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Who Pays for the Welfare in the Welfare State? A Multicountry Study
I.Introduction

ANWARSHAIKH

wasatime,notsolongago,whenthewelfarestatewas viewedasaproudsocialaccomplishment.Butrecentlyithasbeen underconsiderableattack.Attheheartofthisattackhasbeenthe claim that during its heyday, from the 1950s to the 1970s, the socialbenefitexpendituresofthewelfarestateledtosubsequent economic stagnation and persistent unemployment throughout theadvancedworld.Thispaperbringstobeartheempiricalevi dence from a multicountry set of studies. I outline the issues involved,discussthemethodologybehindtheempiricalstudiesof sixmajorOrganizationforEconomicCooperationandDevelop ment (OECD) countries (Australia, Canada, Germany, Sweden, the United Kingdom, and the United States), and present the mainfindings.Mycentralfindingisthatsocialbenefitexpendi tures were financed out of the taxes paid by recipients of these very expenditures: in other words, by and large, social welfare expenditureswereselffinanced, andcouldnothavebeenasource offiscaldeficitsoradragongrowth.
HERE

1.TheRiseandFalloftheWelfareState Thegrowthofwelfarestatesisoneofthecharacteristicfea tures of modern capitalist democracies. European welfare

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statesbeganwithpensionandsocialinsuranceprogramsinthe late nineteenth and early twentieth centuries and then grew into comprehensive systems of social support between the 1930s and the 1950s. In the United States, it took the Great DepressiontosparksimilarinitiativesintheformofNewDeal programs on social security, statebased unemployment insur ance,andlimitedfederallysubsidizedpublicassistance(which Americanscallwelfare)fortheelderlypoor,dependentchil dren,andtheblind. After World War II, the role of the state expanded rapidly. From1960to1988,intheOECDcountriestheaveragegovern mentshareingrossdomesticproduct(GDP)rosebyoverone half (from 27 percent to 42 percent), while the average governmentshareintotalemploymentrosebyabouttwothirds (from11percentto18percent).Alongsidethiscameashiftin thetypesofgovernmentspending,awayfromtraditionalexpen dituresondefense,publicadministration,andgeneraleconomic servicesandtowardsocialwelfareexpendituresonhealth,edu cation, and transfer payments (social security and social assis tancepayments,businesssubsidies,andinterestongovernment debt). By the 1980s, transfer payments had become the single largest category of economic expenditure in most countries (OECD,1985:16). But the rise in government expenditure was only one side of the story. Taxes also rose sharply, and their composition shifted fromtraditionalsources,suchasindirectbusinesstaxes,tosocial security and personal income taxes (OECD, 1985: 1617). Thus onthewhole,bothgovernmentexpendituresandthetaxstruc turechangedinverysimilarways. Theearlypartofthepostwarperiodwasthezenithofthewel farestateastheindustrializedworldgrewatarateofalmost5per cent annually. However, by the mid1970s the long underlying expansionhadpeakedandbythelate1970stheaveragegrowth rate of the industrialized world had fallen to half its previous level.By1983,theOECDcountriesasawholewerebarelygrow

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ing(OECD,1991).Inthisperiodofgrowthslowdownandeven tualstagnationcamerisingunemploymentandpoverty,whichled togreaterdemandsonsocialexpenditures. IntheUnitedStates,thepostwarboompeakedin19681969. Theeconomymovedintoaphaseof(initiallyinflationary)stag nation.Amajorchangetookplaceinallmajoreconomicpatterns atthispoint.Intheboomdecadesfrom1947to1968,growthwas strong, unemployment averaged 4.8 percent, real wages grew almost50percent,andtheaverageannualfederalbudgetdeficit wasamere$1.7billion.1 Inthesubsequenttwodecadesbetween 1969and1989,unemploymentrosetoanaverageof6.6percent, realwagesdeclined by14percent,andtheaveragebudgetdeficit rosealmostfiftyfoldto$82.4billion(ERP, 1996).By1980,eligi bilityforpublicassistancehadbeenrestricted,andforthosewho didreceiveaid,realbenefitswere20percentlowerthanwhatthey hadbeenin1970. From1980to1988,theReaganadministrationcarriedoutafar reachingandsystematicpolicyofattackingworkersandthepoor. Itunderminedunionsandcutbackonthelevelanddurationof unemployment benefits. Union membership declined rapidly duringthisperiod,fromaboutaquarterofthelaborforcetoless thanasixth.Realwagesfellandworkerconcessionsandgivebacks became commonplace. The number of people in lowwage jobs rose sharply: in 1970 only 20 percent of workers earned a real incomeoflessthan$7,000(in1984dollars);between1979and 1984some60percentofnewjobswereinthiscategory(Rosen berg, 1987). Military spending increased dramatically even as socialspendingwasslashed,sothatbudgetdeficitscontinuedto rise to new highs. Throughout all of this, the rhetoric of the period was dominated by the notion of tax relief for an over burdenedpopulation(amostfamiliarphraseonceagain).Cor porations did receive substantial tax relief, which added to the benefitsofadecliningrealwage.Butasweshallsee,forworkers thesituationwasdifferent,sincetheirtaxratecontinuedtorise (seefigure1onpage1211).

