The State as Dynamic Actor in Corporatist Political Economies

Before the second Kok administration took office in June 1998, the social partners reached an agreement in the SER on the full privatization of the social-security implementation system, including both the intake of individual claimants and the administration of social-security provisions, as the newly formed “Purple II” Coalition claimed that the intake of claimants could not be left to market forces. In late 1998, the basic outline for the newly integrated organizational structure was presented as part of the SWI process (“Co-operation, Work, and Income”). Subsequently, the SUWI report (“Structure of the Execution of Work and Income”), officially adopted in 1999, stated that social-insurance organizations and employment boards should join forces in so-called Centers for Work and Income (CWIs). The new “Work and Income (Implementation Structure) Act,” which radically altered the way in which a number of benefit schemes are implemented, came into force on 1 January 2002. The new Act reduced the roles of the social partners, while granting more responsibility to the Ministry of Social Affairs and Employment. The Work and Income Board (RWI), with representatives from employers, employees, and local authorities, was set up to help formulate overall policy directions in the areas of work and income but lacked any real executive authority. SZW, Sociale Nota, The Hague, SDU, 2001. Like most Continental welfare states, the Dutch welfare state lacked a legacy of active labor-market policies until the early 1990s. The Dutch Public Employment Service (PES) had been a state monopoly since 1930. Since the mid-1970s, a dormant state monopoly ran job-placement offices, shunned by employers and skilled workers and overrun by the unemployed for which little could be done. Then, after long preparation, in 1991 a new tripartite employment service came into being. While the demonopolization of placement services and the tenuous combination of functional and regional decentralization represented a major break in Dutch labor-market policy, corporatist innovation in this area failed to meet expectations. A 1995 official review of the new tripartite structure, written by a commission chaired by former Minister of the Interior Van Dijk (CDA), was overwhelmingly negative. The commission argued that the new PES had failed to take charge, decentralization had gone too far, finances were poorly managed, and decision-making procedures were cumbersome and unclear. The social partners were furious about the Van Dijk commission's critique, which led the ambitious Social Democratic Minister of Social Affairs and Employment, Ad Melkert, to seek alternative solutions rather than patching up incipient corporatist arrangements. From the advent of the period of “purple” coalition governments, Melkert launched a number of labor-market policy instruments that were to remain independent of the tripartite PES. Visser and Hemerijck, op. cit. Special “activation” programs, so-called “Melkert jobs,” were designed to promote participation among low-skilled workers, women, younger workers, foreign nationals, the long-term unemployed, and others who stood poor chances of labor-market success. On the demand-side, the “jobs, jobs, and more jobs” slogan was embodied in increased support for wage moderation through reductions in employers' social contributions and greater tax incentives for workers to accept jobs, particularly at or near the minimum wage.

The introduction of the Jobseekers Employment Act (WIW) in 1998 marked a critical step in the shift in state policy focus from “active” to “activating.” Henk Spies and Rik van Berkel, “Workfare in the Netherlands--Young Unemployed People and the Jobseeker's Employment Act,” in Ivar Lodemel and Heather Trickey, eds., “An Offer You Can't Refuse”: Workfare in International Perspective (Bristol: The Policy Press 2000). Henceforth, each new WIW entrant is to undergo an assessment interview, which is officially the responsibility of the municipalities but in practice is often delegated to social-service and employment organizations. In this interview, a person's chances for employment or further education are assessed, after which an individual route to either work or social activation is sought. Participation in this scheme is obligatory for the unemployed, and a refusal can result in the withdrawal of the right to benefits. SZW, Sociale Nota, The Hague, SDU, 2001.

Since the mid-1990s, labor market flexibility has become an integral part of the new policy mix of labor-market regulation and has enjoyed significant support from the social partners. In the meantime, the political exchange logic behind wage moderation changed character. Increasingly, wage moderation was matched by lower taxes and social contributions, made possible by improved public finances and a broader tax base, so as to “grease the wheels” of corporatist concertation. In 1995 unions and employers signed the first collective agreement for temporary workers, which introduced a right of continued employment and pension insurance after four consecutive contracts or 24 months of service. The collective agreement for temporary work prepared the ground for the 1996 agreement on “Flexibility and Security” which in turn paved the way for a new Working Hours (Adjustment) Act in 2000. This measure gave part-time workers an explicit right to equal treatment in all areas negotiated by the social partners, including wages, basic social security, training and education, subsidized care provision, holiday pay, and second-tier pension rights. It is important to emphasize that the initiative for “flexicurity” came from the social partners on the basis of an innovative collective agreement, which then gained the status of law through state legislation. Together with the incremental individualization of the tax system since 1984, “flexicurity” legislation has contributed to the “normalization” of part-time employment in the Netherlands.

In the area of pensions, the purple coalition committed itself to guaranteeing the preservation of basic, public-sector pensions (governed by the AOW, or General Old Age Pension Act). Unlike that of Germany, the Dutch pension system combines a general, revenue-financed, basic pension guarantee with funded extensions of mandatory, earnings-related, occupational pensions. The government's goal was to enable public pensions to increase proportionally with earnings. Expected increases in the public financing burden resulting from demographic aging were to be dealt with through a number of measures, including efforts to increase labor-force participation (especially by limiting early-retirement schemes), lowering interest payments through public-debt reduction, the establishment of a public pension-savings fund, and a broadening of the financing of the AOW. This last goal would be achieved by fixing pension premiums at their 1997 level of 18.25%.

