November 28, 2000
Why We Don't Have to Choose between Social Justice and Economic Growth: The myth of the equity/efficiency trade-off
The central conclusion to be drawn from the recent experiences of some smaller European countries – notably Denmark and the Netherlands – is that relative economic success in today’s globalized capitalism can still be achieved despite, or even because of, continuing relative income equality.
These countries have high levels of collective bargaining coverage, relatively egalitarian wage structures, and a relatively equal distribution of national income. As stressed above, these are very different societies from the U.S., Canada and the UK, and much more attractive from the perspective of those who value the goals of equality and solidarity. Further, inequality and insecurity have not been significantly increasing in the 1990s, despite some "reform" of tax systems and welfare state programs. These countries have achieved strong rates of employment growth and low unemployment, and rates of per capita GDP growth and productivity growth that match or exceed those of the U.S.
Both of these countries are highly export-oriented and highly integrated into regional (European) and even global markets. They have succeeded in international competition in the 1990s through "social pacts" which have maintained real wage growth and have been associated with the reduction of working time and the maintenance of generally good employment conditions. "Flexibility" has been negotiated, but decent standards have been preserved and inequality and low-wage work have been contained. At a minimum, it can be argued that a regulated labour market has been no barrier to high productivity and high-quality production, and there is support for the argument that high productivity is promoted by collective bargaining and developed welfare states.
It is worth considering what Canada might look like if we decided to emulate Denmark rather than the United States, and succeeded in doing so. Both government spending and taxes as a share of GDP would rise by almost 50%, allowing for an enormous expansion of income transfer programs and public services. Collective bargaining coverage would double, low-wage work would practically disappear, and the pay gap between the top and bottom of the earnings distribution would shrink from at least 4:1 to 2:1. Child poverty would be all but eliminated, and household income inequality would be hugely reduced. Furthermore, if the Danish experience is anything to go by, per capita GDP and productivity would be essentially unchanged and we would enjoy sustained growth of living standards. Making Canada look more like Denmark would constitute a rather radical social transformation.
It is true, of course, that Canada is not Denmark, and our close integration with the U.S. exposes us to harmonization pressures with respect to taxes, spending and labour market regulation that are more significant than those in the EU. But it can certainly be suggested that the barriers to such a project are more political than structural.
There are no compelling reasons why Canadians could not put job creation at the forefront of economic and social policy, based on much higher levels of co-operation among business, labour and governments. There are no compelling reasons why growing fiscal surpluses could not be devoted in much greater measure to investments in social programs and income supports, given that these investments could be expected to have positive impacts on long-term productivity and not just on greater equality of outcomes. Canada is very different from the smaller European countries on many dimensions, but that does not negate what can be learned from them about positive co-operation at the workplace, training and labour adjustment policies, real investment in the long-term unemployed, income supports for low-skilled workers, and so on. Indeed, many of these lessons have been drawn by policy makers.
Some argue – loudly and incessantly – that the liberal U.S. model will win out in global competition and force other models from the field. But the cross-country evidence is not consistent with that argument. There are indeed competitive pressures on equality generating institutions as a result of international competition, but it is far from obvious that the U.S. model of high inequality and high insecurity best promotes high productivity and good growth and employment performance. Other countries seem to have found a better way which results in shared progress, and we should learn from them.
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