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SOCIAL RESEARCH TABLE 1:AVERAGE REAL GDPGROWTH RATES (EXCLUDING 1973OIL SHOCK) 19611972 19751982 2.23%
1.97%

19831991 2.66%
2.85%

Europe
UnitedStates

4.68%
3.83%

The phase change outlined for the United States economy mirroredapatternevidentacrossalladvancedcapitalistcoun triesasthedecadesofhighgrowthgavewaytodecadesofslug gishgrowth,inflation,risingunemployment,andanattendant fiscalcrisisofthewelfarestate(Skocpol,1987:36).TheEuro peanandUnitedStatesgrowthratesofrealGDParedepicted intable1,inwhichtheoilshockperiodfrom1973to1974is excludedtoavoidbiasingthecomparisonacrossperiods.The corresponding patterns for unemployment rates are depicted intable2. In the light of these events, which were unfolding across the advancedworld,itisnotsurprisingthattherearoseaclaimthat thewelfarestatewastoblame.Mainstreameconomistsinpartic ulararguedthatitssocialpolicy[ledto]...anoverexpansion ofthegovernment,which[was]...aprincipalcauseoftheeco nomicslowdownandrisinginflationofthe1970s(Buchananand Flowers,1980,chap.6,citedinFazeli,1996:37).Thusthewelfare statewasadragoneconomicactivityand[had]...reducedeco nomicperformance(MoududandZacharias,2000:7).Cutbacks insocialexpenditures,particularlyunemploymentinsuranceand incomesupportforthepoorandtheelderly,weredeemednec essary to restore growth and reduce unemployment (Atkinson, 1999). And indeed, such cutbacks began to spread across the developedworld. Many different mechanisms have been proposed as the sources of the putative negative effects of the welfare state. Within orthodox economics, two are particularly important. The first of these arises from the claim that the welfare state

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WHOPAYSFORWELFARE? TABLE 2:AVERAGE UNEMPLOYMENT RATES (EXCLUDING 1973OIL SHOCK) 19611972 Europe
UnitedStates

535

19751982 5.41%
7.01%

19831991 9.51%
6.74%

2.59%
4.94%

givesrisetobudgetdeficitsinordertofinanceitssocialexpen ditures. These deficits are said to stimulate consumption and reduce the household savings rate, which in turn lowers the longtermgrowthrateoftheeconomy.Asimilarclaimalsoarose ontheleft,intheformofthefiscalcrisisofthestateidentified by OConnor (1973), and in the claim by Bowles and Gintis (1982) that over the postwar period the state induced a sub stantialredistributionfromcapitaltolabor,resultinginaciti zen wage that grew so rapidly that by the 1970s it played a critical role in producing and prolonging the economic crisis ofthe1970sand1980s(BowlesandGintis,1982:69,8485).In all of these arguments, the welfare state tends to reduce and underminegrowthoverthelongrun,whichatsomepointgives rise to stagnation and unemployment (Fazeli, 1996, chap. 2; MoududandZacharias,2000:814). Thesecondcriticismisthatthewelfarestateperpetuatesthevery unemployment it creates. Orthodox economic theory says that unemploymentwouldbeselfcorrectingaslongasworkerslowered theirrealwageswheneverthereisanyunemployment.Butthevar ioussocialprotectionmechanismsofthewelfarestatearesaidto create labor market distortions that interfere in this automatic adjustment process. Unemployment insurance and income sup portreducestheincentiveofunemployedworkerstoacceptlower wages and worse working conditions, while payroll taxes and employee protections reduce the wages that firms are willing to offer to workers. As Krugman puts it, the relatively greater social protectionsinEuropemeanthatanunemployedEuropeandoes not need to search for employment with the desperation of his