Anxious to defend their much-cherished authority over supplementary pensions, the social partners within the Foundation of Labor formulated their own proposals for cost-containment and the modernization of supplementary pensions. They strongly opposed a forced change in the basis of benefit calculation from final salaries to average wages. They did agree, however, to increase the coverage of supplementary pensions and modernize benefit rules in order to increase flexibility and individual choice, while controlling pension expenditures and their contribution to total labor costs. This agreement led in turn to a “covenant” between the social partners and government at the end of 1997, which, like earlier accords, was concluded under a strong “shadow of hierarchy.” Bart van Riel, Anton Hemerijck, and Jelle Visser, “Is There a Dutch Way to Pension Reform?,” in Gordon L. Clarke and Noel Whitside, eds., Pensions in the 21st Century: Re-drawing the Public-Private Divide (Oxford: Oxford University Press, 2003). This “covenant” was a compromise in which the government promised not to reduce the tax deductibility of pension premiums, in exchange for the social partners' agreement to modernize pension schemes and limit the extent to which benefits would be calculated based upon final salaries.

Despite its effectiveness in terms of economic and employment growth, the magic of governing without confessional parties and the novelty of social liberalism in Dutch politics rapidly faded in 2002, an election year. As unemployment declined to nearly 3%, tight labor-market conditions strained the unions' willingness to agree to moderate wage bargains. Even as other countries have begun to follow the Dutch example of wage-cost moderation, Dutch labor costs per-unit-product have, since 1997, been rising faster than the EU average. OECD, OECD Economic Surveys 2002: Netherlands (Paris: OECD, 2002). Most critically, the competitiveness of the Netherlands vis-a-vis Germany, its main trading partner, fell by more than 16%. In the wake of the economic downturn of 2001, these developments spurred the first increase in unemployment since 1994, and the number of jobless claims was rising by 7000 per month by late 2002. These undesirable economic effects quickly began to reverberate across the Dutch political arena. In the wake of the stock market's downward spiral and the terrorist attacks in the United States on 11 September 2001, the non-conformist, right-populist, Islamophobic politician Pim Fortuyn mobilized hidden anxieties and frustrations with the government. When, nine days before the elections, Fortuyn was murdered by a radical environmental activist, the elections of 15 May assumed an extremely emotional character, ultimately leading to a landslide victory of the List Pim Fortuyn (LPF), which won 26 new parliamentary seats to become the second largest party in Parliament. The Christian Democratic CDA returned to power with 43 seats. The “purple” coalition parties, however, were devastated, with the PvdA suffering the greatest loss (from 45 to 23 seats), the VVD declining from 38 to 24 seats, and D'66 representation in parliament halved from fourteen to seven seats. In July 2002, the VVD agreed to became the third coalition partner in a right-wing coalition with the CDA and the LPF, led by the Christian Democrat Jan-Peter Balkenende. The very short-lived Balkenende government was unable to have much of an impact in the area of economic and social policy, however. In office for only 87 days, the government fell as a result of a tussle within the populist LPF and a lack of leadership skills on the part of the young prime minister.

The German State and the Dilemmas of Corporatist Social-Protection Reform. From its inception, the post-war German Social-Market Economy was designed to support a self-regulating, virtuous circle between vibrant job growth and generous social policies, a model that worked well in the 1950s and 1960s and resisted relatively well through the 1970s and 1980s despite the economic crises of the time. Based on data taken from Fritz W. Scharpf, “Economic and Institutional Constraints of Full-Employment Strategies: Sweden, Austria, and West Germany, 1973-1982,” in Goldthorpe, ed., op. cit., 258. The chief policy-making goal before 1990 was to preserve the existing system and the social peace that it had supported by equitably dividing wealth between wages and profits and cushioning workers from the effects of (relatively rare) unemployment. In the words of Ludwig Erhard, Economics Minister in the 1950s and one of the conceptual “fathers” of the soziale Marktwirtschaft, “The restructuring of our economic order must thus create conditions such that the purchasing power associated with rapid economic growth can overcome obstacles and finally end the resentment between `poor' and `rich'.” Ludwig Erhard, Wohlstand fur Alle, ed. Wolfram Langer (Dusseldorf: Econ-Verlag, 1957), 7. Translation the authors'. Although in the late 1980s the German model began to show signs of strain, including rising social-contribution rates and increasing unemployment, it was reunification in 1990 that forced the system into full-blown crisis, as millions of poorly adapted Eastern workers entered the labor market, scores of uncompetitive Eastern firms went bankrupt, and rising economic vulnerability put intense pressure on the welfare state. As time went on, structural unemployment, pressures on social contributions, and increasing welfare expenditures came to represent serious threats to the German model's celebrated capacity for self-regulation.

