Cash benefits and health care should be delivered so as to preserve indi-vidual dignity and without unnecessary stigma. Beveridge emphasized the im-portance of contributions in this context: ‘The popularity of compulsory social insurance today is established, and for good reason; by compulsory insurance . . .the individual can feel assured that [his] needs will be met . . . by paying . . . a contribution, he can feel that he is getting security not as a charity but as a right’(Beveridge Report 1942: para. 296).

10. Social solidarity. Cash benefits and health care should foster social solidarity—a frequently stated goal in mainland Europe. So far as possible, benefits should depend on criteria that are unrelated to socio-economic status. Retirement pensionsare an example; so is medical care in many countries. Additionally, benefits shouldbe high enough and health care and education good enough to allow recipients toparticipate fully in the life of the society in which they live—a broader aim thanthat of relieving income poverty.

administrative feasibility has two aspects.

11. Intelligibility. The system should be simple, easy to understand, and as cheap toadminister as possible.

12. Absence of abuse. Benefits should be as little open to abuse as possible.

problems of definition and measurement abound. Ebciency objectives 1–3 have preciseanalytical definitions, but measurement problems—particularly the incidence of taxes,contributions, and benefits—make it dibcult to assess how far they are achieved. How do we define a poverty line in objective 4; and how large a drop in living standard is ‘unacceptable’ (objective 5)? The appropriate extent of vertical redistribution and a work-able definition of horizontal equity (objectives 7 and 8) have occupied economists,philosophers, and political theorists almost since the dawn of time, and have plaguedpolicy-makers at least since the British Poor Law Act of 1601. Even ‘equality’ is dibcult todefine unambiguously (Okun 1975: ch. 3; Le Grand 1982: ch. 2), especially in the contextof benefits in kind like health care. Concepts such as ‘dignity’, ‘stigma’, and ‘social solid-arity’ (objectives 9 and 10) are hard to define and raise major measurement problems.

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1. INTRODUCTION 13

Writers like Hayek (1976) argue in addition that the term ‘social solidarity’ is devoid ofmeaning, and that its pursuit is both pointless and dangerous. These problems are dis-cussed in some detail in Chapters 3–6.

Even were these problems assumed away, a second set of dibculties arises, in that someobjectives are inherently in conflict and others may be. The trade-off between ebciencyand distributional objectives is no less intractable for its familiarity; the same is true of the trade-off between horizontal equity and administrative simplicity. Other objectivesconflict almost by definition. Consumption smoothing implies that an individual withhigher earnings should receive higher benefits, which sits uneasily with the requirementthat benefits should redistribute towards those with lower incomes, and with the objectivethat benefits should contribute to social solidarity. On one interpretation of equity every-one should receive benefits proportional to their past contributions, but that, again,conflicts both with redistribution towards lower incomes and with social solidarity. Thechoice of objectives and of priorities between them is a fundamental normative issue.

3. A changing world: Challenges and responses

A number of longer-term trends have major implications for the design of the welfarestate and recur throughout the book.

demographic change. Life expectancy has increased in all industrial countries while birthrates have declined, simultaneously increasing the number of older people and reducingthe number of younger workers. As a result, from about 2005 onwards, the ratio of peopleover 60 to those of working age will increase sharply. If present policies continue unchanged, spending on pensions and health care in some countries is set to double.Policies to accommodate these changes are discussed in detail in Chapter 9.

globalization has at least two roots. First, since 1970 the international trade regime hasbecome increasingly open. Secondly, as a result of technological change, in Quah’s terms,economic activity is increasingly ‘dematerialized’—that is, it is in the form of encoded binary bits (computer programs, music, videos) rather than solid, such as a Boeing 747.One of many implications of this trend, according to Quah (1996: 7; see also Quah 2003),is that ‘international trade becomes not a matter of shipping wine and textiles . . . but of bouncing bits off satellites’. In these circumstances, national boundaries become increasingly porous.