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American counterpart (Krugman, 1994: 22). Thus the welfare statetendstopreventtheeliminationofunemployment. Intheendwearetoldthatthewelfarestatetendstoundermine growthandgiverisetounemploymentbecauseithelpsgiverise tobudgetdeficits.Atthesametimeitdistortslabormarketsby making workers less desperate in the face of unemployment, which tends to make unemployment persistent (Pear, 1995). In bothcases,theappropriatesolutionistoreducetheextentofthe welfarestate. Asfarasthelabordistortionsargumentisconcerned,even Krugmanadmitsthatthisargumentisunabletoexplainwhythe socially conscious European countries [were] able to achieve such low unemployment rates before 1970 (23). Detailed microandmacroeconometricstudiesalsoindicateonlyaweak linkbetweenbenefits,labormarketregulations,andunemploy ment (Bean, 1994: 594595, 600603). Most recently, a recent detailedcrosscountrystudyfindsnorealempiricalsupportfor the view that the welfare states labor market institutions and policiesplayedakeyroleintheEuropeanunemploymentcrisis ofthe1980sand1990s(Baker,Glyn,Howell,andSchmitt,2002: 24,5457).Finally,itisastrikingfactthatpreciselyduringthe periodwhenthewelfarestateissupposedtohavemostinhibited economic performance, from 1975 to 1993, per capita gross national product (GNP) in the OECD countries increased by 314percent,whilepercapitaGNPintheUnitedStatesroseby only234percent.2 Butmightitnotbestillpossiblethatintheheydayofthewel farestate,socialspending,particularlysocialspendingdirectedto labor, was financed by government deficits, which in turn were large enough to cause the subsequent slowdown of growth all overtheadvancedworld?Weturntothisissuenext. 2.WhoPaidForSocialExpenditures? Thenotionthatthewelfarestatewasdeficitfinancedrelieson aseriesofimplicitclaims.First,thatthebeneficiariesofthesocial

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spendingreceivedmorethantheythemselvespaidintaxes.Sec ond, that this difference was largely financed by government deficits, rather than transfers from other groups in society. And third, that the resulting deficits were large enough to initiate a slowdownineconomicgrowth. Itisstrikinghowlittleconsistentempiricalevidencehasbeen advancedforsuchclaims.Individualcountrystudiesdonotpro vide much guidance for generalizations about the welfare state (Marmor, 1993). On the other hand, crossnational studies that analyzeonlyexpenditures,3 oronlytaxes,areequallyinadequate because what matters is the net balance between the two. For instance, if the taxes paid by some group matched the social expenditures directed toward it, then these social expenditures were selffinanced, and could not have been a source of fiscal deficitsoradragongrowth. Thequestionthusbecomes:whopaysforthewelfarespending ofthewelfarestate?Inaddressingthisissue,wefocusontherela tions between the state and labor (defined here as wage and salary earners, excluding top management such as CEOs). This focusarisesoutoftheclaimthatitwasthesocialsupportoflabor inparticularthateventuallyunderminedthewelfarestate.4 3.OurPrincipalFindings Ourfindingsarebasedonaseriesofcrossnationalstudiesof thewelfarestate,conductedoverthe1980sand1990s.Theframe workused,whichisoutlinedinsectiontwo,wasoriginallyapplied totheUnitedStates(ShaikhandTonak,1987,1994,2000),and subsequently to Australia, Canada, Germany, Sweden, and the United Kingdom, over various intervals (Tonak, 1984; Bakker, 1986;McGill,1989;Fazeli,1992,1996;Maniatis1992). The principal finding of these studies is that the taxes paid by wage and salary earners closely parallel the social expenditures directed toward them: for the estimated average of the advanced countriesbetween1960and1987,thedifferencebetweenthevalue oftotalsocialbenefitsreceivedandtotaltaxesdirectlypaid(thenet

