From a Caring State to an Investing State. Stages of a Changing Welfare Model in Labour Market Policy

When defining the notion of the welfare state, Esping-Andersen did not only focus on the guarantee of social rights but also regulated the relationships between the individual (and the family), the state and the market at the same time. In this context, he clearly defined the responsibility of the state in securing the basic welfare of its citizens and in ensuring that their basic needs (education, health, security and economic well-being) that are not satisfied by the market are met.

Thus, the ideal type of the welfare state, as a “caring state”, is based on the following pillars: a)

To guarantee social rights while emphasising decommodification, that is, freedom from the obligation of work

With regard to employment, the welfare states of the European Union were characterised by high employment rates and a system of labour market institutions that ensured a high degree of security for the labour force until the second half of the seventies. These included extensive social security systems that were mostly operating on a mandatory basis, granting a high level of income replacement. A further specific feature of the caring state was the protection against dismissal, support for passive and active labour market policies and the active involvement of the state in the regulation, financing and implementation of welfare/labour market programmes.

However, the “caring state” has been facing progressive economic and social challenges since the 1970s. The process of economic transformation defined by globalisation has been accompanied by social and ideological changes, which, by the mid-nineties, transformed the framework conditions for the functioning of national governments and welfare states. One of the main features of the transformation was the gradually decreasing social solidarity and the redefinition of the role of the welfare state. Instead of a “caring state” that guarantees social rights, the image of an “activating state” that expects/enforces economic and social activity and “self-care” has become increasingly accepted in politics and public thinking.

Defining the term “activating state” is quite a challenging task, as the phrase has several different meanings.

In the different ideological models, various terms have become accepted to describe more or less identical phenomena: the “enabling state” and the “workfare state” in the USA, the “work first” model in the UK, the “activating state” in Germany, etc. (Gilbert & Gilbert, 1989; Torfing, 1999; Dingeldey, 2011). This paper aims to define the term “activation” and lay down the general terminological framework of the activating state, and it is not intended to make a comparative analysis of different terms used in different countries.

Some authors (Pierson, 1998; Sonnenfeld, 2001; Butterwegge, 2015) doubt that there is an approach to the “activating state” that is in any way neutral, and they claim that activation is exclusively about the disciplining of those being affected, while the necessary solidarity with them is missing. According to these authors, activation is essentially a euphemism for repression, which makes compulsory work presentable again. Others (Lodemel & Trickey, 2000; Trube, 2003; Rueda, 2007) doubt the prospects of the “activating state” since they believe that the social model of the activating state could prove to be unsuccessful in times of massive and structural unemployment.

Despite of all the social and professional debates highlighting the risks of activation, the direction of welfare reforms has been heading towards the activating state in Europe following the second half of the 1990s, and in most countries, welfare conditional on work has superseded one of the fundamental elements of the Esping-Andersen welfare model: the provision of social security that is independent from the market. Following the millennium, “recommodification” has replaced “decommodification” as the keyword of European welfare models.

The ideological foundations of the “investing state” model can be found in the work of Giddens (1998), who initiated the revamp of the social democratic welfare model in second half of the nineties by developing the model of the “social investment state”. The objective of “third way” reforms designated to transform the welfare model is to replace the previous welfare state that mainly provides passive support with one that is built upon the activity and participation of citizens and that regards welfare expenditure as an investment rather than compensation. According to Giddens, the support of the welfare state is an investment that pays off due to the activity of participants, as over time, employment rates will increase, citizens’ self-sufficiency will improve and the level welfare dependency will be reduced. Thus, education and service systems need to be established that are able to specifically remedy the disadvantages of peripheral social groups – those with low levels of education, single mothers, individuals of disadvantaged regions, etc. – and enable labour market participation. The idea of an “investing state” presumes a strong state and extensive participation on the state's part, while the civil sector also plays a substantial role in such state. At the same time, the relation between the state and the society is also changed. The state – in order to improve its citizens’ skills and employability – starts to continuously invest, especially in education and training, but calls for the active and proactive participation of concerned citizens. As opposed to the previous social democratic model, where citizen and social rights prevailed, this model offers “no rights without responsibilities”. For this reason, it is advised to reduce the time frame and substitutive nature of passive benefits and to use active labour market policies extensively.