In response, successive governments have undertaken initiatives designed to remedy the failures of corporatism and readjust the German political economy to new economic realities. State intervention in the German social-protection system began, somewhat tentatively, under the center-Right governments of Chancellor Helmut Kohl. Spurred on by the economic dislocations resulting from reunification, Kohl expanded social programs and labor-market schemes designed to absorb large numbers of unemployed, preserve social stability, and begin the task of adapting the Eastern workforce to a modern capitalist economy. Quickly dropping to 60% after reunification, Eastern industrial output had recovered to only 68% of Western levels by 1993, resulting in the elimination of 3.9 million jobs between 1990 and 1993. By February 1996, unemployment in the East had reached 17%, with an additional 800,000 people participating in make-work schemes. Christopher Flockton, “Economic Management and the Challenge of Reunification,” in Gordon Smith, William E. Patterson, and Stephen Padgett, eds., Developments in German Politics 2 (Durham, N.C.: Duke University Press, 1996), 214-215. By the mid-1990s, around 450,000 people were participating in federal training programs, with another 400,000 temporarily employed in temporary job schemes. As a result, as early as 1991 spending by the BA had become the largest single element of financial transfers from West to East, and by the end of 1994, the total volume of support offered by labor-market policies was actually above the level of registered unemployment. Matthias Knuth, “Active Labor Market Policy and German Unification: The Role of Employment and Training Companies,” in Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, N.Y.: Cornell University Press, 1997), 71-73.

As the 1990s wore on, it became clear both that high non-wage labor costs and exploding expenditure levels were unsustainable, while structural unemployment bore witness to the system's failure to manage adjustment in the face of strained public finances and slowed growth. In response, the current center-Left government of Chancellor Gerhard Schroder has stepped up state intervention in labor-market policy, building on the efforts of its predecessor. Authorities realized that such an approach would inevitably expose many problems, such as the unemployment “hidden” by existing BA training and make-work schemes, before it could begin to solve them. Despite the political risks, however, the government has considered the potential price of doing nothing to be greater. As one highly-placed labor-market-policy official put it, “one cannot wash one's hands without getting wet.” Interview, Eden Andreas, Bundesanstalt fur Arbeit, 18 April 2001.

Intensified state intervention grew out of a series of failed efforts to support corporatist bargaining over wages and social-policy reform. In 1995, the government created the Bundnis fur Arbeit, or “Alliance for Jobs,” a standing forum for the government and social partners jointly to develop social-policy and labor-market reforms. Revived under Schroder in 1998, the Bundnis seemed to augur a period of reinvigorated corporatist bargaining. Despite much fanfare, however, the forum produced very little in terms of tangible policy results. Neither employers (who wish above all to increase labor flexibility and limit social contributions and tax burdens) nor unions (who are more concerned with protecting the wages of their older industrial membership than promoting jobs in emerging, non-unionized sectors) demonstrated much interest in making sacrifices for the noble but less proximate goals of reducing unemployment and ensuring the viability of social protection. As a result, the institution tended to degenerate into a talking-shop. In early 2003, the government finally allowed the organization to lapse, thereby recognizing a failure that been evident for some time. Some observers went so far as to portray the Bundnis as a cartel in which unions and employers defend established interests rather than address unemployment and which the government uses to create a veneer of social dialogue. See “Der Fehler ist System: Das Bundnis fur Arbeit schafft keine Jobs,” Die Zeit 10 (1 March 2001), 1.

The failure of the Bundnis reflects the broader dilemmas faced by the German state in shaping labor-market and social policies. Because the purview for state intervention in the labor market is limited by both the principle of Tarifautonomie and the prerogatives of the tripartite Bundesanstalt fur Arbeit, or Federal Labor Office (hereinafter BA), German governments have traditionally pursued reform by promoting bargaining among the social partners rather than through imposition. A characteristic example of this strategy has involved reforms of the extensive network of early-retirement schemes. Instituted in the 1980s, these programs exploded in the 1990s, with 809,000 people receiving benefits in 1999, not including disability pensions, OECD, OECD Economic Surveys 2000-2001: Germany (Paris: OECD, 2001), 37. These policies have resulted in one of the lowest labor-market participation rates in the OECD for workers 55 and older (52.9% in 1995). See Philip Manow, “Social Insurance and the German Political Economy,” Max-Planck-Institut fur Gesellschaftsforschung Discussion Paper 97/2, November 1997, 39. and around 20% of the population aged 55-65 in the West and 40% in the East participating in related programs by 1996. Philip Manow and Eric Seils, “Adjusting Badly: The German Welfare State, Structural Change, and the Open Economy,” in Scharpf and Schmidt, eds., vol. II, op. cit., 294-295. Another 800,000 in 1999 were participating in various training and subsidized job schemes managed by the BA. See OECD, OECD Economic Surveys 2000-2001: Germany, 37. Although such policies have the politically desirable effect of reducing the unemployment rate, in which participating workers do not officially count, they are extremely expensive and have at best questionable effects on actual joblessness, since firms have little incentive to replace workers “retired” at the expense of the social-security system, Ibid., 31. particularly in strained economic circumstances.