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socialwage)remainsbetween1and2percentofGDP(3to5percent oftotalwagesandsalaries)inalmosteveryyear.Sincethisispositive, itimpliesthatwageandsalaryearnersreceivedmorethantheypaid. Butthisoverallnetsubsidyisclearlysmall.Andasweshallsee,while itisgenerallypositiveinthefiveOECDcountriesstudied,itisgen erallynegative(thatis,anettax)intheUnitedStates. Thesmallsizeofthisaveragenetsocialwageratio(netsocial wagerelativetoGDP)doesnotsupporttheclaimthatsocialben efit expenditures hurt economic growth in the advanced world. Indeed, what it instead shows is that the principle effect of net transfer flows is to recirculate income among wage and salary earnersasawhole.Butevenhere,theevidenceindicatesthatany suchintraclassredistributiveeffectisquitelimited.Detailedstud ies across household income classes in various OECD countries seemtoindicatethatredistributiveeffectsconcentrateonthelow est and highest income ranges, so that the bulk of the income rangesarenotmuchaffectedbythenetgovernmentintervention (OECD,1985,chap.7,sec.B). There are, of course, differences among countries, but even these are not necessarily what one might have expected. For instance,intheboomyearsthenetsocialwagewasnegativeinthe UnitedStates,whichmeantthatwageandsalaryearnerpaidout more intaxesthantheyreceivedtheyhelpedreduce anyexisting fiscal deficit. Over the same interval in Sweden, the net social wagewasroughlyzero,indicatingthatitsgeneroussocialwelfare expenditures were actually selffinanced. In neither the United States nor Sweden, therefore, can welfare expenditures be indicted as the cause of fiscal deficits or consequent economic stagnation.However,inGermanythenetsocialwagewasgener allypositiveintheboomyears,ontheorderof4percentofGDP. Andeventhismodestproportionisoneofthehighestinoursam ple.Hereatleastwecansaythatthenetsocialwagedidhavea substantialimpactongovernmentfinances:from1950to1973,it accounted for roughly 42 percent of the government deficit, which was itself about 7 percent of GDP. Yet Germanys growth

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ratewashigher thanthatofeitherSwedenortheUnitedStatesin everysubperiod(OECD,1991).Infact,ineveryperiodthereisa positive correlation between the size of the net social wage and economicgrowth:Germanyhasthehighestgrowthrate,Sweden isinthemiddle,andtheUnitedStateshasthelowest.

II.MethodologyoftheNetSocialWage Ourconcernsrequireustoidentifythedifferentpartsoftotal taxes that flow out of the aggregate wage bill, and the various socialbenefitsthatflowbacktotheworkingpopulationthrough the medium of government expenditures; this will allow us to assess their net balance (the net social wage). The category of workingpopulationisnotdefinedhereinsociologicalorpolit ical terms, but rather in terms of all those who earn wages and salaries,withtheexceptionofCEOsandothertopmanagement. Thisisinpartbecausewagesplayacentralroleinmosteconomic processes, but also because it allows us to get consistent results across countries. We use national economic accounts and other sourcestoestimateandtrackthenetsocialwageinsixadvanced countries:theUnitedStates,Canada,theUnitedKingdom,Ger many,Sweden,andAustralia. The net social wage consists of the difference between social expenditures directed toward the working population (labor) andthetaxesdirectlyleviedonthissamegroup.Onthesideof social expenditures, we count all welfare expenditures (health, education,welfare,housing,transportation,parksandrecreation, transferpaymentstoworkers,etc.).Wedividesuchexpenditures into two subsets. Expenditure Group I, which we assume is entirelyreceivedbyworkers,andconsistsofitemssuchasLabor Training and Services, Housing and Community services, and Income Support, Social Security, and Welfare (except the small itemscalledMilitaryDisabilityandMilitaryRetirement,whichwe treat as a cost of war). And Expenditure Group II, which is

