Why We Don't Have to Choose... - related material

November 28, 2000

Why We Don't Have to Choose between Social Justice and Economic Growth: The myth of the equity/efficiency trade-off

Section IV:
Causes of Success and Failure

The purpose of this section is to review some general issues which bear upon the question of relative economic performance. It is argued that macro-economic factors explain much of the differential in growth performance between countries (as opposed to social and labour market policies) and that high taxes and "generous" welfare states are, at a minimum, consistent with relatively good economic performance for two key reasons. First, the choice between delivery of services through the public sector as opposed to the market is largely neutral in terms of efficiency. Second, the so-called dead weight or efficiency costs of relatively high and progressive taxes tend to be greatly exaggerated.

Finally, this section briefly reviews some general grounds for believing that there may be a positive linkage between low levels of inequality and economic growth, and it reviews some of the evidence linking the economic performance of the Netherlands and Denmark to underlying social factors.

(A) Macro-economic Factors

The generally dismal employment experience of much of Europe and Canada in the 1990s, when compared to the U.S., has frequently been blamed on more regulated labour markets and more generous welfare states. Without long elaboration here, it should be noted, however, that much of the difference in growth performance can be attributed instead to the policy decision of most central banks to place a strong emphasis on achieving very low rates of inflation through continuing high real interest rates. U.S. economic growth through the 1990s has been underpinned by much more expansionary monetary policy.

While the U.S. Federal Reserve was certainly concerned with the possibility of inflation as the 1990s recovery continued, they allowed the unemployment rate to fall far below the "NAIRU" level which had once been considered to be inflationary, and they tested the potential for non-inflationary growth before gently applying the monetary brakes. To a significant extent, Europe "chose" low inflation over the reduction of unemployment by maintaining high interest rates in the 1990s even in the face of stubbornly high unemployment. This policy was also bound up with the process of European Monetary Union.¹²

Following broadly comparable performances in the 1980s, the significant Canada-U.S. growth differential which emerged in the 1990s also owes much to macro-economic policies. The OECD and the Department of Finance largely agree that Canada’s much tighter monetary policy at the start of the decade produced a deeper and more prolonged downturn than in the U.S., and was the major cause of the more serious Canadian debt/deficit problem. This, in turn, resulted in much more contractionary fiscal policies in Canada through much of the 1990s.

While Denmark and the Netherlands generally pursued monetary polices comparable to other European countries, one difference lies in the fact that both had largely eliminated their large public sector deficits in the 1980s, and they were not obliged to make deep cuts to public spending in the 1990s. Indeed, Denmark significantly boosted spending early in the decade to help lower unemployment. In short, macro-economic policy continues to make a significant difference.

(B) The Efficiency Neutrality of the Choice between Private and Public Consumption

While it is often argued that the high tax "burdens" needed to finance income redistribution and high levels of public and social services reduce growth, the evidence above and a large and growing literature suggest that the social decision to maintain or not maintain a relatively large public sector is, in fact, neutral or even positive.

There are plausible and well-documented links between high levels of public spending on broadly accessible health and education programs and workforce productivity, and there is every reason to believe that the market provision of education, skills training and health result in costly and inefficient delivery of services and the exclusion of many. There is no good reason to believe that paying for health, education, pensions and day care through taxes rather than through market income, and delivering services through the public rather than the private sector, carries a cost in terms of economic efficiency. Indeed, private systems of delivery – such as U.S. health care – are widely considered to be cost inefficient as well as socially unjust.

To illustrate, a recent study by Allan Larsson – a senior official with the EU Employment and Social Affairs Directorate – noted that about 40% of household expenditures in both the U.S. and Sweden goes to social protection – health, education, pensions, and day care combined (41.2% in Sweden vs 39.6% in the U.S.). The difference is that, in Sweden, 90% of that expenditure is financed through taxes and almost none from after-tax income, compared to just 25% from taxes in the U.S. As he noted, the choice is not between high and low overall costs for social protection, but rather between a more or less equal distribution of income, services and opportunities.¹³

Canada’s more redistributive tax/transfer system compared to the U.S. is also complemented by a higher level of delivery of public services, replacing some expenditures from after-tax income. In the U.S., medical care expenses consume a startling 13.96% of after-tax household income, compared to just 3.2% in Canada, while a recent OECD study found that private U.S. household spending on social security – contributions to private pensions, health, disability, and similar plans – amounts to more than 8% of U.S. GDP – well above the 1% to 3% range in continental European countries.¹⁴

To the extent that higher taxes simply represent a choice to finance social security and some services from taxes rather than from after-tax income, the "burden" is simply a reallocation of funds from private to public consumption.