Advocates of the “social investment” model (Palier, 2010; Morel et al, 2012; Hemerijck, 2017) that gained attention most recently following the millennium follow the traditions established by Giddens’, but they also believe that his “social investment state” model leaves many questions unanswered, which have to be clearly answered when constructing the welfare model of the twenty-first century. One of the components of Giddens’ model that is often questioned by them is that his model is based on selective discretionary benefits that call for individual activities and opportunities instead of entitlements, and the state functions as a social investor, referring to people as “human capital”. The strictly analysed productive social policy – which primarily focuses on economic interests and profit – necessarily splits the target group and only supports those who can generate profit with little investment.

The advocates of the new model assert that “social investment” – contrary to the third way model – serves the purpose of augmenting social benefits, but does not aim to replace them. They also believe that social protection ensuring existence is the prerequisite to successful social investments (Esping-Andersen, 2002; Ferrera, 2009; Hemerijck, 2015).

The “social investment” model – as we can see – is in fact not the renaissance of the Scandinavian model or the “caring state” model. Benefits are not universal, the groups targeted by the labour market policy are mainly those peripheral groups of the labour market that can be most quickly activated, and the model does not offer a clear-cut answer as to what would happen to multiply disadvantaged groups who have lost their work capacity. The “social investment” model does not accept the idea of decommodification. Moreover, the advocates of the “social investment” model believe that proper social participation can only be achieved if (labour) market participation is fulfilled as well – i.e. avoiding welfare dependency and relying on individuals’ own achievements instead – and it does not universally guarantee the social rights identified as “third-generation rights” by Marshall (1950).

To sum up the theoretical framework of the paradigm shift of the welfare state, the most significant characteristic is the regulation of the conditions of the redistributive income that reduces the losses caused by the market. In contrast to the “caring state” welfare model that is independent from the market, and that utilises the concept of universal access, the idea of conditional welfare benefits – that are mainly conditional on work – emerged, also being referred to as “recommodification”, bringing back the citizens to work and giving a new interpretation of social rights. The small steps in the process of change obscure the most important element: the fundamental transformation of the model and the marginalisation of social rights.

This period follows directly after the era when the welfare states were at their heights. The preceding period had lasted from the 1960s to the early 1970s, during which the European countries had established active policies in reaction to insufficient labour supply, in order to ensure that well-trained workers were available to the rapidly developing industrial sectors. Thanks to the labour shortages that were the result of the dynamically developing economy, western capitalism did not develop a sizable and visible “reserve army” (Lutz, 1984, p.186), and unemployment and poverty were not widespread. However, there were many problems with the “marginalised groups” of society (Geissler, 2006, p. 201), the lowest 5% of the population.

The changes started after the 1973 and 1979 oil crises. The accelerating inflation and unexpectedly sharp rise in unemployment, as well as the appearance of long-term unemployment, were a shock to the economy, but the states continued to search for solutions in the framework of Keynesian economic policy. For a long time, it was believed that this was just a cyclical phenomenon, and the problem could be contained through an appropriate countercyclical intervention by the welfare states. Under these circumstances, most countries set the objective of “maintaining” the unemployed, so that the workforce would be able to enter into employment immediately on the primary labour market after the crisis had passed (Bonoli, 2005). To this end, and in order to stabilise purchasing power, they applied the Keynesian policy of stimulating demand. The main aim of state intervention at both the macro- and the microeconomic levels was to avoid debt crises. Changes in the economy – the decline of mining and heavy industry, and the emergence of the tertiary sector – mainly had a negative impact on men. In order to ensure the livelihood of families, unemployment benefits were introduced, and the unemployment insurance system was established in almost all countries. Since the crisis was considered to be temporary and the maintenance of purchasing power believed crucial to the operation of the economy, the evolving unemployment insurance and passive systems were rather generous, especially in countries with a conservative welfare model. The development of a high level of benefits, and especially of unemployment benefit, was also due to the fact that the trade unions – which were still strong and well-organised actors at this time – defended the positions of welfare strongly. Family support systems were strengthened, and access to services funded by the EU Structural Funds was facilitated.

