Welfare States: Choices and Challenges

WELFARE STATES Although all advanced industrial democracies have welfare states, there are significant differences in the types of welfare states around the world. This differences reflect the historical experience of different countries and the relative strength and weaknesses of different economic sectors. This brief summary will present the threesector model of the political economy, discuss the historical circumstances of welfare states origins in the late 19th and early 20th centuries, and conclude by analyzing why different welfare states are responding differently to the pressures of globalization.

1.1 THREE SECTOR MODEL It is common in economics to describe economies as consisting of three basic factors of production: land, labor, and capital. As a factors of production, “Land” are natural resources, real estate, and quasi-rents, “Labor” is the time and efforts of workers, and “Capital” are tools, including money, needed for production. Any economic product can be thought of as different proportions of these factors. For example, a tupperware container is a combination of the materials the make up the plastic, the labor of the factory workers to make and package the container, and the machines and money to accomplish its production. They also represent political interests. Labor represents the interest of wageearners. Land is the interests of farmers and rentiers including landlords, bondholders, and primary economic sectors such as agriculture and mining. Capital stands in for the interests of the investing class, including banks but also the owners of firms. At any time, one group may be politically powerful and able to pursue policies that benefit them, sometimes to the disadvantage of other groups.

1.2 SOCIAL WELFARE & SOCIAL INSURANCE Social welfare is mainly social insurance against the risk individuals face in a modern economy. Farmers and miners face the natural risks of bad harvests and fluctuating commodity prices. Workers face the risk of disability and unemployment, the need to attend to the care and raising of their children, and changes in the cost of living. Capitalists face the risks of competition from domestic and foreign firms, technological change, and runs on leveraged assets (bank runs). Welfare states provide insurance against these risks to facilitate the smooth operation of the economy. In the United States, price supports for agricultural products, subsidies for mineral discovery and extraction, and guarantees for bond and pensions insure the major risks of landed and rentier interests. For workers, unemployment insurance, Social Security, education and training programs, tax subsidies for employer-based health insurance, and maternity leave policies protect against many of the risks facing workers and their families. For investors and entrepreneurs, organizations like the FDIC insure deposits against bank runs, trade policies grant protection against unfair trade practices, and various regulatory agencies protect businesses against unfair trade or business practices by their competitors. In addition, interventions in financial markets to preserve asset prices also provide insurance against inflationary and deflationary risks.

2.0 TYPES OF WELFARE STATES Although classifications vary, scholars generally divide welfare states into three broad categories: liberal, corporatist, and social democratic. Liberal states attempt to provide social welfare mostly through market1

based policies, such as tax incentives, and the promotion of workforce skills, such as broad-based education and job retraining programs. In addition, welfare policies tend to be means-tested, meaning that services, such as Medicaid and unemployment insurance, are made available on a need-based criteria. Corporatist welfare states operate by giving organized groups, such as labor unions, agricultural cooperatives and trade associations, guaranteed representation and control over policies that affect their welfare that allow them to negotiate collectively for their groups interests. For example, German works councils provide labor representation on the corporate boards of companies that employ their workers. Social Democratic welfare states aim at providing a minimum level of social welfare for all citizens through government programs with universal access. For example, they may provide longer maternity-leave, subsidized public and college education, and a guaranteed minimum and health insurance. They tend to be high tax states to support these public programs.

2.1 LIBERAL WELFARE STATES “Liberal” does not mean political left as it has come to mean in United States, but refers to its older meaning when it was associated with limited and small government and an appreciation for market-based policies. Liberal welfare states include most of the English-speaking advanced industrial economies including the United States, Canada, Australia, New Zealand and the UK. As stated above, their welfare policies tend to be means-tested and market-based.

Unemployment insurance and income maintenance programs provide a smaller share of income lost than other welfare states and there is little intervention in labor markets or labor protections compared to other welfare states. Social security is financed by a flat-tax on wage income. Many welfare programs work through tax incentives such as the American Earned Income Tax Credit (EITC) or tax subsidies/ exemptions to employers to provide health insurance.

There is little guaranteed maternity leave or public programs to assist families with child-care. The aim of social policy in Liberal Welfare States is to maintain fluid and flexible labor markets and to maximized social mobility and economic opportunity. As a result, they are often characterized by lower unemployment rates, lower tax rates, and less government regulation than other welfare state systems.