For both reasons, globalization reduces the ability of a country to act independently in designing its institutions. Countries with expensive welfare states, it is argued, will increasingly be at a competitive disadvantage relative to those with more parsimoniousones. At the same time, however, demands on the welfare state are rising: there are moreold people, and in many countries rising numbers of unemployed; in addition, as dis-cussed below, there are more lone-parent families, and increasing numbers of low-paidand part-time workers.

changes in family structure have taken several forms. First, families have become morefluid. The institutions of the immediate post-war period assumed an archetypal nuclear

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14 CONCEPTS

family: the main (frequently the only) source of income was the wages of the husband;and husband and wife stayed married, so that the husband’s pension entitlement alsocovered his wife. Though not wholly valid even then, the assumption was true enough to form the basis of most social policy. Today, in contrast, many more marriages end in divorce; and parenthood is less closely tied to marriage. These changes have major implications for social policy, particularly so far as child support and pension arrange-ments for women are concerned. A second set of changes arises from the increasing number of women who have jobs outside the home.

changes in the structure of jobs. The nature of work is also changing. Post-industrial employment tends to favour professional and highly skilled occupations. The demand forunqualified workers is lower than in the past and, in consequence, their wages are lowand their employment often precarious and part-time. There are worries about increasingpolarization between a core of skilled workers and a peripheral workforce. Contributorysocial insurance is of doubtful relevance to the latter group.

rising expenditure on the welfare state over past decades has been universal. Rising income leads to demands for higher insurance benefits and more extensive consumptionsmoothing, and to the adoption of a poverty line that rises in real terms. A second causeis technological advance: more advanced medical technology extends the range of whatis possible, fuelling the drive for higher spending on health care; and technological advance is a major driver of mass tertiary education. Thirdly, population ageing will increase spending on age-related benefits, notably pensions, health care, and social care.

resulting challenges and responses. Two challenges stand out. A problem—both for eco-nomic policy and for social policy—is the possibility that the strategic design of the wel-fare state is based, at least in part, on a past social order with stable, two-parent families,with high levels of employment, and where most jobs were full-time and relatively stable.

Secondly, the conflict between economic growth and equality has become sharper overthe years. ‘The harmonious coexistence of full employment and income equalization thatdefined the postwar epoch appears no longer possible’ (Esping-Andersen 1996a: 4). Thereis a major debate, discussed in Chapter 15, Section 2.2, about why this is so.

Despite much public discussion of a ‘crisis’ of the welfare state, change has been mainlymarginal. Esping-Andersen (1990, 1999, 2002 et al.) distinguishes three broad approachesto economic and social change since the first oil shock of the 1970s.

Under what Esping-Andersen calls the social-democratic approach (broadly that in theScandinavian countries, and particularly in Sweden), policy was aimed at increasing thedemand for labour through active labour-market policies and increased public-sector employment. The problem with this approach was its cost. By the mid-1990s Swedenfaced major fiscal problems at a time of rising pressure on public jobs. Part of the responsewas a move towards wage flexibility; there was also reform to the state pension system.

The corporatist approach—that in the rest of mainland Europe—tried to reduce thesupply of labour, notably through early retirement. In many ways this is the Scandinaviansolution by a different route: instead of finding jobs, frequently in the public sector, forpeople who would otherwise be unemployed, this approach tries to open up jobs by offering early retirement, either explicitly or through the award of a disability pension.

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The cost in this case is not that of public employment but of public pensions. The approach is coming under increasing fiscal pressure.

The neo-liberal approach—broadly the Anglo-Saxon model (the UK, the USA, Australia,and New Zealand)—sought to increase the demand for labour by liberalizing labour mar-kets, not least through increased wage flexibility. This approach has two advantages: itavoids the heavy fiscal cost of the Scandinavian or mainland European arrangements;and employment growth in the Anglo-Saxon countries over the 1980s was significantlyhigher than in the rest of the OECD. The besetting problem of the approach is rising inequality and poverty, particularly among unskilled workers and single-parent house-holds. As discussed in Chapter 2, Section 6, in the later 1990s reform in both the UK andthe USA refined this approach by combining labour-market flexibility with policies of ‘activation’ based round benefit structures that gave strong labour-market incentives, together with policies aimed at improving people’s labour-market skills.

This book is primarily about what economic theory tells us about how to respond to these challenges. The resulting debates are drawn together in the concluding part of thefinal chapter.

n QUESTIONS FOR FURTHER DISCUSSION

1. What is the welfare state?

2. What are the main purposes of the welfare state?

n FURTHER READING

On the welfare state generally, see Barr (2001a,b), the latter a collection of 100 articles about thewelfare state, and, for an introduction, see Glennerster (2003a).

Titmuss (1958) attempts to define the welfare state; see also Esping-Anderson (1996b).Esping-Andersen (1996b) also gives a wide-ranging overview of the challenges facing welfare

states across a broad range of countries, including the former Communist countries, LatinAmerica, and the newly industrializing countries of East Asia. For contrasting views on the debateabout the welfare state, see Lindbeck (1997), Atkinson (1999a,b), and Neil Gilbert (2002).

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