In the wake of the post-reunification influx of unemployed Eastern workers, the federal government attempted to limit recourse to these schemes, in the process subtly assuming a degree of authority from the social partners. In particular, the government has worked within the BA to end some early-retirement programs and boost subsidies for part-time jobs for older workers with the aim of increasing their rate of exit from traditional employment while providing them with an income in the labor market. Unfortunately, this approach had the perverse effect of actually increasing the number of early retirees, since the greater availability of part-time work has enabled many older workers to compensate for the loss of income that early retirement entails. There are two categories of German early retirement programs, those for workers with “reduced capacity” to work (claims that are often specious) and benefits for those unable to find part-time work but who wish to retire from their full-time positions. Early retirees often base their claims on reduced capacity even as they continue to work part-time. Although the dire state of the Eastern economy has made curtailing these programs politically tricky, Bernard Ebbinghaus, “Any Way Out of `Exit from Work'? Reversing the Entrenched Pathways of Early Retirement,” in Scharpf and Schmidt, eds., op. cit., vol. II, 534-535. the government has continued to tighten eligibility restrictions. Christine Trampusch, “Die Bundesanstalt fur Arbeit und das Zusammenwirken zwischen Staat und Verbanden in der Arbeitsmarktpolitik von 1952 bis 2001,” Max-Planck-Institut fur Gesellschaftsforschung Working Paper 02/5, May 2002.

Recent governments have also worked to reform corporatist labor-market arrangements by promoting low-wage jobs through reimbursing employers' social contributions and granting tax exemptions to low-wage workers. Although the Kohl government made tentative moves in this direction, such efforts have gained momentum under the Schroder administration. For example, in April 1999 the government extended the obligation to pay social-security contributions to “casual” employees, or those working fewer than fifteen hours per week, while shifting public revenues to the social-security system by reimbursing the taxes and contributions of all workers making slightly more than DM630 (about ˆ320) per month. OECD, OECD Economic Surveys, 1998-1999: Germany (Paris: OECD, 1999), 85, 177. The hope was to collect social-security contributions from lower-wage workers, improve collection from the so-called Scheinselbstandige, or “supposedly self-employed” (a category often abused as a shelter from taxes and social contributions), and encourage job creation by preserving exemptions for workers earning the lowest incomes. For a discussion, see Wade Jacoby, “Institutional Transfer and Institutional Experimentation: Four Cases from Eastern Germany,” Paper presented at the workshop “Semisovereignty Revisited,” University of Birmingham, April 2002, MS, 17; and Wolfgang Streeck, “High Equality, Low Activity: The Contribution of the Social Welfare System to the Stability of the German Collective Bargaining Regime,” MS, 10-11.

In other areas of labor-market policy, the state has been able to adopt a more direct approach to creating jobs, working to compensate for the failures of corporatist wage bargaining by expanding policies of labor-market activation. While the Kohl government focused efforts in this area largely in the East, the current administration has developed similar programs across the German economy. For example, the recent Sofortprogramm zum Abbau der Jugendarbeitlosigkeit, or “Immediate Program for the Reduction of Youth Unemployment” (suggestively referred to as “JUMP”), Joblessness among workers under 25 rose significantly in the 1990s, reaching 10.4% in 1998 with 476,000 without either jobs or apprenticeship places. More alarmingly, between 1991 and 1998 the number of young applicants registered for apprenticeship slots increased from 541,790 to 796,400, while the number of available positions decreased from 830,940 to 603,900. Bundesanstalt fur Arbeit, “Ausbildung, Qualifizierung und Beschaftigung Jugendlicher,” Informationen fur die Beratungs- und Vermittlungsdieste der Bundesanstalt fur Arbeit, 2/99, 13 January 1999, 69, 72. created a wide range of training and apprenticeship measures, additional wage subsidies for firms that hire unemployed youth, and job-counseling services, devoting DM2 billion (ˆ1.02 billion) annually (of which DM600 million derives from the European Social Fund) to the goal of creating 100,000 new jobs for workers under 25. The law was intended to last twelve months but has been extended each year by agreement between the BA and the government. See Bundesanstalt fur Arbeit, “Sofortprogramm zum Abbau der Jugendarbeitlosigkeit: Zwischenergebnisse aus der Begleitforschung,” Informationen fur die Beratungs- und Vermittlungsdieste der Bundesanstalt fur Arbeit, 20/00, 17 May 2000. Whereas the BA has traditionally administered such programs with almost total autonomy, JUMP is run jointly by BA and the Labor Ministry, reflecting the same gradual centralization of authority seen elsewhere in labor-market policy. The BA claims that 43,000 successful placements were made in 1999 and that, between 1998 and 2002, 406,000 people benefited from the program. Bundesanstalt fur Arbeit, “JUMP: Das Sofortprogramm zum Abbau der Jugendarbeitlosigkeit,” special issue of Direkt: Fordern und Qualifizieren 10 (April 2000), 2; and Bundesministerium fur Arbeit und Sozialordnung, “Jump ist ein voller Erfolg,” press release, 15 February 2002.

