Chapter in:
Jon Erik Dolvig and Andrew Martin (eds), European Social Models from Crisis to Crisis: Employment and Inequality in the Era of Monetary Integration, Oxford University Press. 2014.
DOI:10.1093/acprof:oso/9780198717966.003.0010
Abstract:
The trends have turned. From a development with rising welfare generosity and declining earnings differentials, most European countries now experience stagnating welfare generosity and increasing earnings differentials. This chapter shows that a more equal wage distribution fuels welfare generosity via political competition (the equality magnifying effect), and that a more generous welfare state fuels wage equality via empowerment of weak groups in the labor market (the wage equalizing effect). Together the two effects generate what the chapter denotes as a mechanism of institutional reciprocity, explaining why welfare spending and wage equality move in tandem. Thus a serious shock can easily turn the trends, and once they are turned, welfare spending and wage equality move again together, but in the other direction. The chapter discusses how institutional reciprocity can explain the recent developments in Europe, and how it shapes the responses of the European countries to the current economic crises.
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