LIBERAL FEATURES: Labour market: - little active labor market policy (<0,8% GDP)* - moderate labor participation rate women (65-74%)* - large share of employment in wholesale and retail (>22%) - large share of employment in financial services (>11%) Disability: - Social Risk: high threshold (>80%)* Funding: - no tax exemptions on labor (at the wage level of an average production worker) - low yield of taxes and social security contributions (<38%) - no or low employer contribution to social security (max. 8%) - lower marginal tax rate single persons (<43%) - lower marginal tax rate double earners (<42%) Unemployment and social assistance: - short duration of earnings-related unemployment insurance (non means-tested) (max. 1 year) - low net replacement rate at the start of unemployment for wage of 2/3 average production worker (60-69%) - low net replacement rate at the start of unemployment for wage of average production worker (60-69%) - low net replacement rate after 5 years unemployment, single persons (<39%) - low net replacement rate after 5 years unemployment, couples without children (<50%) - high share of means-tested social assistance in total social security spending (>15%) Old age pensions: - public benefits are partially or completely means-tested Surviving dependants’ pensions: - public insurance widows: low flat rate benefit - public benefits are partially or completely means-tested Costs of children: - low level of public provisions - low average family allowances (< €140) - family allowance income-related or means-tested - relatively low family allowance for non-poor single parent families Leave facilities: - low level of pregnancy benefit (<70% of earnings) - no pregnancy leave for all employed women

Adapted from: deBeer, Vrooman, & Wildeboer Schut 2001

2.2 CORPORATIST WELFARE STATES The countries of central and Southern Europe -- Germany, France, Italy, Belgium and Spain -- make up the bulk of the Corporatist welfare states, although Japan may also be included in this group. The central feature of Corporatist systems is the explicit recognition of social groups (as opposed to individuals) in decision making and in the provision of welfare programs. As noted above, agricultural and fishing cooperatives, trade associations, and labor unions are granted a “seat at the table” to negotiate policies (public and private) that impact their welfare or expose them to greater economic risk. In addition, theyoften share responsibility with 2

CORPORATIST FEATURES: Labor market: - moderate active labor market policy (0.5 - 0.8% GDP)* - low labor participation rate of women aged 25-54 (<65%)* - low labor participation rate of men aged 55-64 <60%) - low labor participation rate of men aged 65+ (<5%) - high coverage of collective labor agreements (>90%) - low share of employment in services sector (<65%) Disability: - Social Risk: coverage restricted to (certain) employees - Social Risk: moderate threshold (65-79%)* - Social Risk: wage related benefits - Professional risk: full wage compensation Funding: - largely financed by contributions of employers/employees (>50%) - no tax allowances for non-working spouses Surviving dependants pensions: - no collective widow insurance for all inhabitants* Occupationalism: - frequent arrangements for particular occupational groups - high level of social protection for civil servants (>$500 per capita) Costs of children: - relatively high family allowances for non-poor couples - relatively low family allowances for poor single parent families - high tax allowance for children Leave facilities: - long duration of parental, pregnancy, and childbirth leave (incl. nonpaid period > 1.5 year) Adapted from: deBeer, Vrooman, & Wildeboer Schut 2001

the government for providing welfare services. For example, the Catholic Church often plays a large and official role in education and welfare in many European countries. Labor unions are active in providing job training, apprenticeships, and labor quality. Business trade associations take responsibility for regulating their members and supporting ailing firms. The role of the government is mainly to mediate between groups with competing interests and serve as a guarantor to agreements negotiated between them. In addition, since many programs and functions are performed by private or semi-public entities, much of the cost of these programs does not manifest in public budgets. The best example of this are Germanyâ&#x20AC;&#x2122;s Bismarck â&#x20AC;&#x153;social insuranceâ&#x20AC;? model for healthcare insurance. The government requires everyone to purchase insurance, but the insurance and healthcare services are provided privately, while the government regulates the cost and quality of the services provided and supports those who are unable to pay for their own coverage. In addition, the government lowers costs to producers by subsidizing education costs for socially beneficial occupations, such as medicine.

2.3 SOCIAL DEMOCRATIC WELFARE STATES The core of the Social Democratic welfare states is Scandinavia, including Denmark, Sweden, Finland and Norway. The central features of a Social Democratic system are the commitment to universality -- everyone is eligible to benefit -- comprehensiveness, and the aim to provide a high basic level of well-being and income to all.