(C) Taxes, Equity and Efficiency

Much of the case for an equity/efficiency trade-off rests on the view that high taxes – and particularly progressive income taxes – reduce incentives to work and to save and thus reduce growth. This argument rests on the core "free market" proposition that taxes "distort" market signals, and that efficiency losses will therefore rise in line with the general tax level as a proportion of GDP, particularly if the tax burden is heavily tilted towards the most "distortionary" forms of tax. Most current advocates of tax cuts argue that a lower level of taxation will boost longer term economic growth by creating a more competitive, dynamic and efficient economy (This section of the paper summarizes part of the argument put forward by Andrew Jackson in "Tax Cuts: The Implications for Equity and Efficiency," in the Canadian Tax Journal, Vol. 48, No. 2, 2000.)

Current economic research provides, at best, very thin and mixed support for the large efficiency impacts commonly expected from general tax reductions. With respect to the taxation of labour income – via personal income taxes and social security contributions which create a "tax wedge" between the total wage costs of the employer and the take-home pay of workers – one theoretical argument is that higher average and marginal rates will reduce the willingness of workers to supply more labour. Thus, higher taxes will allegedly result in workers being less prepared to work long hours or work overtime, or even to invest in the skills needed to get higher paying jobs. Conversely, however, it can be argued that higher average and marginal tax rates on labour income will actually increase the willingness of workers to work longer hours, since they need to work those additional hours to get the same or more after-tax income.

With respect to the taxation of capital income, the basic theoretical argument is that increased taxation of property income in the hands of individuals (through dividends, capital gains, interest, and so on) will lead people to save less. Again, however, it can just as plausibly be argued that lower after-tax returns from savings will lead people to save more in order to reach the same savings target.

As summarized by the OECD in a major 1997 survey of the literature, when it comes to the taxation of labour income, national and comparative cross-national research shows that there is little or no impact from higher taxes on the willingness to work of (predominantly male) primary income earners.¹⁵ Similarly, an IMF survey of the literature found that "although studies do not all agree on whether the uncompensated wage elasticity of men is positive or negative (i.e., on whether men increase or decrease their hours worked in response to an increase in their wages), the majority of studies agree that whatever the sign of the elasticity, its absolute value is small."¹⁶

Recent studies show that past differences between men and women have fast eroded, and that work effort is very insensitive to after-tax income.

It has also been argued that a progressive income tax rate structure creates disincentives to workers taking higher paying but more stressful jobs, or upgrading their education and skills. However, the idea that workers avoid high paying jobs in order to avoid high taxes is implausible, and studies tend to show that very few jobs, even high-skill jobs, are left unfilled because of a lack of qualified applicants. Only one percentage point of the Canadian unemployment rate in 1999 was due to skill shortages.¹⁷

The final alleged link between personal taxes and economic growth is through personal savings. As noted above, it can theoretically be argued that taxes on capital income reduce or alternatively, increase personal savings. Economists have been unable to show that after-tax returns affect savings rates, either positively or negatively. Overall, the OECD concludes that "on balance, it appears that taxing capital income reduces savings, but not by very much." They note that, based on one recent study, the complete elimination of the average tax rate of 40% on capital in 21 OECD countries would raise private savings by about 0.5% of GDP.

It is notable that the U.S. – clearly a low-tax jurisdiction compared to most OECD countries – has consistently had one of the lowest personal savings rates in the OECD. By contrast, personal savings rates are very high in many European countries that have high levels of personal taxation as a share of GDP. National savings rates vary more because of institutional features – such as the nature of pension arrangements and the nature of housing markets – than as a result of differences in tax systems. The key conclusion is that there is no strong evidence for the argument that cutting taxes on property income will lead to higher savings rates.

In the case of Canada, a major link from high and progressive personal taxes to growth has been via an alleged "brain drain" to the U.S. However, Canada attracts many more skilled and highly educated workers than it loses and in the 1990s, the outflow to the U.S. has been very modest – and indeed, at an historic low point. It is far from clear that taxes play the major role in decisions to emigrate.

Another key theoretical link from taxation to growth is the channel from the cost of capital (which is influenced by business taxes) to business investment (that is, investment in structures, machinery and equipment, as well as "soft" business investment in research and development and in worker skills). Economists agree that high levels of business investment contribute to faster labour productivity growth by increasing the capital stock, and business investment in research and development, innovation and skills is a vitally important source of growth in a ‘’knowledge-based economy."