With the introduction of these benefits, however, a gradual shift started from social rights acquired by contributions towards needs-based benefits financed by taxes. It was typical that in order to reduce unemployment and excess supply in the labour market, groups of inefficient workers were excluded from the job seekers. Those without professional qualifications, women, people with disabilities, young people without work experience and older people facing retirement were compensated and kept away from the labour market. Decommodification and the state-guaranteed social right were a general feature of the first period. In the short term, this method indeed seemed like a favourable solution, since it reduced unemployment and ensured purchasing power for the economy through passive income. However, there was a high price to pay, and long-term inactivity led to the development of welfare states that were expensive to maintain and in many cases unsustainable in financial terms (Gilbert & Gilbert, 1989; Pierson, 1998; Bonoli, 2005).

By the end of the first phase, the welfare state optimism of the seventies was disappearing. The ability of the welfare state to function was questioned. After experiencing the ineffectiveness of counter-cyclical state intervention attempts on Keynesian-based economic policies, decision makers turned to new solutions at the end of the period. The possibility of transforming generous unemployment insurance and passive welfare systems has been analysed and the first reforms were introduced.

See e.g. the gradual extension of the retirement age, the expansion of active labour market tools among Western European countries or the emphasis on the role of public employment in conservative welfare states (especially in West Germany) in the late 1980s.

At the beginning of the 1990s, it became clear that it would not be feasible to channel the economic and social changes through the reform programmes that had begun in the late eighties.

Despite the changes, some countries still retain the labour market relief programmes that they had used previously, such as early retirement. These include, for example, Austria.

As a result, the era has become a period of budget stabilisation and cutting of public expenditure. Neoliberal ideas received much more support than in the previous phase, and the economic stability and the primacy of market interests became dominant. The view that there is no welfare state without a stable economy became widely accepted. The welfare state itself was subjected to a serious of attacks by members of the new neoliberal school that proclaimed Hayek's (1991) principles: increasing government intervention could easily lead to welfare addiction and a totalitarian government. By the end of the decade, neoliberalism and the theory of the “negative state” had become widely accepted.

The European Commission's White Paper entitled “Growth, employment and competitiveness” (1993) also reflected the strengthening of economic interests, and the OECD Job Study (1994) also had a significant impact on the development of the welfare reforms. It was one of the prominent messages of the strategies that strong social protection would raise the cost of labour above market prices, and high wages, high taxes and the strong bargaining power of trade unions would hamper economic growth and competitiveness considerably. The strategies were predicted to launch a strong deregulatory programme, maintain low minimum wages, reduce wage costs and taxes and reform the system of unemployment benefits (Rueda, 2007).

Despite the economic and cultural differences between European countries, the changes in the area of labour market policy showed many similarities. In all countries, ensuring labour market flexibility and the activation of inactive social groups became the central theme (Giesecke, 2006).

Critics have been disputing since the appearance of the new model that dismantling workers’ rights and security would be a long-term solution for treating the symptoms of the crisis. The general spread of flexible forms of employment exacerbates social inequality, reduces purchasing power, erodes the carrier prospects of those concerned and has a negative impact on the income level of those who work in non-flexible forms of employment as well (Bothfeld et al, 2009; Butterwegge 2015).

In 1993, the German Parliament adopted the “Savings, consolidation and growth” programme

Erstes Gesetz zur Umsetzung des Spar-, Konsolidierungs- und Wachstumsprogramms (1. SKWPG und 2. SKWPG)

In the second phase of the welfare state – because of the dominant ideology, that in times of accelerating globalisation, competitiveness can only be ensured by reducing social security and downsizing the welfare system – welfare benefits provided on an insurance basis decreased, while the range of recipients of means-tested social benefits is widening. Frequent review of benefits or substitution by lower-level support has become a feature of the era, but active labour market incentives have also been steadily gaining ground (Bonoli, 2011). In the second period of the welfare transformation, the representatives of different welfare states were no longer just some instrumental elements borrow from each other, but the whole system. On the new level of the policy learning, conceptual “order” created a new “theoretical framework” to solve the problem. The “work instead of benefit” programmes were accompanied by a series of organisational, legislative and financial changes and aimed the limitation of social right of the citizens. Instead of decommodification, the “work-based” welfare model has been strengthened (conditional transfers) and the active labour market instruments have been expanded.