They have high levels of taxation supported by a broad social consensus, including business groups, to generous and universal social provisions. Programs tend to be administered through public agencies. Like the Liberal systems, but unlike the Corporatist ones, the Social Democratic Welfare states provide services to individual citizens, not as members of defined social groups. This frees them from dependence on membership in social groups, while the universality and comprehensiveness of the government programs remove the stigma of using public resources. In addition, the government provision of basic social welfare functions makes them less sensitive to the economic fortunes of individual economic sectors.

SOCIAL-DEMOCRATIC FEATURES Labor market: - intensive active labor market policy (>1.1 % BNP)* - high labor participation rate of women aged 25-54 (>75%)* - large share of employment in health/social work (26-30%) - no statutory minimum wage Disability: - Social Risk: low threshold (<65%)* Unemployment and social assistance: - high net replacement rate after 5 years unempl., families with children (>71%) - high net replacement rate after 5 years unempl., single parent families (>69%) Funding: - high marginal tax rate breadwinners (62-64%) - high average rate of income tax and social security contributions (>26%) Old age pensions: - high minimum level of public benefits non-ex-employees - high coverage of earnings-related occupational pension schemes (100%) Surviving dependents pensions: - public insurance widows: high flat rate benefit* - no separate public insurance for widows of former employees Costs of children: - relatively low family allowance poor couples with children Leave facilities: - long duration of earnings-related parental, pregnancy, and childbirth leave (>26 weeks) Adapted from: deBeer, Vrooman, & Wildeboer Schut 2001

3.0 POLITICO-ECONOMIC ORIGINS OF WELFARE STATES Welfare states emerged from social contracts forged during the late 19th and early 20th centuries. While all developed countries reacted to the twin developments of democratization and industrialization, the balance of interests differed from country to country. This section identifies these differences and shows how they influenced the development of different welfare states. The discussion will be based on the three-factor model 3

presented earlier. At any time, one of the three factors is relatively scarce compared to the other two, allowing it to extract a higher return for its contribution at the expense of the other factors. In response, the other two factors mobilize politically to balance the political influence and economic power of the scarce factor. This cleavage defines the axis of political conflict with implications for the form of welfare state.

3.1 LIBERAL ORIGINS In the United States, the scarce factor was capital. Even in the late 19th century, land was plentiful relative to the human and financial resources of the country. Unlike Europe, there was not landed aristocracy that controlled the land. Labor was unorganized and low-skilled relative to its European counterparts. Open immigration further added to the labor supply. Capital, however, was in scarce supply, with the House of Morgan funneling European capital into American businesses. In short, capital was scarce compared to land and labor and the political battles were fought mostly between the Populist coalition of farmers in the South and West with industrial workers in the large urban centers and the financial and corporate interests of the Northeast and Midwest. This political division organized politics in the US along economic lines posing the “haves” versus the “have-nots.” It also enshrined laissez-faire and small government as governing principles, so that even when the New Deal passed a raft of social legislation, it was never as generous or comprehensive as its European counterparts. This coalition also yoked labor to farmers and Progressive reformers who shared a somewhat different social policy vision and precluded the emergence of labor as an independent and organized political force. Social policies developed piecemeal, starting with pensions for Union War veterans, and allowed the rise of private insurance provision through fraternal organizations and mutual aid societies.

3.2 CORPORATIST ORIGINS In central Europe, the scarce factor was labor, or more specifically, skilled labor. Labor was highly organized and radicalized in the industrial cores of many European countries. The unification of Germany was forged under Bismarck’s coalition of “iron and rye” -- Ruhr industrialists (Capital) and Prussian Junkers (Land). In Japan, the Meiji Restoration was accomplished by an alliance of Osaka merchants (Capital) and Samurai / Imperial landlords (Land). In Italy, Piedmont-Lombard industrialists teamed up with Southern agricultural landlords held power during this period. To a lesser extent, these political coalitions appeared in Latin America’s Southern Cone (Argentina & Brazil) with similar consequences. These political constellations gave social policy a decidedly conservative character. Many social welfare functions were left in the hands of religious and family institutions. It is also not accidental that many of these regimes lapsed into Fascism during the interwar period. However, they all faced powerful and rising trade-union movements and worker’s parties that challenged the status quo. Many of the social reforms, such as Bismarck’s social insurance (mimicked by Giolitti in Italy and Hara Kei in Japan) policies, were passed as measures by conservative 4

political elites to co-opt or appease political pressures created by these movements. Division between the political and revolutionary wings of Socialist movements meant that they expanded their influence in both the workplace and the public sphere. As labor evolved into “status quo” political force, they were often incorporated into shared power arrangements that gave labor organizations a voice and role in political decisions, but also preserved prerogatives and interests of conservative social and economic groups.