In mainstream economic theory, the cost of capital – which is influenced by the level and structure of corporate income and capital taxes – has a direct impact on the level of real business investment. If the "capital tax wedge" or marginal effective tax rate on investment rises, then investment will fall. (The tax system may also shift the composition of investment by favouring or discriminating against certain sectors.) A negative impact on investment from the effect of taxes on the cost of capital is certainly theoretically plausible, but as the IMF study reports, "numerous studies...have attempted to measure the influence of the cost of capital on investment. While many of these studies find that investment is negatively related to the cost of capital, most find that the size of the effect is rather small."

The OECD survey of the literature also found that "while many studies find that investment is negatively related to the costs of capital, most find that the effect is small." Economists have found that business investment is much more strongly related to the growth of the market (the demand side) than to the cost of capital (the supply side), since firms will not invest – even if taxes are low – unless markets are expanding.

The major point is that macro-economic policy – the level of real interest rates, fiscal policy – is by far the most important variable behind the level of real business investment.

To be sure, corporate tax rates play a role in where companies invest, and there have been recent trends towards a downward harmonization of corporate taxes across countries. But an investment may promise a high rate of return for many reasons: access to skilled workers, high productivity, access to good public infrastructure, access to energy, resources and other inputs at favourable prices, and so on. In the case of Canada, a 1999 benchmark study by KPMG, The Competitive Alternatives,¹⁸ finds that the effective total tax rate for nine industries is slightly lower than in the U.S. (35.7% vs 36.0%), while Canada has a significant cost advantage in numerous non-tax areas. The small difference in effective corporate income tax was more than offset by other, lower taxes.

To summarize, the mainstream economic literature as summarized by the IMF and the OECD does not support the frequently heard argument that relatively high taxes kill growth and jobs. In an increasingly integrated global environment, there may be some negative influences from very progressive income taxes and high corporate taxes, but there is still a lot of room for choice. As shown above, overall tax levels have not been harmonized downwards, and there is no good reason to believe that a high level of taxes is incompatible with growth, particularly when the importance of public investment in growth is considered.

(D) Positive Linkages from Equality to Growth: Investment in Human and Social Capital

The economic literature on development, such as recent World Development Reports from the World Bank, has begun to draw some positive empirical and theoretical linkages between equality and economic growth, emphasizing such issues as access to credit and basic education for the poor, and the relationship between high inequality and destructive social and political conflict. The fundamental – and not surprising – message is that marginalization of a large part of the population in deep poverty is negative for economic development. While this literature is less relevant to the analysis of the comparative growth performance of OECD countries, it has drawn attention to the potential linkages from income distribution to growth which take place through investment in human and social capital.

A key tenet of the so-called new growth theories is that long-term growth is driven less by investment in physical capital (buildings, machinery and equipment, infrastructure, etc.) than by innovation and the advancement of knowledge and learning which involves high levels of investment in human capital. Osberg notes that "one of the major themes of recent growth theory is the importance of human capital in production and the intergenerational transmission of human capital."¹⁹

Few would disagree that investment in education and training has a major role to play in growth, and growth in OECD countries has indeed been linked to increasing educational attainment. Hansson and Henrekson find that higher government expenditures on education were positively associated with higher average private sector productivity growth in OECD countries from 1965 to 1982.²⁰ The literature as a whole, as

reviewed by the IMF, suggests that the returns from public investment in education are high. In Canada, a strong argument has been made by Fraser Mustard and associates at the Canadian Institute for Advanced Research that investments in early childhood education yield large future returns in the form of a better-educated and more skilled workforce.

The links from income inequality to the development of human capital are no less clear than the links from human capital to growth. There is abundant evidence that children from low-income households tend to do less well in school than do their peers.²¹ Further, negative linkages from low income and poverty to poor educational achievement compound and continue over time. Low educational attainment will increase inequality among the present generation, which will have an impact on the successor generation and will impact on future growth. The frequently made distinction between equality of opportunity and equality of results makes sense only in a single generation model. Given the importance of conditions in childhood to human development, there has to be some equality of condition in the present in order to generate equality of opportunity for the next generation.

