Welfare helps market fare well

Most people wouldn’t walk a tightrope unless they knew there was a safety net below.

So it is for young people considering going through a long period of training to learn a particular trade. Without the social safety net, they may not do it because the risks – that their job won’t work out, that their company will go under, or that their field will fizzle – are just too great. Instead, they’ll learn general skills useful in a wide variety of jobs.

So says comparative political economist Torben Iversen, who was promoted to professor of government at Harvard last July. Iversen, called “the outstanding comparative political economist of his generation” by Minda de Gunzburg Center for European Studies Director Peter A. Hall, believes the extent and nature of the welfare state help determine the risks workers are willing to take in the job market.

That is a central theme of Iversen’s recent research, that rather than being a mere tool for redistribution of wealth or an enemy of the free market, the welfare state can act as an ally to the market by encouraging workers to take risks and upgrade their skills.

“My argument is that if you want people to invest heavily in skills very specific to a particular field or occupation, they expose themselves to risk,” Iversen said. “I think that the welfare state – broadly conceived – helps alleviate the risk associated with developing new skills.”

The idea is at the center of Iversen’s forthcoming book, “Welfare and Production,” which he plans to present at a workshop in May. The book looks at the oft-studied welfare state, but takes a new look at the link between a society’s social protections and its system of production. Iversen expects the volume to be in print sometime next year.

Iversen says Europe and the United States present two interesting examples of the link between social protections and the state of an economy. In Europe’s more highly developed welfare states, with generous unemployment insurance, workers tend to be much more specialized than in the United States, where more general skills are favored.

The general skills in the United States, he said, are a workers’ own insurance against getting laid off, by ensuring he or she can get rehired fairly quickly, and are a consequence of the relatively stingy welfare state here.

“If you don’t have that protection, you get good general skills so you can move around and get a job anywhere,” Iversen said. “That’s what I think is going on in the United States. The more you get people to invest in general skills, the less protection they need and demand, the less protection they get and the smaller the welfare state.”

Iversen said that fact is reflected in the standards employers use to evaluate prospective employees. A worker who has had several different jobs is considered a good prospect here because he or she has had a lot of experience. In Europe, the same prospective employee would be viewed as someone an employer couldn’t rely upon, Iversen said.

In looking at their roots, Iversen said the more narrowly skilled European labor market could be a result of the old European craft system, where workers traditionally had more specific skills. The extent of the social welfare system could have resulted from the post-World War II deindustrialization and shift to service-based economies. In Europe, Iversen said, the change was much more abrupt than here in the United States, perhaps creating a greater demand for security in European societies.

The end result, he said, is the current reality where U.S. companies often invest in European companies in order to take advantage of very specific skills, while European companies do research and development work on this side of the Atlantic because of the abundance of highly educated, highly mobile engineers willing to work project by project.

The social welfare choices we’ve made aren’t without costs. In the United States, lower levels of wage regulation have resulted in higher employment, but also in huge disparities in wages between the highest- and lowest-paid workers. In Europe, wage inequities are narrower, but unemployment can be an intransigent problem, with the lowest-paid workers making more than their U.S. counterparts. The result is that Europeans tend both to have more taken from their paychecks in taxes and to pay more for basic services.

“If you’re looking at Sweden, they pay two to three times more for unskilled McDonald’s workers than here,” Iversen said. “You’ll find Swedes will pay more for a Big Mac than us.”

A new look at old systems

Iversen, who received a master’s degree in political science from the University of Aarhus in Denmark, said he became interested in the differences between the political economies of the United States and Europe after coming to the United States in pursuit of a doctoral degree from Duke University.

“What doesn’t look very interesting before, suddenly looks very strange when seen from the vantage point of someplace else,” Iversen said. “When I came over here in 1989, I realized how unique the system I came from was.”

Iversen received a Ph.D. in political science from Duke in 1995. He was named assistant professor in the Department of Government at Harvard in 1994, a position he held until 1999. He served as associate professor of government from 1999 to 2001.

Iversen has written numerous journal articles and two books, including “Contested Economic Institutions: The Politics of Macroeconomics and Wage Bargaining in Advanced Democracies” in 1999, and “Unions, Employers and Central Banks: Macroeconomic Coordination and Institutional Change in Social Market Economies” in 2000.

Iversen’s work has been influential among his peers, said Hall, the Frank G. Thomson Professor of Government.

“Torben is certainly the outstanding comparative political economist of his generation,” Hall said. “He has made striking contributions to our understanding of how the independence of central banks affects the economy, how the policy choices facing governments have changed with the coming of post-industrial society, and how the investments individuals make in skills affects their views about social policy. In each of these spheres, his path-breaking work has changed how we see the world.”

alvin_powell@harvard.edu