Was the welfare state unsustainable?

One of the most lasting achievements of the neoliberal hegemonic narrative is related to the “collapse” of the welfare state. It is now received wisdom that social welfare states had suffered from inherent problems that had to be ‘corrected’ in the eighties by 'sensible' neoliberal leaders such as Thatcher and Reagan. What is striking is how little these claims have been or are checked against reality. Doing so would reveal, before all else, that the decades of the welfare state produced higher growth rates and higher levels of employment than the following decades of neoliberalism. Significantly, the data also disproves the central tenet of the Thatcherite narrative, according to which the welfare state collapsed because labour had acquired overly strong rights, primarily but not exclusively in the form of trade union power, which it used to secure itself more and more entitlements. Through these entitlements labour captured a larger and larger share of total economic output in the form of ever higher wages and other benefits. As a consequence the profitability of Western European firms was squeezed, and the financiability of the welfare state came into question by the early seventies. (The Marxist version of this narrative would add that capital gave up the compromise about the welfare state as a result of the profit squeeze in the early seventies.)
As it happens, empirical data disproves this narrative. What we see from the data is that the labour share of GDP stayed constant or even decreased slightly during the welfare state decade. It then increased slightly in the seventies, a decade when five great crises hit the world economy: the first oil crisis, the Nixon shock, the abandoning of the gold standard, the second oil shock and the Volker shock. This was primarily caused by decreased economic activity (the denominator falling) and sticky wages (the numerator staying stable). From the early eighties onwards, with the onset of the neoliberal era we see a continuous and marked drop in the labour share of GDP.

In the case of the welfare states of the EU 15, we see an oscillation of the labour share of GDP between 70 and 72 per cent of GDP in the sixties. With the arrival of the crisis in the eighties this share increases by no more than two percentage points, then starts to decrease to reach a low point below 65 per cent just before the Great Recession of 2008. In the case of the US, which did not have a welfare state, we see a clear downward trend from 1944 onwards, albeit with some oscillation. The slow downward trend accelerates considerably during the Reagan, Bush Snr, Bush Junior and Obama presidencies, with somewhat of a reversal during the Clinton years. It is also visible from the data that there was no significant difference between the changes in the labour share of public and private employees. All in all, the welfare states did not go bankrupt because of a profit squeeze or the over-empowerment of labour. The narrative did convince some voters, and was used to curb and roll back trade union rights. With the gradual neoliberalisation of the left (Mitterand, Papandreou, Blair, Schröder) even the one time sceptics bought into the mainstream narrative.