Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: The modern welfare state and full-employment policies have common intellectual roots. In the 1930s and 1940s, Keynesian visions of full employment and Beveridge-inspired ideas of a universal welfare state grew up in about the same intellectual environment. Both ideas emphasized a government’s responsibility for the welfare of its citizens. The two ideas were also projected by approximately the same individuals.

From the very beginning, welfare-state arrangements and full-employment policies were regarded as strongly complementary. Both were designed to improve the economic security of the individual, although welfare-state arrangements deal largely with life-cycle considerations, while full-employment policies focus on the situation at a given point in time. They were also believed to support each other. Not only would high aggregate employment help finance the welfare state by boosting the tax base and keeping down the number of beneficiaries. A reverse causation was also assumed: various welfare-state arrangements were often asserted to contribute to full employment. Hence a virtuous circle was postulated between the welfare state and full employment. Governments also constructed specific institutional arrangements and regulations that were explicitly designed to strengthen the consistency and complementarity between the welfare state and full-employment policies.

Actual economic and social developments during the first decades after World War II seemed to support the view of a harmonious, indeed symbiotic,relation between the welfare state and full-employment policies. It turned out to be possible to combine full employment with high economic security and a gradually more even distribution of income, which are important ambitions of the welfare state.

Exactly what, then, were the asserted complementarities between the welfare state and full-employment policies, and why do these complementarities look less convincing today? I would like to organize the discussion of these questions around four issues: (i) the influence of welfare-state arrangements on short-term macroeconomic stability; (ii) the long-term incentive effects of welfare-state arrangements, and related taxes, on aggregate employment and unemployment; (iii)the role of explicit administrative measures to boost aggregate employment in the long run; and (iv) the employment consequences of various labor-market regulations designed to fulfill much the same purposes as traditional welfare-state arrangements. The paper concludes with (v) a discussion, using a simple macro model, of how various welfare-state arrangements affect the contemporary employment crisis in Western Europe.

Keywords: Full Employment; Welfare State

JEL-codes: E24; I30

22 pages, October 29, 1997

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