In this context, it is worth noting that the ranking of countries by a common standard in terms of the literacy and numeracy levels of young people and adults – perhaps the most fundamental measure of human capital in a world of very different educational systems – is suggestive of a close link to overall levels of income inequality. Based on the results of the International Adult Literacy Survey (IALS), the high-equality Scandinavian countries rank highest in terms of average literacy scores, followed by Germany and the Netherlands, with Canada and the U.S. lagging behind. The Scandinavian countries rank well in terms of the proportion of adults with high scores, but the major difference is that the incidence of limited literacy levels is very low. Put another way, the low income inequality countries tend to have a very narrow spread of literacy scores. Also, the literacy attainment of young adults is less strongly linked to the socio-economic background of parents than in other countries. In short, there is a direct link from inequality to human capital as measured by literacy, and the IALS report closely documents this link, as well as the positive links from literacy to growth.²²

These studies also indicate that higher skill production models in Europe are linked to the higher literacy and numeracy levels of production workers.

Most economists recognize that public investment has positive impacts on growth, and the importance of public investment in physical infrastructure, education, training, and research and development is not controversial (even though it is necessarily financed by taxes.) Income redistribution through transfer programs is, however, often seen in a much more negative light, notwithstanding the growing evidence that high inequality is associated with low, rather than high, growth. An interesting recent study has linked higher public spending on transfers (which directly reduce inequality) to economic growth in OECD countries, although the linkages are not explored.²³

As has been noted, some people have suggested that there is a linkage from relative equality produced by transfers to growth through improved human capital. Others have pointed to reduced social costs such as the costs of crime, urban pathologies, the lost productive potential of the marginalized population, and public expenditure on defensive necessities like police and prisons rather than productive investment. While plausible, research on the linkage of deadweight social costs of income inequality to economic growth is still in its infancy. Research studies have, however, shown very clear linkages from inequality (and not just poverty) to ill health, suggesting that inequality reducing transfers may reduce public and private health costs. Whatever the direction of causality, it is clear that the level of spending on transfers and public services has tended to rise with national income, suggesting either that public expenditures promote growth, or that richer societies tend to choose greater equality and more security outside the market.

Another relatively recent theme is that growth is positively impacted by high levels of social trust and co-operation (social capital).²⁴ Again, however, the links from co-operation to growth have not been specified very concretely. The next section of this paper attempts to makes sense of some of the cross-country comparisons made above in terms of the level of social co-operation.

(E) Social Co-operation as a Factor in Job Creation and Economic Growth

As previously noted, labour market regulation tends to narrow wage differentials and to raise the relative pay of lower paid workers, thereby reducing the inequality of incomes directly generated by the job market. At issue are the impacts on growth, job creation and productivity. The argument here is that equal outcomes sustain growth through trust and co-operation.

While labour market "rigidities" have been widely attacked as economically inefficient, collective bargaining and employment standards can achieve "efficient" outcomes in terms of balancing wage and productivity growth, facilitating workforce adaptation to changing market conditions, and maintaining the profitability of private investment.

Over the past few years, the annual OECD Employment Outlook has provided substantial evidence on this point, implicitly criticizing the influential 1995 OECD Jobs Study. For example, the 1997 Employment Outlook contained a long study which found no correlation for OECD countries between levels of collective bargaining coverage or trade union density and various measures of economic performance, and the 1996 and 1998 editions of Employment Outlook contained comprehensive studies which found no significant links between high wage floors (set by bargaining or minimum wages) and lower rates of employment of less skilled workers. In other words, the equity gains did not carry an employment or economic efficiency price.

There is an abundant literature that documents the positive effects of collective bargaining, union representation and employment standards on productivity at the industrial and firm level. The key links include higher capital investment, reduced worker turnover and thus higher levels of firm-specific skills and higher returns on firm investment in training, and increased workplace co-operation on the basis of negotiated agreements on technology, work organization, working conditions, and other issues. The major study Paying for Productivity, by U.S. economist Alan Blinder for the National Bureau of Economic Research, shows that the productivity gains from new technology are crucially dependent upon workplace co-operation and that good industrial relations are key.

The ILO’s World Employment Report of 1995 (Part 4) contains an extensive rebuttal of the labour market deregulation prescription for growth and job creation, emphasizing the importance of employment stability and negotiated workplace dialogue to "functional flexibility" at the workplace level. The report also recognizes the positive dynamics that arise when unions close low wage routes to firm and industry competitiveness and force the new investment in capital, innovation and skills needed to raise productivity through the production of more innovative and sophisticated products and services.