Reflecting a similar pattern of increased activism on the part of the federal government, the Law for “Job-Activation, Qualification, Training, Investment, and Placement (Vermitteln in German), or Job-AQTIV Gesetz, has focused on reintegrating the long-term unemployed in order to shrink the number of workers on the unemployment rolls and reduce benefit expenditures. Henceforth, regional or local branches of the BA must create personalized profiles for each job seeker, offering “appropriate” job openings and providing tailored advice and counseling services. In return, the unemployed person is obligated to accept “reasonable” job offers and make a concerted effort to find work or else risk seeing his benefits suspended. The law also introduced new instruments to train and retrain workers, increased subsidies to employers to reduce non-wage labor costs and encourage hiring, and instituted additional job-creation schemes. See SPD und Bundnis 90/Die Grunen Budestagsfraktionen, “Zur Reform der Arbeitsforderung: Eckpunkte der Fraktionen SPD und Bundnis 90/Die Grunen vom 3. Juli 2001 fur ein Job-Aktivierien, Qualifizieren, Trainieren, Investieren, Vermitteln-Gesetz,” July 2001. The efficacy of this measure remains to be seen, but its contractual posture toward the unemployed--connecting the right to benefits to job-seekers' obligations--reflects a major departure from the traditional view that unemployment (and other social) benefits are “rights” paid for by years of contributions.

Furthermore, while the BA still officially manages many such schemes, the federal government has recently assumed an increased degree of authority for their financing and administration in the hopes of increasing the BA's responsiveness to worsening labor-market conditions. In 1993, for example, the government passed a law providing that the Labor Ministry would henceforth directly set the BA's annual budget. Trampusch, op. cit., 28. Previously, the government was obligated to cover the BA's annual deficits but had no authority to set its budget. By 1999, the federal government was financing nearly a third of all employment programs, traditionally financed overwhelmingly by the BA, and has steadily increased the share of resources devoted to high-priority, active policies labor-market. Uwe Blien, Ulrich Walwei, and Heinz Werner, “Labour Market Policy in Germany” (Nurnberg: Bundesanstalt fur Arbeit, 2002), 6. It has also partially shifted welfare funding from social contributions to general taxation in an effort to reduce non-wage labor costs. In 1999, for example, a new tax (the controversial Okosteuer) on environmentally “dangerous” activities and materials funded the replacement of 0.8% of annual pension contributions with federal tax monies. The tax also aimed to compensate for the loss of revenue resulting from caps on social-contribution rates implemented as part of the 2001 pension reform in order to promote job-creation and to provide a shot in the arm for social-security funds by expanding their contribution base. The 2000 tax reform, which reduced tax rates and liberalized restrictions on firms' and banks' sale of stock held in other companies, was another element of efforts to encourage investment and job growth.

In 2002, the state began to assert even greater control over the BA after it was discovered that the agency had grossly inflated job-placement statistics. The highest German administrative regulatory agency concluded that as many as 70% of cases had been incorrectly reported and that it was doubtful whether the statistics issued by the BA “can at all be used as the basis for the law-making and budgetary decisions of the Bundestag and the government.” The report found confirmation in Labor Minister Walter Riester's admission that “it cannot be excluded that workers in the labor office had an interest in falsely reporting statistics on successful job placement.” The scandal led to the resignation of BA President Bernhard Jagoda and proposals for major reforms of the BA. See “Bundesanstalt gerat immer starker ins Kreuzfeuer der Kritik,” Frankfurter Allgemeine Zeitung, 6 February 2002, 13; and “Jagoda weist Rucktrittsforderungen zuruck,” Frankfurter Allgemeine Zeitung, 7 February 2002, 13. Since March of that year, the BA has been governed by a three-person executive board appointed directly by the federal government. The following summer, the government established the “Hartz Commission,” an independent panel of experts from government ministries, employers' associations, and unions, to make recommendations for further labor-market reforms. The Commission recommended reinforcing state influence over labor-market policy, including increased federal funding for active labor-market policies, the development of state-run temporary job agencies to promote flexible employment, and further reforms of the BA's administration and employment services. See Hartz Commission, “Moderne Dienstleistungen am Arbeitsmarkt: Vorschlage der Kommission zum Abbau der Arbeitslosigkeit und zur Umstrukturierung der Bundesanstalt fur Arbeit,” August 2002. The qualified character of the Commission's tripartism could also be seen in the selection of Peter Hartz, the personnel director at Volkswagen, with which Schroder has long had business ties, rather than a board of union and employers' association leaders to direct its work. To be sure, such policies in part reflect the government's response to mounting public pressure, but they also indicate real concern about the apparent incapacity of Germany's tripartite labor-market institutions effectively to govern themselves. Less than two years after their introduction, the first round of Hartz measures seem to have had some effect, evidenced in a June 2003 reduction of 33,000 in the number of jobless with no concomitant upturn in the economy. Officials attribute this positive outcome to the government's active labor-market policies. The remaining Hartz reforms were passed in October and December 2003. See Bundesanstalt fur Arbeit, “Die Entwicklung des Arbeitsmarktes im Juni 2003,” press release, 8 July 2003; and “Something Stirs: German Unemployment Is Responding to Chancellor Schroder's Measures,” The Economist, July 26th-August 1st 2003, 48.