However, the stabilisation process initiated by neoliberal economic philosophy did not bring the desired results either in labour market policy or in stabilising public finances. This led to the strengthening of the positions of social democratic parties and leftist political forces by the mid-nineties, who began to develop a new – or emerging – economic and welfare model.

In contrast to the neoliberal trend which had dominated the political palette of the early nineties, social democratic and left-wing political forces gained leading positions in the middle and the second half of the decade. The left, represented by Tony Blair (1997–2007), Gerhard Schröder (1998–2005), Wim Kok (1994–2002), Poul Nyrup Rasmussen (1993–2001) and Lionel Jospin (1997–2002), was left with much less leeway when it came to managing the economic problems that arose in the second half of the nineties than the politicians of the “golden age of social democracy” (1945–1973). Their ambition to reform social democracy and to develop a new economic and welfare model became manifest in the “third way” experiment, the attempt to reconcile market and social interests. In this context, globalisation was interpreted as a resource and welfare expenditure as social investment. The new “left-wing realists” conducted a policy of welfare rationalisation that often surpassed even the policies of the liberal parties. These efforts are often levelled with the criticism that the dividing line between neoliberal doctrines and reformist social democratic programmes is very thin (Giesecke, 2006; Rueda, 2007; Palier, 2010).

The leeway of left-wing political forces in the second half of the decade was also influenced by international developments which were controlled by the relevant international organisations. In this regard, the EU was of utmost importance, whose role was characterised by a dichotomy during this period. On the one hand, due to the dominant political trends, the EU was open to the “third way” experiments that tried to reconcile social protection with economic growth. In this context, the area of social policy was a productive factor that was indispensable for economic development. As a result of this, and as the culmination of the Luxembourg process, new articles appeared in the Amsterdam Treaty of 1997 (Articles 125–130) in the focus of these was the principle of open coordination.

In the two key documents of the OECD in this period (Job Strategy of 1997 and The New Social Policy Agenda of 1997), the economic and social areas also were given equal weight and importance, as two interdependent areas.

In parallel to all this, the EU created the EMU (Economic and Monetary Union 1992), which specified rigorous conditions for the member states in order to achieve a stable common currency, and in this regard, it clearly represented strong neoliberal economic policy views. It was also along this approach that the “deregulation process” launched during the previous stage was carried on, limiting the role of the welfare state. In most countries, tools and resources were assigned to municipal governments, and a new labour law was legitimised which particularly supported flexible forms of employment.

These atypical forms of employment culminated in the concept of “flexicurity” as a key element of the EU Employment Strategy in the new millennium. The most influential theorist of the activation policy of this period, Giddens (1998), adopted this philosophy of activation from the Danish model and made it one of the central ideological elements of “third way” policy.

Trade unions tried to achieve greater social expenditure ratios during the budget negotiations, while promising that they would not enforce wage demands that are unacceptable to the market. It is seen as one result of the tripartite system that the social partners have agreed to make the labour market more flexible as well. Critics regard this as a complete failure of the trade unions, since in this way they have legitimised through these negotiations the workers’ deprivation of rights when flexible forms of employment were introduced (Butterwegge, 2015).

The new content of the conceptual learning “order” in the third period of the welfare transformation – “no rights without obligations” – became one of the defining “theoretical frameworks” of welfare states at the turn of the millennium. This gave fresh impetus to activation policies.

However, the changes observed in the third cycle, despite the fact that the political background was favourable, did not strengthen the welfare state in every aspect. This era, summarising intentions and implemented programmes, can be characterised as an intensive phase of reducing welfare benefits and as an age of institutional reform. Critics of the “Third Way” model – due to the decrease in passive benefits and the continued exclusion of social rights – were very small between the neoliberal doctrines and the reform social democratic programmes. Although the statements of left-wing political forces proclaimed the strengthening of the welfare state, the welfare reforms implemented did not reflect these intentions.