These positive impacts reflect the reality that bargaining at the firm or national level is about an accommodation of interests. While unions expect that productivity improvements will be shared, wage bargains necessarily reflect the competitive situation facing firms and the need to maintain strong, private investment to achieve future growth.

The alleged disincentive effects of good income security programs for unemployed workers are greatly exaggerated, and "generous" UI benefits have been found to reduce poverty and income inequality and to facilitate efficient job search.²⁵ Moreover, unions and governments in many countries with "generous" UI systems support active labour policies that emphasize training on the job, rights to training and education leaves, and the retraining and direct creation of good jobs for the unemployed, rather than "passive" long-term income support. (That said, socially compensated long-term unemployment is indeed an unfortunate major feature of many European countries.)

High levels of public investment in labour adjustment and skills training programs have rightly been seen as a key ingredient in the good employment performance of Sweden in its heyday, and more recently, in Denmark and the Netherlands which moved strongly in this direction in the 1990s. Denmark, in particular, has greatly expanded such programs in the 1990s, moving from a German-style "passive" benefits system to a Swedish-style "active" labour market policy designed to counter long-term unemployment. Effectively, young people are guaranteed a subsidized job at normal wages or a training position that leads to real job opportunities.²⁶

In the Netherlands, some trimming of long-term unemployment benefits has been accompanied by the expansion of active labour market programs to ensure a successful transition from school to work for young people, resulting in a youth unemployment rate near zero. In the 1990s, the Netherlands also greatly expanded subsidized employment for marginalized groups such as the older long-term unemployed and workers with disabilities who have been placed with both private and public sector employers.²⁷

In the Netherlands and Denmark, there has been a conscious shift of policy away from the provision of long-term transfers to the unemployed and towards subsidized job creation, income supports for marginal workers, and training.²⁸ In both countries, social security reforms affecting unemployment and long-term benefits have been negotiated on a tripartite basis, and the unions are active co-managers of the social security systems. In short, there has been reform in the direction of more active policies, but limited direct cuts to benefits. In the Netherlands and Denmark, particularly the former, most observers agree that collective bargaining has accommodated the growth of part-time work and flexible work hours (such as weekend work and more variable shifts) while preserving a high floor of minimum conditions. Part-timers get the same hourly wages and benefits as full-time workers, and casual "on-call’ work is very much the exception. While short-term employment contracts are permitted, there are limits on their duration so that temporary workers can obtain permanent status quite quickly. The social and economic significance of non-standard work is thus quite different in these countries than in the liberal labour markets of the U.S., the UK and Canada, where there are very large gaps in income, benefits and rights between permanent, full-time (i.e., standard) and temporary or part-time (non-standard) workers.

The key point is that regulated labour markets promote more equal wages, benefits and working conditions, but they do not necessarily carry a significant price in terms of labour market rigidity. It is quite possible for the labour market to be flexible to changing conditions without there being large differences in pay. A key conclusion of the ILO studies of employment success in Europe is that a combination of flexibility for employers and security for employees has been achieved. The precise terms of the negotiated arrangements vary, but the key point is that the arrangements have been negotiated, and accommodations made on both sides.

At the macro-economic or society-wide level, national wage pacts and a "new corporatism" have been seen as by the ILO and the European Commission as a major reason for the relative employment and growth success of a number of smaller European countries – Ireland, Denmark, the Netherlands, and Austria. The core argument has been that strong labour market institutions do not necessarily result in a lack of adaptability of national wages to changing macro-economic and competitive conditions or as a barrier to needed flows of labour between industries, and are still important in terms of sustaining demand.

The economic success of some smaller European countries in the 1990s owes much to wage moderation. In the Netherlands, Ireland, Denmark, and Austria, trade unions and employers have consciously bargained so as to maintain the profitability of national firms to increase employment and to win new investment. In the case of the Netherlands and, to a lesser extent, Denmark, reductions in regular working-time were very much a part of the arrangement, and hours reductions played a role in the high rates of job growth. In all of these countries, the maintenance of collective bargaining arrangements and of good employment standards has been implicitly part of the deal, along with the maintenance of reasonably generous welfare states. Wage moderation – though not at the expense of an increase in real wages – has been given in return for job creation and the maintenance of low levels of wage and income inequality.

In the manufacturing sector – for which the data are most consistent and reliable for making international comparisons – it is clear that regulated labour markets have resulted in reasonable growth of wages in relation to productivity.