More recently, under the banner “Agenda 2010,” the administration has passed additional reforms which aim to promote employment, reduce non-wage labor costs, and liberalize regulations on economically-motivated layoffs and shop hours. Many of the October 2003 labor-market reforms were devised in response to the Hartz Commission's recommendations. The “Agenda 2010” program also involves proposals for health insurance, pensions, and income support. In a series of measures passed in December 2003 after weeks of negotiations between the government and opposition CDU/CSU, the length of eligibility for primary unemployment insurance (Arbeitslosengeld) was reduced to twelve months for all workers, with the exception of those older than 55, who will enjoy eighteen months of eligibility. Moreover, unemployment-assistance benefits (Arbeitslosenhilfe), paid to workers at the end of their eligibility for the more-generous unemployment insurance, will, over a two-year period, be reduced to the level of Sozialhilfe, the basic income-support program. The measures also provided for the liberalization of protections against layoffs in Germany's smallest firms and the loosening of the country's notoriously strict shop-opening laws, with the social partners in a given sector limited to a passive veto authority. In order to secure the passage of the package's labor-market measures, the government was forced to make concessions on its tax-reform proposals that significantly reduced the total size of the reduction. It also made some concessions on some of its labor-market measures, including an obligation for the long-term unemployed to accept any legal job, rather than only those that are “appropriate” to their employment history. Other parts of the package, which did not require the Bundesrat's approval, had been passed unchanged by the Bundestag in October. For a discussion, see Thibaut Madelin, “Allemagne: L'opposition impose a Schroder de serieuses concessions sur le marche du travail,” Les Echos, 16 December 2003, 5; and “Von gro?en und kleinen Reformen: Die Agenda 2010 und was aus ihr geworden ist,” Frankfurter Allgemeine Zeitung, 20 December 2003, 3. As with the government's earlier measures, with “Agenda 2010” Schroder's strategy has been willing to risk significant political capital in order to see through reforms.

Despite their relatively aggressive character, recent German measures have not resolved Germany's employment crisis. The country continues to struggle with record levels of unemployment, at 10.4% in May 2003 with 4.34 million on the official unemployment rolls, “Keine Wende auf dem Arbeitsmarkt: Aktive Arbeitsmarktpolitik hellt Statistik etwas auf,” Frankfurter Allgemeine Zeitung, 6 June 2003, 13. persistently high non-wage labor costs, and rates of economic growth that range from sluggish to non-existent. Nonetheless, the cumulative effects of early reforms under Kohl and, more significantly, the measures undertaken by the Schroder administration, are beginning to make themselves felt. In addition to the payoffs of the early Hartz reforms, the prioritization of active labor-market policy has begun to remedy some of the German labor market's most trenchant problems. Although still at alarming levels, long-term unemployment decreased between 1998 and 2000, with those without jobs for twelve months or longer shrinking from 52.6% to 51.5% of total unemployment. OECD, OECD Employment Outlook (Paris: OECD, June 2001), Statistical Appendix, 227. Efforts to promote part-time work have also begun to pay off, with the percentage of total employment represented by part-time jobs rising from 15.8% in 1997 to 17.6% in 2000. Ibid., 224. Furthermore, despite an upturn in overall unemployment, joblessness among those over 50 decreased by 6% in 2002, and the number of workers aged 16-25 removed from the rolls increased by 10% between 2001 and 2002. Bundesanstalt fur Arbeit, 2002 Annual Report (Nurnberg: BA, 2003), 8, 11.

No longer able to rely upon a system of tripartite labor-market policy-making and increasingly vulnerable to criticism of its record on employment, Schroder's government has thus gradually assumed a variety of responsibilities that formerly lay within the domain of the social partners, increased public resources devoted to the labor market, and developed a range of new policies that parallel existing programs managed by the BA. Rising joblessness and increasing pressures on social-policy financing seem to confirm the suggestion of some observers that the high-wage, high-skill, high-employment economy upon which Erhard's soziale Marktwirtschaft was founded may no longer be sustainable. For a particularly pessimistic perspective on the German economy's capacity for adjustment, see Wolfgang Streeck, “The German Economic Model: Does It Exist? Can It Survive?” in Colin Crouch and idem, eds., Political Economy of Modern Capitalism: Mapping Convergence and Diversity (London: Sage, 1997), 33-54. In any event, German corporatist labor-market institutions have clearly failed to adapt, leaving a policy vacuum that the state has begun to fill.

Recent pension reform has entailed even more direct state intervention, reflecting an erosion of the traditionally consensual rapport between the major political parties in this area and increasing strains between the state and social partners. The differences between trajectories in labor-market and pension policy result from the administrative structure of the pension system, which has long been directed by government experts--albeit in close consultation with the opposition, unions, and employers--in contrast to the tripartite administration of the labor market. Unimpeded by limitations such as Tarifautonomie, the German state has adopted a “go-it-alone” approach to pension reform, excluding unions and the opposition from the influence that they have traditionally enjoyed.

Created in 1957, the German pay-as-you-go pension system remained relatively untouched until 1989, when the Kohl administration raised the retirement age to 65, established a 0.5% per-year penalty for early and an equivalent bonus for later retirement, and slightly modified the benefit-calculation system. Passed before reunification, this relatively modest measure, which preserved an average replacement rate of 70% and involved significant concessions to the opposition SPD and the trade unions, was unable to cope with the huge additional burden of Eastern workers for whom the system assumed responsibility after 1990. When it assumed power in 1998, the new center-Left government understood that the consensual tinkering of the previous decade could no longer ensure the system's future viability. Recent state intervention has also involved efforts to control spiraling health-care costs by rebalancing corporatist arrangements. In 1989, for example, the Kohl government passed a measure that limited physicians' autonomy and introduced elements of competition and patient choice, while working within the existing corporatist framework. For details, see Susan Giamo and Philip Manow, “Welfare State Adaptation or Erosion? The Case of Health Care Reform in Britain, Germany, and the United States,” Paper presented at the American Political Science Association Annual Meeting, 28-31, Washington, D.C., August 1997.