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directed toward workers and nonworkers alike and comprises itemssuchasEducation,HealthandHospitals,Recreationaland Cultural Activities, Energy, Natural Resources, Passenger Trans portation,andPostalServices.Theworkersshareinthisisesti mated by multiplying the group total by the labor share in personalincome(ShaikhandTonak,1987,1994). Onthesideoftaxeslevieddirectlyontheworkingpopulation areincometaxes,socialsecuritytaxes,propertyandothertaxes. Theprimarymonetaryflowfromwhichthetaxesaredeductedis totalEmployeeCompensation,whichisthetotalcostofworkersto theiremployers.Weconsiderthistobethegrosswageofworkers, comprisingwagesandsalariesaswellasbenefitssuchasEmploy ersContributionsforSocialInsuranceandOtherLaborIncome. The total taxes to be considered then fall into two groups: Tax GroupI,whichcomesentirelyoutofgrosswages,andconsistsof alldeductionsforsocialsecurity(thatis,thesumofEmployeeand Employer Contributions), and the more general Tax Group II, whichconsistsofPersonalIncomeTaxes,MotorVehicleLicenses, PersonalPropertyTaxes(primarilyonhomes),andOtherTaxes and Nontaxes (a very small category that includes passport fees andfines),andisallocatedbetweenlaborandnonlaborusingthe shareoflaborincomeinpersonalincome. Comparing the expenditures on labor and the taxes paid by labor then gives us the net social wage, defined as benefits received by workers minus taxes paid (see Shaikh and Tonak, 1987, 1994, 2000, for further details). The net social wage ratio thenreferstoitssizerelativetoGDP.

III.EmpiricalResults

1.TheUnitedStates WebeginwithourresultsfortheUnitedStates,withdatataken fromShaikhandTonak(2000).Figure1depictsthebenefitrate

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Figure 1: US Labor Taxes and Benefits Relative to GDP
20%

541

15%

Labor Benefits
10%

Labor Taxes

5%

0% 1952

1962

1972

1982

1992

oflabor(totalsocialexpendituresdirectedtowardslaborrelative to GDP) and the tax rate of labor (total labor taxes relative to GDP).5 Itisclearthatbothrisesharplyoverthepostwarperiod. ButwhatisparticularlystrikingisthatintheUnitedStates,dur ingthelongboomfromtheendofWorldWarIItothelate1960s, thebenefitrateisalwaysbelowthetaxrate.Thusduringthelong boom the net social wage is negativethat is, it is a net tax on labor.Ratherthandraggingdowntherestoftheeconomyinthis interval,UnitedStatesworkersweresubsidizingit. It is only after the boom runs out in the early 1970s and the unemployment rate rises sharply that the benefit rate overtakes thetaxrateandthenetsocialwagebecomepositive.Thisissim plybecauseincreasednumbersofunemployedandimpoverished peoplebecomeeligibleforpayments,whileatthesametimetheir decreased incomes reduce the taxes they pay. This same effect alsoraisesthegovernmentdeficit.Thusapositivenetsocialwage becomesassociatedwithariseinthegovernmentdeficitduring thegrowthslowdown,givingrisetothemistakenimpressionthat theobservedcorrelationbetweenthetwowascausal. Butthecorrelationdidserveanimportantideologicalpurpose, becauseitbecamefodderfortheattackonthewelfarestate.By

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Figure 2: U.S. Net Social Wage Relative to GDP
10%

8%

6%

4%

2%

0%

-2%

-4% 1952 1962 1972 1982 1992

the 1980s, beginning with Reagan and continuing after his administration, this assault succeeded in dismantling the safety netandsharplyreducingthestrengthofworkersorganizations (Amott,1987:51).Eventhesharpriseintheunemploymentrate at the beginning of the ReaganBush era (see table 2) barely changesthebenefitratebecausebenefitandeligibilitycutbacks compensate for the greater numbers of unemployed. A second surgeofunemploymentattheendofthiseraraisesthebenefit rate once again because total benefits accelerate in the face of greaterunemploymentwhiletotalemployeecompensationslows downforthesamereasonandtheirratioactuallyrise.Underthe Clintonadministrationitremainsstable,butthetaxraterises,so thatthegapclosesoncemore. Figure2showsthesesamemovementsfromthepointofviewof theUnitedStatesnetsocialwageratio(netsocialwageasaper centageofGDP),whichissimplythedifferencebetweentheben efitandtaxratesdepictedearlier.Overtheentirepostwarperiod, from1952to1997,theaveragenetsocialwageratiointheUnited Statesisamere0.33percent.Ineffect,workerspaidfortheirown socialbenefits.6

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Figure 3: Net Social Wage Ratio of Five Countries
10%