Table 12 presents data on the average annual rate of increase of unit labour costs in manufacturing, with a positive number indicating that nominal hourly wages have increased at a faster rate than real hourly output. As shown, wages have increased modestly in relation to productivity in the U.S., and the same has been true in the Netherlands, Denmark and Sweden. The growth of unit labour costs has been much more rapid in the UK (where it was offset by a significant currency depreciation when Britain left the ERM) and in Germany.

Table 12
Wages

Labour Cost Competitiveness in Manufacturing (1990-98)	US	Canada	UK	Germany	Netherlands	Denmark	Sweden
Average annual change in unit labour costs 1	0.2	0.7	2.8	1.3	-0.5	0.2	-0.4
Average annual change in real hourly wage in the business sector 1	0.4	0.4	0.8	1.8	0.6	NA	0.3
Average annual increase in real wages per employee 2	0.5	1.0	0.3	1.2	0.3	1.5	1.3
1 U.S. Bureau of Labor Statistics. Hourly wage deflated by Consumer Price Index. 2 OECD, Economic Outlook, Annex Tables 12,16.

The second column in Table 12 shows hourly wage growth in manufacturing, deflated by the national consumer price index. It is notable that real hourly wage growth in Germany – and to a lesser extent, the UK – has been significantly higher than in the other countries. Similarly, the growth of real wages per employee in the business sector has been significantly higher in Germany than in the U.S., though no higher by this measure than in Denmark or Sweden. (Unfortunately, this measure does not control for hours worked.)

In the U.S., in the manufacturing sector and in the business sector as a whole, productivity growth in the 1990s has been running significantly higher than real wage growth. While there are several reasons why wages deflated by consumer prices might lag behind output growth deflated by producer prices, the evidence shows that the corporate profit share and the corporate profit rate in the U.S. have been strongly rising in the 1990s and that the fruits of growth have gone disproportionately to business profits.

The pre-tax corporate profit rate in the U.S. (returns to capital per dollar of assets) was 10.4% in 1997, higher than at any business cycle peak since 1959, and the capital share of income earned in the corporate sector was 21.6%, almost back to the 1959 level and sharply up from 18.4% in 1989.²⁹ Simply put, workers have benefited very little from the long U.S. expansion in terms of higher wages, although there has been some wage growth for lower paid workers since 1997 as unemployment fell to very low levels.

Given intense competition for markets in many sectors and the international mobility of capital, there are clearly pressures at work to maintain the relative competitiveness of national firms and industries. Seen in this context, the relative success of the Netherlands and Denmark in terms of achieving strong rates of growth of output and productivity and jobs while maintaining quite strong rates of private investment owes something to the fact that real wage growth has been kept at a level sufficient to maintain strong business investment. The collective decision of the labour movements in both countries was to give priority in bargaining to job creation and growth. While the "new corporatism" has occasionally aroused controversy, it must be noted that in the Golden Age of full employment and low inflation from the 1950s to the 1970s, unions bargained wages which closely matched productivity growth in order to maintain full employment and spur growth through investment.

To summarize, there are good reasons to believe that there is an important and positive linkage between relative equality and economic growth which runs through the way in which the labour market is organized. High levels of collective bargaining coverage,

supplemented by employment standards, produce relatively more equal wages and a low incidence of low-wage work. This can produce a climate of trust and co-operation at the workplace level, based on the fair sharing of productivity gains. Unions can also choose to place the priority in bargaining on job creation, rather than on wage growth for the already employed, as has been the case in some countries. In the Netherlands and Denmark in the 1990s, this was done through wage moderation combined with the reduction of working-time and negotiated flexibility – all of which helped to create jobs.

Finally, constructive labour-management relations can help maintain a broad social consensus around social and labour market policy issues. This has been the case in the Netherlands, where the tripartite (business/labour/government) Social and Economic Council is an extremely important voice in social policy development, including on issues related to the design and funding of income support programs. Generally speaking, consensus decisions are translated into policy, and a lack of consensus is relatively rare.

Similar, though different, consensus-building institutions exist in the other successful small European countries. In Ireland, for example, non-governmental organizations have been added to the tripartite process. Training and active labour market policy issues tend to be dealt with in such fora, where the institutional design is likely to produce some balance of social equity and economic efficiency concerns over social and labour market issues that have both social and economic significance. Neither consensus nor balance is guaranteed, and tripartite arrangements can break down in rancour and conflict, as they did in the Netherlands in the early 1980s. The central point is that social co-operation remains very much alive in some countries, and it appears to have been a major factor in producing the elusive combination of growth with social equity that is seen in some smaller countries.

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