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The role of the economy in social policy
Brakeman or promoter?



Thomas Paster
 

 
State social policy means higher wage costs for companies, but it can potentially also serve the interests of business. Thomas Paster examines how employers influenced the development of the welfare state in Germany and why they supported some social reforms. His study shows that companies see their socio-political interests very differently, depending on historically specific political framework conditions.
 

 
Companies are considered to be politically influential. Investors and transnational companies are threatening to emigrate or downsizing in order to underscore their displeasure with political framework conditions. In September 2012, for example, the French entrepreneur Bernard Arnault, head of the luxury goods group Louis Vuitton and the richest entrepreneur in France, announced that he wanted to emigrate to Belgium. His reason: he wanted to avoid the planned increase in the top tax rate to 75 percent. In the same way, political decision-makers often justify unpopular decisions by referring to the constraints of location competition.
 
The influence of companies and investors in politics does not result so much from the potential voters they create, but from the dependence of social prosperity on corporate investment decisions. Governments therefore often have to find compromises - between the demands of their constituents and what companies are willing to accept. This applies in particular to the area of ​​state social policy, which is co-financed by companies through social security contributions and thus increases production costs.
 
While there is consensus in the social sciences that business interests play an important role in politics, little is known about the real impact of interventions by business representatives on political decisions, particularly in the area of ​​social policy. How big is the influence of the economy on socio-political decisions? What are the socio-political goals of different economic groups, and how successfully do they achieve their goals? Do they generally reject social policy, or are there also reasons for companies to support state social policy?
 
To answer these questions, the role of economic interests in important socio-political reform projects in Germany and in international comparison was researched at the Max Planck Institute for Social Research. The focus was on the employers' associations as collective lobbyists, especially of industrial companies in social policy. With the help of historical sources such as newspaper reports and parliamentary statements, the socio-political attitudes of the associations and their role in political decision-making were examined.
 

 

Social policy and its diverse effects on companies


 
Studies show that government social policy can have both positive and negative effects on companies. On the one hand, state social programs can increase wage costs and reduce the labor supply. Depending on how they are structured, social benefits reduce the need for gainful employment and thereby weaken the incentive to work. On the other hand, state social policy can also support the personnel policy of companies. An example of this are social policy programs for early retirement, which facilitate conflict-free downsizing. Social policy can also help companies to recruit and retain qualified employees, for example through short-time work in the current economic crisis. This enabled companies to keep qualified but temporarily unavailable employees so that they could fall back on trained staff in the event of an economic upturn. In the relevant specialist literature, one can therefore find arguments that suggest the hypothesis that companies will in certain cases support social policy, as well as arguments that suggest the opposite.
 

 

Do companies support state social policy?


 
The study shows that both the positions and influence of employers' associations in social policy vary greatly over time. Employers are not omnipotent; their political influence depends on the historically specific political framework. Employers' associations also adapt their socio-political attitudes to the general political conditions. The reasons for agreeing to the expansion of social policy often do not lie in the expectation of economic advantages for companies - as some economic models suggest - but in political exchange processes.
 

“Viewed over a longer period of time, both the positions and the influence of employers in social policy vary greatly. »


 
Two overarching political goals of employers can be identified: pacification and containment (Fig. 1). Pacification is the pacification of social conflicts through political concessions. Containment is the weakening of expansive social reforms through appropriate demands for change. The relative importance of these two goals varies over time, depending on specific historical framework conditions. Industrial employers pursued the first strategy in situations in which the emergence of radical political currents called into question the fundamental interests of industry or even the liberal-capitalist social order as a whole and the employers' associations therefore regarded political stabilization as a primary goal. Employers pursued the second strategy in the phases of developing social policy.
 

 
Fig. 1: Social policy goals of the economy: pacification and containment
 

 

 

Pacification and Political Stability: The Initial Phase of the Welfare State


 
Examples of the pacification strategy in Germany are the Bismarck’s social reforms and the Stinnes-Legien Agreement of November 1918. Representatives of large-scale industry were significantly involved in these two projects. Heavy industry in particular, which was politically conservative and anti-union at the time, supported Bismarck's plans.
 