In August 2000 Schroder's government released its pension proposals, which went far beyond Kohl's 1989 measures and contravened the preferences of the SPD's union allies. The reforms incorporated and extended a measure passed by the Christian Democrats in 1997 but quashed by the incoming administration in 1998, suggesting that increased intervention in the pension system crosses partisan lines. The initial draft envisioned a reduction in total average benefits from 70% to 64%, This actuarial figure is deceptive, since it represents the benefits of a notional worker having contributed for 45 years. Most workers' benefits would thus actually be lower. and, from this adjusted rate, an additional annual reduction of 0.3% for those retiring in or after 2011 (the disputed Ausgleichsfaktor, or “Equivalence Factor”). This provision meant that each cohort's benefits would be 0.3% lower than those of the previous year's retirees, with each individual retiree's benefits remaining constant. The measure also created a legal right to firm-level pensions and introduced caps on contribution rates and subsidies for low-wage workers' pensions. The reform's centerpiece and most controversial part, however, was the unprecedented introduction of supplemental private accounts, into which each worker would deposit up to 4% of his annual income (beginning with 0.5% in 2001 and increasing by 0.5% annually until 2008), supplemented by generous government subsidies and tax exemptions. Bundesministerium fur Arbeit und Sozialordnung, “Die Rentenreform 2000: Ein mutiger Schritt zu mehr Sicherheit” (Bonn: Bundesministerium fur Arbeit und Sozialordnung, August 2000). In addition, the government was to pay annual supplements to the system, increasing from DM8.1 billion in 2001 to DM43.7 billion by 2030. SPD und Bundnis 90/Die Grunen Bundestagsfraktionen, “Entwurf eines Gesetzes zur Reform der gesetzlichen Rentenversicherung und zur Forderung eines kapitalgedeckten Altersvorsorgevermogens,” 14 November 2000, 4.

The proposals elicited sharp protests, as women's groups, the opposition CDU/CSU, pensioners' associations, and the Left of his own party demanded major changes to the measures. In one famous incident during a congress of the moderate public-service union, the Chancellor declared in response to heckling from the audience, “It is necessary, and we are going to do it. Basta.” See “Schroder bleibt bei der Rentenreform hart: `Wir werden es machen. Basta,'” Frankfurter Allgemeine Zeitung, 6 November 2000, 1. Decrying a “privatization of social risk,” Interview, Ludger Loop, Gesellschaft fur Innovation, Beratung und Service, IG Metall, 13 March 2001. unions demanded the preservation of total average benefits at 67% the quashing of the Ausgleichsfaktor, said to disadvantage younger workers, increased state and employer support for firm-level pensions, and the abandonment of the proposal for private accounts. This last demand was the highest priority, for unions suspected that employers' exemption from contributing represented the beginning of the end for Germany's cherished system of parity financing. In the words of one union leader, “the welfare state has the task of holding society together.” Accordingly, unions feared that the partial exit of employers from pension financing would jeopardize the integrity of German society. Interview, Michael Guggemos, IG Metall Vorstand, 19 January 2001.

Declaring itself willing to discuss “the details, but not the principle” of the reform, the government adopted a multi-pronged strategy to secure the reform's passage while making the fewest possible concessions. The first aspect of this approach involved separating the reform into two laws. The first law, involving changes in the basic pension regime, was opposed by the CDU/CSU, and, to a lesser extent, by the unions. Since the German constitution makes the federal government responsible for guaranteeing social protection and because the basic pension scheme does not affect the financial burdens of the Lander, Much has been made of the Bundesrat's ability to block legislation. As the pension reform demonstrates, however, the government's control over the ways in laws are drafted and gray areas in the constitution provide flexibility in determining which laws are subject to the upper house's approval. however, the law did not need the approval of the upper house of Parliament, or Bundesrat, where the CDU had the votes to block it. As a result, the reform of the basic pension scheme, adopted by the Bundestag on 26 January 2001 and heralded by Riester as “the greatest social reform of the post-war era,'” “Riester spricht von der `gro?ten Sozialreform der Nachkriegszeit',” Frankfurter Allgemeine Zeitung, 27 January 2001, 1. incorporated almost none of the CDU's priorities.