3.3 SOCIAL DEMOCRATIC ORIGINS In the countries that developed into Social Democratic welfare states, the scarce capital was often land. As small island nations (England) or near-Arctic climates (Scandinavia), arable land was in short supply, especially after the population explosion attending the onset of the Industrial Revolution. This land was often in the control of aristocratic landlords who lived off the agricultural rents of their estates. These nobles often had disproportionate political power and influence and used it to maintain their position and wealth by pursuing protectionist policies against agricultural products. The debates over the English Corn Laws is an example of these conflicts. High food prices raise the living costs of industrial workers, created wage pressures that reduced the profit for new industrial capitalists and entrepreneurs. Therefore, employers and workers found common cause in opposing the interests of the landed elites. The alliance between the Labour Party and the more bourgeois Liberal Party prior to WWI showed the continued relationship. The unity of “good government” reformers from middle-class and professional backgrounds combined with working class votes resulted in social policies that were more comprehensive, universal and publically administered than their Liberal or Corporatist counterparts. Although Labour was a pillar of the governing coalition, it was a junior partner, and not the independent and institutionalized agent of workers as it was on the European continent.

While tensions remained between the interests of employers and workers, the political environment often meant that employer concerns were incorporated into the design of policies and the adversarial relationship found in other countries is muted. A key aspect of Social Democratic welfare states is that the policies are a statement of social solidarity, a political commitment that all citizens, regardless of merit or means, is entitled to material resources required for a decent life. The passage of the British NHS after WWII reflected the sense of solidarity created by the shared sacrifice in the war effort. Similarly, the passage of welfare policies in Scandinavia was intended to ameliorate underlying social conflicts. The “labor peace” and business-labor collaboration in the WWII war effort in the US also laid the ground for social legislation. As a result, the value of welfare state policies goes beyond its impact on economic outcomes alone.

4.0 EVALUATING WELFARE STATES: EQUITY vs. EFFICIENCY How well do different types of welfare states perform? It is common to answer this question by looking at the equity (equality) vs. efficiency tradeoff. We can either have economic efficient policies that promote growth and lower unemployment or we can opt for policies that address social ills and inequalities at the cost of economic growth. Efficiency can be gauged by looking at measures of income per capita, economic growth, unemployment and exports (as a measure of international competitiveness). Equity can be measured by examining economic inequality and measures of social ills such as poverty. Sociologist Lane Kenworthy notes that there are three competing hypotheses about the relationship between equality and efficiency, that can be 5

shown in the following diagrams

In the first, there is a direct tradeoff between efficiency and equality: you can have efficiency or you can have equality, but you cannot have both. The conventional wisdom is that Social Democratic welfare states score high on equality, Liberal welfare states score high on efficiency and Corporatist ones fall somewhere in between on both criteria. The second diagram argues that, except at high levels of equality, it has no impact on economic efficiency. Different welfare states may be efficient through different means: Liberal ones through their reliance on market incentives, Corporatist systems by their ability to make “grand bargains” between competing interests and Social Democratic ones by virtue of greater social solidarity and uniformity. However, the main point is that the choice of welfare state policies is indifferent to economics and is primarily a political and social statement of normative values. The third diagram shows the “middle class” thesis that argues both high and low levels of economic inequality are inconsistent with economic efficiency and growth. The best situation is a large middle class with small groups of rich and poor reflecting their merits. A large, relatively affluent middle class is also likely to be politically and economically moderate, balancing competing social and economic priorities. There is evidence for all these positions. The chart below shows the performance of individual countries on a range of economic variables. Simple averages for the welfare state type are in bold italics.

Adapted from Pontusson (2006)

Gini Coefficient Disposable Income

GDP/Capita US$ at PPP (2002)

Real GDP/Capita Growth 1960-1980

Real GDP/Capita Growth 1980-2000

Exports Percent of GDP

Average Unemployment Rate (2000-2003)