Heavy industry agreed with Bismarck on the goal of suppressing the workers' movement, which was perceived as revolutionary. By comparison, support for Bismarck's reforms in the more politically liberal and more union-friendly manufacturing industry was much lower.
 

«For the economy, political stability has priority over cost efficiency. »


 
The establishment of corporatist bodies and the introduction of workers' rights in the context of the November Revolution of 1918 followed a similar logic. These were demands that had been vehemently rejected by most industrialists just a few years earlier, but were now readily accepted. Now they appeared to be a suitable means of weakening the revolutionary council movement and directing political development in a liberal-capitalist direction.
 
Both reforms were thus supported or even co-initiated by industry; so they did not have to be wrested from industry. The reasons for this, however, lay in political goals and not in the expectation of higher labor productivity or higher employee motivation. With the ebb of revolutionary forces in the early 1920s, industry abandoned some of the previously made socio-political concessions, in particular the eight-hour day. During this period, industry only supported state social policy selectively, that is, when it appeared politically opportune.
 

 

Expansion of the welfare state in the post-war period


 
After the Second World War, the pacification motive lost its importance and the containment motive became more important. After the experiences of the Weimar Republic and the time of National Socialism and against the background of the systemic competition with Soviet communism, the employers' associations now, in contrast to the Weimar Republic and before, consistently advocated social equality and social partnership. They tried not to generally prevent the expansion of the welfare state in this context, but rather to modify reform projects, which were usually initiated by other actors, according to their own goals. For them it was mostly about limiting cost increases.
 
However, the employer positions were often passed over during the expansion phase. A common pattern is that employers' associations initially rejected proposals to expand the welfare state. However, if there was a clear political majority in favor of a specific reform, they would come up with alternative reform proposals. This approach can be found, for example, in the pension reform of 1957 and the introduction of long-term care insurance in 1994. In both cases the employers' associations tried to mitigate the cost effects of the planned reform through alternative proposals - each with little success.
 

 

Change in the socio-political positions of employers


 
If one looks at the socio-political positions of the employers' associations over a longer period of time, it becomes apparent that the associations adapted their socio-political positions to the general political conditions. They supported the expansion of social policy if this represented a lesser evil for them or appeared to be a suitable means of warding off more radical developments. These adjustment processes only become recognizable when looking at a longer period of time.If one analyzes the socio-political positions of the employers' associations on certain reform projects in isolation, it often appears that their positions prevailed.
 
Over a longer period of time, however, it can be seen that these positions themselves were often the result of political adjustment. Put simply: the role of the economy in politics is not only influencing but also adapting.
 

“The role of the economy in social policy is not only influencing but also adapting. »


 
However, the willingness of the economy to adapt to the political framework has declined since the 1980s. This can be seen in much more stringent demands for social cuts and deregulation of the labor markets by employers' associations and think tanks sponsored by them, such as the New Social Market Economy Initiative. Expanded opportunities to relocate, while at the same time increasing social spending and increasing demands on the flexibility of employees, undermine employers' willingness to provide social compensation. At the same time, interests within the economy are becoming more heterogeneous, as certain socio-political regulations affect companies differently. With the exception of those areas in which companies have an economic self-interest in government intervention - such as in the area of ​​training policy or the promotion of company pension schemes - they are increasing their demands for the state to withdraw if the political framework allows it.
 

 
Thomas Paster has been a research assistant at the MPIfG since September 2009. After studying political science in Vienna and Gothenburg, he obtained his doctorate in 2009 at the European University Institute in Florence.
Research interests: comparative welfare state research; comparative political economy; institutional change; Economy and politics; historical-comparative methods.
 

 
For further reading

 
source
Thomas Paster: The role of the economy in social policy: brakes or sponsors? In: MPIfG yearbook 2013-2014. Cologne: Max Planck Institute for the Study of Societies 2013, 75-80.