Around the turn of the millennium, following the loss of the left-wing parties, a straight path led to the completion of activating labour market policies.

The fourth phase of the reform process was a period of ground-breaking changes and pioneering reforms. The model of the activating state became dominant not only in liberal and conservative welfare regimes but also in the Scandinavian welfare states too (Knotz, 2018). The nature of the problems the policy should deal with, the goals of the policy, the instruments that should allow to achieve these goals and the settings of these instruments social learning shown new “order” of policy learning: the social learning. The policy paradigm, the whole system of values, that determines the attitude to the problem has changed, and the three pillars of the welfare model were endangered.

Society's attitude towards welfare recipients had changed fundamentally. When granting welfare benefits for the unemployed, it was not acquired rights that played a decisive role, but worthiness. They were no longer seen as victims of changes in the economic system and subjects of welfare compensation, nor as targets of social investments – as the theorist of “third way” policy, Giddens (1998) referred to them – but as “expenditure items” that hindered economic development and represented a burden for the welfare system.

The reform package has been well suited to the debate on self-care and the need for individual responsibility in many countries in Europe at that time (Giddens, 2001; Offe, 2003; Knuth, 2005; Wiesenthal, 2006). Most of the “out of work” social support changed into “in work” support, and the definitions of working capacity and “suitable work” were fundamentally transformed as well. They had to rely on individual performance instead of community protection, and the solidarity-based insurance systems drifted towards equivalence-based or selective discretionary benefits.

It was a defining feature of labour market policy changes after the turn of the millennium that comprehensive reform programmes were introduced which had an impact on the fundamental principles and practices of earlier labour market policy. The first in the row was the United Kingdom, even before the turn of the millennium, which introduced the New Deal programme in 1998, and was joined by Germany, with the adoption of the Hartz reforms in 2003/2004. The Netherlands also continued this process as it announced the Work and Welfare Act (WWB) also in 2004, as did Denmark with the “More people into employment” programme adopted in 2002. The common feature of the reform programmes was the “recommodification”, the linking of welfare benefits to more intensive work and the “social obligations” – mainly the obligation to participate in the production of community goods – instead of social rights.

Another significant area of change was the transformation of the institutional system,

As part of this process, so-called Job Centres were set up, which jointly dealt with clients who had formerly received unemployment and social assistance benefits (e.g. Job Centre Plus in the UK, 2002, Job Centres in Germany, 2003, and Denmark, 2007).

In the first years after the turn of the millennium, the fundamental aim of the reform of the welfare system and the reform of the employment policy was to reduce the number of unemployed and inactive people and to decrease the public expenditure related to the target group. Another important goal was to alleviate the much-criticised welfare dependency and to improve the self-sustaining ability of the target group. In contrast to the “means-test”, the “work-test” was used in the examined cycle, which focused not on social rights but on compulsory activity and individual responsibility. In the case of welfare benefits, the “accounting approach” prevailed: only “investments” (providing welfare and services) were initiated, if they could benefit from it (in return for the benefit, they waited for return) (Butterwegge, 2007). The “workfare” character of the welfare model has strengthened. All actors in society have been identified as economic actors and not citizens, and citizens have lost a lot of their citizenship status and rights.

The undesirable consequences of the “activating state” model were already evident before the 2008 economic crisis. Workfare-like labour market policy generates low income among the employed, deprives citizens of their social rights, and returns them to dependency on poorly paid jobs. It is divisive in political and social terms, weakening democracy, social capital and the possibility of inclusion. With the intensification of the dysfunctions of the “activating state”, the need for a new welfare model has been increasingly evidenced by the outbreak of the 2008 global economic crisis.