By contrast, the second law, which created the supplemental accounts, required a majority in both houses, and in particular the votes of Berlin and Brandenburg, both of which were governed by SPD-CDU “grand coalitions.” As a result, the government could ignore neither the Lander's concerns about the increased costs that the reform would entail nor the CDU's opposition to both laws, centering on the Ausgleichsfaktor, said to deal a serious blow to “generational justice,” the law's alleged lack of consideration for families with children, and the use of federal money to subsidize pensioners below the poverty level. In part, the incoherence of these objections reflected competition among various CDU constituencies, but it also mirrored internal disorganization resulting from a major party financing scandal that broke in 1999. One CDU member actually admitted privately that his party had no coherent positions on social-policy reform. Interview, member of CDU/CSU Arbeitsgruppe Arbeit und Soziales, 15 March 2001. In navigating the law through the Bundesrat, the government employed a strategy that permitted it to preserve the law's core provisions. It agreed to delay the application of the law until 2002 in order to relieve some of the costs of implementation to the Lander, at an additional expense of DM1 billion to the federal government, The additional money was required because the Lander were already suffering decreased revenues as a result of the 2000 tax reform. This DM1 billion supplement was provided in addition to existing subsidies to the pension system, which by 2001 had risen sharply to an annual DM114 billion. and provided DM21 billion to cover administrative costs and subsidies to participating workers. This federal money and the lure of the administrative jobs that the law would require prompted Berlin and Brandenburg to support the reform. The government used a similar strategy in the case of the 2000 tax reform, for which it secured Bundesrat approval by granting federal money for infrastructure projects to Lander whose votes were needed. Even in the face of CDU and public opposition, the clever navigation of the legislative process had allowed the first major structural reform since the current pension system's inception.

In the case of pension reform, exclusion and control rather than consensus and compromise were thus the hallmarks of the government's approach. While the tripartite structure of German labor-market policy and the principle of Tarifautonomie have called for a subtle and shifting combination of incentives and intervention, significant pension reform has required a more unalloyed interventionist strategy. These policy-specific dynamics noted, the German state has played a critical role in shaping reforms in both areas, even when it has not been able alone to dictate their character. Although authorities have had to confront the constraints represented by inherited corporatist institutions, they have in some cases also been able to exploit possibilities for more unilateral action. To the extent that the German state has been able to see through policy changes, therefore, it has done so by both recognizing its limitations and working to convert institutional liabilities into assets.

Conclusion: The State and Future Prospects for Corporatist Governance

In our contribution to this volume, we have traced the experience of social-protection and labor-market reform in Germany and the Netherlands since the 1980s, emphasizing the shifting and dynamic role of the state in these two corporatist political economies. As we have shown, Staatsentlastung, or relieving the state of a share of the burden of policy-making, cannot be taken for granted, but rather requires skillful state action in order to encourage the social partners to adopt public-regarding strategies of collective action. This is particularly the case under hostile economic climates marked by fiscal austerity, slow or absent growth, structural unemployment, and intense pressures on welfare financing. When this strategy fails, inherited corporatist arrangements can become significant barriers to effective reform, prompting the state to adopt riskier strategies of corporatist disengagement or legislative imposition. As a result, the state may regain a degree of autonomy vis-a-vis the social partners in important policy areas, at the cost, however, of increased policy and administrative burdens.

As the cases of Germany and the Netherlands amply demonstrate, the particular character of state responses to corporatist failures varies significantly with both national institutional capacities and specific policy legacies. Forms of intervention can range from stimulating corporatist accords in wage-bargaining and pensions, to legislating corporatist agreements in labor-market regulation, to bypassing corporatism in labor-market policy, to the dismantling of corporatism in social-security administration. In the Netherlands, where the state is unitary but decentralized rather than federal, authorities have at times been able to intervene more directly than their German counterparts. That said, both Germany and the Netherlands have witnessed greater assertiveness on the part of state actors relative to earlier periods. At times, they have been successful in rebalancing or relaunching corporatist policy-making, while at others, they have “gone it alone” and suspended or even dismantled corporatist institutions that have failed to produce necessary reforms. While both German and Dutch policy-making have thus been vulnerable to national variants of Scharpf's “joint-decision trap,” both states have met with considerable success in overcoming this dilemma and lent renewed momentum to the reform process. In each country, these myriad of forms of state intervention have also begun to alter the character of politics and policy-making in two political economies traditionally celebrated as exemplars of gradual, consensually negotiated political-economic change.

In retrospect, the success of the “Dutch,” or “Polder Model,” is often explained as a result of the long-term compromise of the social partners over wage moderation in the 1980s and more flexible employment relations in the 1990s. In fact, the revitalization of corporatist wage bargaining in the 1980s and 1990s was prompted by a highly effective “shadow of hierarchy” that grew out of the 1970 Wage Law and was supported by a high degree of institutionalized capacity for autonomous state action. The state, for example, more or less forced the social partners into the path-breaking Wassenaar and New Course accords of 1982 and 1993. It is important to note, however, that the institutional framework of the bi- and tripartite institutions of the Foundation of Labor and Social and Economic Council did not have to be invented, but rather involved turning inherited corporatist structures to new purposes. The result was a synthesis of moderate wage increases with a high degree of flexibility at the micro-level, as well as a rather smooth interplay among wage setting, monetary and fiscal policy, economic growth, and moderate inflation. Since Wassenaar, however, there has been limited political intervention in wage setting. Although the Minister of Social Affairs and Employment has the authority to declare (parts of) collective bargaining legally binding (or not) for all workers and employers in a certain branch of industry, in practice extension is routinely applied. In other words, the Dutch state has still considerable power in industrial relations but has increasingly exercised this power indirectly.