Annual Employment Growth 1990-2002

LIBERAL

.330

29,483

2.5

2.3

40.0

5.6

1.7

Australia

.311

28,068

2.5

1.9

22.9

6.4

1.5

Canada

.302

30,303

3.2

1.5

45.9

7.3

1.4

Ireland

.325

32,646

3.5

4.7

94.9

4.3

3.5

21,783

1.4

1.3

36.7

5.3

2.0

New Zealand UK

.345

27,976

2.0

2.0

28.1

5.1

0.5

USA

.368

36,121

2.1

2.1

11.2

5.1

1.2

CORPORATIST

.279

27,752

3.3

1.7

48.7

6.3

0.7

Austria

.266

28,872

3.7

2.0

50.1

4.0

0.9

Belgium

.250

27,716

3.6

2.0

86.3

7.3

0.5

Germany

.264

25,947

3.1

1.6

33.7

8.4

-0.2

Netherlands

.248

29,009

2.9

1.9

67.2

3.0

2.0

Switzerland

.307

29,940

2.1

1.0

46.4

3.2

0.7

France

.288

27,217

3.5

1.6

28.7

9.0

0.6

Italy

.333

25,568

4.0

1.8

28.4

9.4

0.6

SOC. DEMO.

.247

29,624

3.2

2.1

45.1

5.8

0.2

Denmark

.236

29,328

2.7

1.7

43.8

4.8

0.2

Finland

.247

26,478

3.7

2.4

42.9

9.3

-0.4

Norway

.251

35,482

3.7

2.5

46.6

3.9

1.1

Sweden

.252

27,209

2.7

1.6

47.2

5.3

-0.5

6

The next two charts show the impact on welfare state policies on reducing income equality. The chart to the left shows the contribution made to reducing inequality from taxes (pre- and post-tax incomes) and transfer payments. The chart to the right shows the level of inequality based on market outcomes and after taxation.

The length of the line is the implied impact of welfare state policies on income inequality and the progressivity of the tax code.

4.1 CHANGING VIEWS OF WELFARE STATES Over time, the expert consensus on the relative merits of different welfare state systems has changed dramatically. In the late 1970s, with the US and UK mired in stagflation, many of the Corporatist welfare states (including Japan) seemed to be more successful due to their ability to moderate wage pressures and respond to international competition better due to their ability to negotiate “grand bargains” between labor and business.

In the mid-1990s, with Sweden in the recent aftermath of bank bailouts, Germany sluggish due to their efforts to integrate the economically backward East Germany into the West and high unemployment throughout the Eurozone had many Europeans questioning the desirability of their social and labor market policies. In addition, the prolonged slump in the 1990s in the relatively generous welfare state of Canada supported this assessment, along with the post-bubble Japanese economy’s malaise. At the same time, the US seemed to booming with low unemployment and rapid job growth combined with policies to reform welfare, reduce budget deficits, and liberalize trade and capital markets seemed to be the model economy. The US’ success convinced several of Europe’s countries, notably Ireland, Iceland and the Baltic States, to adopt their own versions of America’s “neo-liberal” policies, while some Social Democratic countries to “right-size” their generous social welfare policies and reduce tax burdens.

If we scan the landscape today in the wake of the 2008 global financial crisis, we may take a different perspective. The Social Democratic welfare states have weathered the crisis quite well, despite the problems of the Eurozone’s periphery. While the US has not been the worst performer, renewed concerns about growing inequality, slowing economic mobility, high unemployment, growing public debt, and rising poverty call into question many of the reputed advantages of the American model. Meanwhile, most of continental Europe is facing critical choices about whether to revise or reaffirm their social contract. This review of history is not intended to show that any past judgment was right or wrong, but should remind us to be circumspect in our judgments about the future of these policies in all countries.

One should also be careful about one-to-one comparisons across welfare states because different countries accomplish the same social welfare goals using different methods, policies and institutions. This is especially 7

important when looking at their impact of public finances. A country that relies heavily on tax expenditures and the tax code, like the United States, may understate the total cost of social welfare policies. They are invisible because they are only foregone revenue with respect to budget balances. The prime examples of this are the EITC and the exemption of employer-based health insurance from taxation. In addition, while not ordinarily counted as a “welfare” policy, education expenditures promote economic mobility. If public spending on education is included, the size of the American welfare state rivals Europe’s largest. Another example with the Corporatist regimes is that many social welfare functions are delegated to private or semipublic entities and do not show up on the public fisc. A prominent example is Germany’s “job-sharing” program that encourages workers to work less to maintain higher employment. Part of the cost is carried by private actors and so its real cost is not reflected in public budgets. When making comparisons, one should strive to make “apples-to-apples” comparisons as much as possible.

5.0 THE FUTURE OF THE WELFARE STATE Contemporary welfare states face four major challenges in the near future to their sustainability and effectiveness. Since they differ in how they provide and finance social welfare functions, these challenges affect different systems differently. However, all welfare states face choices about their economic viability and the nature of their social contract. This final section will describe the four major challenges to the welfare state and discuss how they may interact with different welfare states.