As a result of the 2008 global economic and financial crisis, the welfare reform process – started at the turn of the millennium – continued. EU governments have been constantly looking for ways to develop a model of a sustainable welfare state with adequate social protection in changed circumstances. Over the course of the reforms, the fundamental objectives – ensuring the balance of the national budget, increasing the responsibility of the citizens in ensuring their own existence, reducing the welfare dependence and increasing individual participation in the labour market – had not changed fundamentally until the end of the decade. However, it has become more evident that an approach that focuses solely on economic interests has serious economic and social risks (e.g. declining market demand, increasing poverty and social inequality, democratic deficit and radicalisation). Expert assumptions that have emphasised the need for an enhanced role of the welfare state since the turn of the millennium and the timeliness of a new welfare model have intensified. Contrary to the concept of the “third way” model as defined by Giddens (1998), social spending was not interpreted as a replacement for “social protection” or “social promotion”, but was considered to be a social investment, as a new area of action for the welfare state. Earlier criticism of the functioning of the welfare state and expert proposals for renewal the European welfare model (Ferrera et al, 2000; Esping-Andersen et al, 2002; Hemerijck & Berghman, 2004; Bonoli 2005; Morel et al, 2012) had an impact on EU welfare strategies. The change has been urged by the new types of welfare and economic risks that have intensified in the meantime (ageing society, increasing proportion of working poor, emerging labour shortages, intensifying migration processes and integration conflicts).

The “recalibration” of social policies for the consolidation of welfare states was launched by the Social Investment Package (EC, 2013), adopted by the European Commission in 2013 for the 2014–2020 planning cycle. The aim of the renewable strategy was to modernise the welfare systems of the Member States and to improve citizens’ resilience to social risks. In contrast to the decreasing role of the state in social security in previous years, the welfare state appeared in a new role, becoming an “investing state”. The “re-calibration” of the welfare state was intended to be achieved through social investment. Although the new “investing state” model continues to activate, widen the employment of citizens, it does, however, focus more on prevention, opportunities and skill development, and training; guarantees minimum wages; reduces social and income inequality; and contributes to the quality of life of citizens. Three key target groups of the strategies are the children, the youth and the women. The changing strategy is a good reflection of the current economic and social situation and new risks of the twenty-first century (Morel et al, 2012; Nolan, 2013; Hemerijck, 2013; Hemerijck, 2015).

As a result of this process, it has been introduced in some European countries, for example, the state-funded institutional system of day care for children (e.g. providing compulsory preschool spaces: Germany 2013, Hungary 2015), the Youth Guarantee Programme 2014 for young people in the EU Member States, and series of further programmes to support women's participation in the labour market.

In the post-millennium period in the mainstream labour market policy, the expectation of self-sustainability has become a priority, and in the job-creation, growth and investment-centred strategy, the primacy of market investors has become crucial instead of social right or quality of life. This is basically due to two factors: In most EU countries, the resistance of those who represent the social interests of marginalised groups in the labour market and emphasise the welfare functions of the welfare state (e.g. trade unions) has been significantly weakened after the turn of the millennium, while the positions of deregulation parties representing economic interests have strengthened (Mailand & Arnholtz, 2015). With the emergence of flexible forms of employment, low incomes have led to relatively low success rates, high levels of job turnover, not just economic crisis cycles but also new forms of employment. Workers moved in and out of these jobs, increased the proportion of those with precarious status, new social problems (precarious employment, “working poor”, erosion of skills, insufficient social security, etc.) (Bonoli, 2011; Card et al, 2017). “Social investment” is the development of people's abilities and the promotion of their social and labour market participation which is not only about individual welfare but also economic interests in order to ensure the EU's economic competitiveness. The responsibility of the welfare state in managing new social risks is strengthened, even if only for certain target groups: children, women and young people. The new ecosystem has changed after the Great Depression of 2008 could be the starting points for a new model of social learning that strengthens social rights, creates a new partnership between the state and the citizen and can contribute to the creation of a new model of the welfare state. At the same time, the “investing state” model is no longer counting the “decommodification” principle, one of the decisive elements of welfare states that emerged after World War II. It is much more attached to the market, performance-oriented and productivity-focused. The principle of distribution versus social right-based universality is the selective discretion, which also entails the risk of further exclusion of less productive social groups (Cantillon, 2011; Bengtsson, et al, 2017).

The theoretical discussions about the characteristics and operation of the “social investment” model have not yet been completed (Hemerijck, 2015; Hemerijck, 2017). In most cases, there is still a lack of clarity of the novelty, theoretical framework and peculiarities of the model, as well as a series of empirical macro data to justify efficient operation.