543

8%

6%

Australia
4%

Canada Germany Sweden

2%

UK

0%

-2%

-4% 1952 1957 1962 1967 1972 1977 1982 1987

2.FiveOECDCountries Asimilaranalysiswasundertakenfortheotherfivecountriesin thisstudy(Canada,Germany,theUnitedKingdom,Australia,and Sweden).Becauseofdatalimitations,startingdatesfortheseries range from the early 1950s for the first three countries, to the early1960sforthelasttwo.Endingdatesalsovary,sincethecoun trystudieswereundertakenbyvariouspeopleoverdifferentinter val in the 1980s and early 1990s. For this reason, it was only possibletocreatecomparabledataforallcountriesfortheperiod from1960to1987.7 Forourpurposesthisissufficienttoaddress the question of whether or not, in Europe at least, the welfare statemighthavecausedtheslowdownofgrowththatbeganinthe 1970s. Figure 3 depicts the net social wage ratio in each of the five OECD countries. Several concerns are immediately apparent. First, unlike the United States, the other OECD countries had generally positive net social wage ratios. Germany and the UnitedKingdomhadthehighestratios,thougheventheyaver agedonlyabout5percentofGDPandabout8percentoftotal wages.Second,Sweden,theveryparadigmofawelfarestate,had an average net social wage around zero over the boom period,

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Figure 4: Overall Net Social Wage of Five Countries

10%

8%

6%

4%

2%

0%

-2%

-4% 1960 1965 1970 1975 1980 1985

anditclimbedabovezeroonlyinresponsetothestagnationin growth. Athirdfindingisthatfrom1960to1972,priortothegrowth slowdown in the mid1970s, the net social wage ratio ranged between 0 and 2 percent in the United States (figure 2), and between2percentand4percentintheotherfivecountriescom bined(figure4).8 Boththeseratiosrosesubstantiallyduringthe subsequentperiodofstagnation,butthiswasaneffectofthestag nationitself.Sincegovernmentdeficitsalsoroseforthesamerea sons, the rise in the net social wage is correlated with a rise in government deficits. This then gives rise to the mistaken belief thatariseinthesocialwagewasfueledbyariseinbudgetdeficits, whichthencausedthegeneraldeclineingrowth. 3.UnitedStatesandFiveOECDCountriesTakenTogether Figure 5 depicts the estimated net social wage ratio of the advancedcountriesasawhole.Tocalculatethis,theaveragenet socialwageratioofthefiveOECDcountries(Australia,Canada, Germany, Sweden, and the United Kingdom) was treated as a representative sample of that in Europe. It was then averaged with the United States ratio, using the respective shares of

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Figure 5: Combined US and Europe Net Social Wa ge Ratio
10%

545

8%

6%

4%

2%

0%

-2%

-4% 1960 1965 1970 1975 1980 1985

Europes and Americas GDP in the sum of their GDPs, all expressed in United States dollars (OECD, 1991). We see that fortheentiregroup,thenetsocialwageratioisroughly1per centfortheboomperiod.Itreallyrisesabovethat,toaround3 percent, in the period of stagnation beginning in the early 1970s.Comparisonoffigure3andfigure5makesitclearthat theaveragepatternisverysimilartothatofSweden. TheSwedishwel fare state, it seems, turns out to be paradigmatic in more ways thanone.

IV.SummaryandConclusions Afterthegreatpostwarboomintheadvancedworldgaveway to stagnation and inflation in the 1970s and 1980s, it became a commonplaceonboththeleftandtherighttoattributethedis appearance of growth to the overexpansion of the state. It was claimedthatthatthewelfarestategaverisetobudgetdeficitsin ordertofinanceitssocialexpenditures,andthatthesedeficitsin turnedreducedgrowthandspurredinflation.Mostoften,these