The Globalization Challenge. One of the great economic risks is foreign competition and exposure to foreign trade has historically been one of the risks that social insurance and welfare policies protect their citizens against. Countries with more exposure to international markets tend to have higher social spending than their less exposed counterparts. However, the rise of the international marketplace through developments in transportation and communication infrastructure combined with the expansion of free trade has put workers in developed nations in direct competition with cheaper labor in developing countries. As a result, critics argue that developed nations must work to reduce labor costs either by lowering wage or eliminating benefits. The chart below shows the average hourly compensation for countries around the world. Many workers in Europe’s Social Democratic and Corporatist welfare states enjoy some of the highest hourly compensation levels in the world. In addition, some hold that labor markets should be deregulated and workers’ protection to make companies more flexible to deal with international competition. This may present a particular problem for welfare states that rely heavily on employers to provide or finance the cost of social welfare, such as private pensions, healthcare, and health, safety, and labor market regulations. This may pose a particular problem to large Corporatist welfare states because it may undermine the power and membership of labor unions. If labor unions weaken, they may become less effective advocates for policies protecting workers, a critical function in Corporatist systems. In small economies, employers and workers may be “in the same boat” with respect to foreign competition and corporatist institutions may help them realize their mutual self interest. However, in larger economies, global competition with low cost labor may undermine unions where employers and workers may have less of a common interest. The “luxury” of the welfare state might not survive global competition.

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The Tax Arbitrage Challenge.

One consequence of globalization is greater capital mobility for firms and high wealth individuals. In the past, they may have had no alternative to accepting high progressive tax rates on corporate and individual income.

However, greater capital mobility allows corporations and individuals to pursue policies of tax avoidance by moving capital to low tax jurisdictions. This create two problems for welfare state policies. First, high tax welfare states, such as the Social Democratic welfare states of Scandinavia, may be less able to finance welfare policies that operate through public budgets because they may face difficulties collecting taxes at the highest marginal rates. Corporations may choose to relocate production and jobs to lower tax locales and individuals may shield their wealth in offshore tax havens, depriving governments of revenue. Second, the mobility of capital may shift the burden of taxation from capital to labor, taking advantage of the lower mobility of labor relative to capital. This means that workers may be net losers because even if they maintain their social welfare benefits, they will be doing so at a higher individual cost to themselves. Welfare states that are less reliant on tax revenues because they operate through regulation or provision through private or semi-public institutions may be less affected by this challenge.

The Demographic Challenge. Most every advanced industrial society faces the challenge of aging societies. As some people live longer and birth rates fall further below replacement, the population will age. The key statistic here is the dependency ratio, which is the number of individuals (mostly the elderly and the young) who depend on the working age population to support them, often through social welfare policies. As the graph to the right shows, the dependency ratio for most developed nations is expected to double over the next half century. Since social programs for the aged depend on taxing incomes of individuals in the workforce, a higher dependency ratio may make financing these programs in the future difficult. Countries may decide to reduce the generosity of these programs, raise retirement ages to reduce payouts, or raise taxes on current workers, creating disincentives for work. One possible solution to the demographic challenge is to liberalize immigration policies to allow more young immigrants from developing nations to work legally in advanced economies and thereby increasing the size of the workforce. However, immigrant workers might undercut labor unions and workerâ&#x20AC;&#x2122;s wages. Some European welfare states have responded to this problem by implementing pro-natalist policies, such as longer maternity leaves, income maintenance, and childcare initiatives that provide incentives to bear and raise more children and slow the aging of population.

The Immigration Challenge. The final challenge to European welfare states is the impact that immigration may 9

portend for social solidarity necessary to support welfare states. Although some countries are encouraging migration to address the demographic challenge, increased immigration and larger foreign-born populations may have two negative impacts on social welfare programs. First, many welfare states have enjoyed homogeneous populations, which facilitate redistributive welfare programs because of the perception that the recipients are “people just like me” makes them more acceptable and legitimate in the public’s eye.

Second, there is the -- often incorrect -- perception that immigrants “free ride” and benefit from social welfare systems without making a fair contribution to its maintenance. These views may make welfare programs less palatable and sustainable politically. This development may prove to be a particularly thorny problem for the Scandinavian welfare states both due to their generosity, their pride in their social tolerance, and their relatively homogeneous societies until present. As the recent Breivik massacre in Norway suggests, these tensions may undermine the social and political consensus necessary to sustain welfare state programs and institutions.

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