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claimsweresupportedbypointingtothefactthatsocialexpen ditureshadrisenasashareofGDP. But a reference to the rising share of social expenditures is inadequate,becausetheshareoftaxesinGDPalsoroseequally rapidly.Andwhenexaminedfromthisperspective,wefindthat the benefit and tax rates closely parallel each other in all six advanced countries studied here (Australia, Canada, Germany, Sweden, the United Kingdom, and the United States). The dif ference between the benefit and tax ratios, the net social wage ratio,isgenerallyquitesmall. IntheUnitedStatesfrom1952to1997,theaveragenetsocial wageratiointheUnitedStatesisamere0.33percent.Thusdur ingtheentirepostwarperiod,UnitedStateslaborpaidforitsown socialbenefits.Indeed,intheboomyearsofthepostwarperiod, from1950to1972,theUnitedStatesnetsocialwagewasnegative, whichmeantthatwageandsalaryearnerspaidoutmoreintaxes than they received. Rather than dragging down the rest of the economy in this interval, United States workers actually subsi dized it. It is only after the unemployment rate rises when the boom runs out in the early 1970s that the net social wage ratio turnspositive.Butthisisbecauseincreasednumbersoftheunem ployedandthepoorledtoincreasedbenefitpayments,whileat the same time their decreased incomes reduced the taxes they pay.Thissameeffectalsoraisedthegovernmentdeficit.Thusa positivenetsocialwagebecameassociatedwithariseinthegov ernmentdeficitoncethegrowthslowdownhadbegun,givingrise tothemistakenimpressionthattheobservedcorrelationbetween thetwowascausal. In the other five OECD countries studied, over the long boomtheaveragenetsocialwagewasabout3.5percentofGDP. Here too the subsequent slowdown in growth raised the net socialwageratiotoabout5percent,justasitraisedthebudget deficit.

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Yetinallcasesthesecorrelationsareaconsequenceoftheslow downs in growth. On the deficitasdrag argument, one would have to at least demonstrate that countries with higher positive netsocialwageratiosinthepriorboomperiodhavesubsequently lower growth rates, and that countries with negative net social wageratioshavesubsequentlyhighergrowthrates.Butsuchacor relation does not hold. We find that net social wage ratios vary considerably across countries during the long boom, ranging from5.5percentintheUnitedKingdom,4percentinGermany, about2.5percentinCanadaandAustralia,amere0.4percentin Sweden,to1.2percentintheUnitedStates.Yetallofthesecoun trieseventheUnitedStateswithitsnegativenetsocialwage suffered a substantial slowdown in growth over the next two decades. The putative causal link between social expenditures andslowedgrowthsimplydoesnotholdup. Notes
1Realwagesareaverageannualearningsofnonagriculturalworkers

deflated by the consumer price index, both series taken from ERP (1996),tablesB42andB56,respectively. 2ThedataareinUnitedStatesdollars,Atlasmethodology,fromthe WorldTablesoftheWorldBank. 3For instance, Pampel and Williamson (1989) place a great deal of emphasis on the demands placed on social expenditures by interest groups such as the middle classes (contradictory class locations), ascriptivegroups(gender,race,ethnicitybased),andtheaged(xiiixiv), yettheyseldommentiontaxesatall.Theythusendupgivingthefalse impressionthatsocialexpendituresaccountforwhattheycallthecri sisofthewelfarestateinthe1970sand1980s(28). 4ThisclaimisexplicitinBowlesandGintis(1982).Butthisisdisputed byShaikhandTonak(1987,1994,2000)andMiller(1988,1989). 5Since we are concerned with their impact on the economy as a whole,wemeasurebenefitandtaxratesrelativetoGDP.Butifweare interestedintheirimpactonthestandardoflivingofworkers,thenwe shouldscalethemrelativetothegrossincomeoflaborthatis,relative toemployeecompensation,asinShaikhandTonak(1987).

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6In terms of gross labor income, the net social wage in the United

States from 1952 to 1997 averaged a mere 0.60 percent (Shaikh and Tonak,2000:252).Thisisnotonlytiny,butalsonegative(i.e.,anettax onlabor). 7Itwasnecessarytoextrapolatebenefitandtaxratiosforcertainini tialandfinalyears(Australia,1960,19841987;Canada,1987;Germany, 1987;Sweden,19861987;UnitedKingdom,1987). 8The combined ratio was calculated by converting all the net social wagesineachcountryineachyearintoUnitedStatesdollarsthrough eachyearsexchangerate,summingthem,andthendividingthemby thesimilarlyconvertedtotalGDPofthefivecountries.Thisisequivalent totakingaweightedaverageoftheindividualcountrynetsocialwage ratios, using the share of each countrys converted GDP in total con vertedGDP.

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