The Globalisation Of a Welfare State

Chapter 3 of New Zealand, New Welfare, edited by N. Lunt, M. O’Brien & R. Stephens. (Cenage Learning, 2007)

Keywords: Globalisation & Trade; Labour Studies; Social Policy;

In March 1952, just two men were on the Department of Social Security’s unemployment benefit. The rules of entitlement partly determine the numbers, but those registered with the Department of Labour as seeking work at that time would have added perhaps another forty. It was not a census year, but in the Population Census 12 months earlier 7902 men and 288 women had reported themselves as unemployed and actively seeking work. Most felt no need for the Department of Labour’s good offices.

In contrast, forty-five years later in March 2007, surveyed unemployment amounted to 84,000, equally divided between men and women. There is no longer registered unemployment statistics, but the 2006 census reported 106,000 were unemployed, reflecting definitional differences.

Admittedly the labour force is about three times larger, but the quantitative change is dwarfed by the qualitative change. Compared to half a century ago, today’s labour force is more female, browner, older, more skilled, more urban, and more in part-time work (and more productive and better paid).

Wolf Rosenberg (1960, 1977) argued that the labour market is at the heart of the welfare state because it provides jobs and thereby incomes to many families (including saving for their retirement) and its tax revenue is a major source for the government expenditure on other aspects of the welfare state such as education, health and income maintenance.

Other aspects of the welfare state experienced great change in the fifty odd years too: notably the young staying longer in educational institutions, the increased scope – and cost – of health care, the changing structure of the family, and the aging of the population. There is a far greater recognition of social diversity. But while these are global phenomena happening to all rich countries, they are largely independent of globalisation and would probably have happened even had there been no increased integration of national economies. (Easton 2007)

However the labour market has been responding to the pressures of globalisation, so this chapter largely focuses on its response. Just as it and the economy had changed, so the design and operation of the welfare state had to respond.

The Labour Market of the 1950s

In the first two decades after the War there were two dramatic, but inter-related, differences from the 1930s when the Welfare State was conceived in its modern form.

First, the post-war world experienced serious supply shortages including of fibres such as wool and of foodstuffs such as meat, cheese and butter. As a consequence the New Zealand commodity terms of trade – the ratio of the prices for exports relative to imports – was higher in the 1950s and early 1960s than at any other time in New Zealand’s history. Practically that meant that the return for the New Zealand farmer’s effort was high, by international standards. Second, these high returns did not go exclusively to the farmers but were shared by the whole community through a system of protection and related interventions, which forced farmers to purchase New Zealand-made products, even though they could have purchased them more cheaply overseas. More New Zealanders were employed and/or they were paid higher wages. Thus New Zealand was a more egalitarian society and (probably) a higher employment economy as a result of this protection. (Easton 1997: 77-85)

On that foundation the welfare state as we knew it was based. In 1972 the Royal Commission on Social Security codified this post-war evolution. Today the principles it set down may be taken as a summary of the welfare state as it was for the first four decades after the War. (RCSS 1972)

Many economists of the 1950s argued – Rosenberg was not among them – that the low unemployment of the era was inhibiting economic growth. Given that the period was one of high economic growth by subsequent standards, their analysis does not seem to be correct. Admittedly, the high levels of employment seemed miraculous. In fact, as already hinted, the measured level of unemployment was not an indicator of the available labour reserves. Even the Census figure is misleading. Labour shortages could be met from women at home and students, who while not defining themselves as unemployed could be available for work if required, from workers taking a second job and from immigrants. Moreover, while there were skill shortages, the impression is that skill specialities were not as great as today. So the labour market seems to have been able to respond to changes in demand without severe disruption.

 But what about the inflationary pressures that arise from labour shortages? Price and wage setting was not as market-based as it is today, with widespread price controls and the wage path, largely determined by the Court of Arbitration, being restrained in order to ensure that the most marginal employees retained their jobs. It seems likely too, that burgeoning prosperity meant that most people, experiencing regular increases in their spending power (except as their children grew up), did not demand maximum returns, but a fair share of a steadily increasing national income.

In those days taxation was not high. In 1952 the average worker paid around 11 percent of his wages in income tax, while the government’s total tax take was only 28 percent of GDP. Then spending on education, health and social security were not as proportionally high as they are today, making up only 22 percent of current central government spending in the 1950s.

Generally, life in the fifties was solid – happy for children, but hardly lively: pudding, not dessert. But this was an interregnum while the world recovered from global war. Globalisation had been a driving force in the international economy since the beginning of the nineteenth century, and while there had been a pause between 1914 and 1950, its pace would soon pick up.

The End of an Era

Long after the world of the 1950s has passed, there remains a widely held regret that it could not be retained, and a belief that the policies which framed it should be reintroduced. Such nostalgia fails to recognise that the particularities which enabled the economy to work the way it did no longer exist.

For politicians do not change lightly a successful regime. Their modifications to the welfare state in the late 1960s and 1970s were a response to forces outside New Zealand’s or the government’s control. They were confronted with a brutal reality that it was no longer working as effectively as it did in the past. Their responses were often not optimal – ‘desperate’ would frequently be a better description.

There is a single day on which the immediate postwar era may be said to have come to an end. On 14 December 1966 the price of wool fell dramatically – ultimately around 40 percent – and, except for a brief period during the international commodity boom of 1972 and 1973, it never recovered. In those days wool made up 40 percent of export receipts: adding in meat, the sheep industry contribution to exports was nearer two thirds. The collapse in the return to sheep farmers meant that there was no longer the income cushion which protection could transfer to the domestic economy. This is well illustrated by the ‘Nil Wage Order’ decision of the Court of Arbitration of June 1968 at which point the wage settlement system broke down despite a later decision to give a 5 percent increase. The effect of the Court’s decision was that the loss of purchasing power from lower export prices had to be shared across the community, just as the benefits from the higher export prices had been in the past.

But whether the cut in spending power was shared or not, there would have had to be a reduction in aggregate spending. The consequence was there was less production, and therefore less employment. For the first time since the beginning of the war, unemployment became evident, with registered unemployment rising to 6600 in April 1968 (while a survey based on the Census definition might have found more than 25,000 unemployed). (Gallacher & Braae 1983) With rising unemployment and downward pressure on both government spending and real wages the foundations of the 1950s welfare state were compromised.

There was no immediate realisation that an era had ended. Indeed, despite being of the political right, the incumbent National Government tried to maintain essential elements of the welfare state. The real benefit level from 1968 was higher than it had been in 1966 or before (albeit it a little lower than its 1967 level), a stark contrast with the vicious real cuts which occurred in 1991 under a later National government facing a less serious situation. But ultimately, if the economy changes than so must the welfare state.

The Rise of Social Diversity

Social changes were also impacting directly upon the labour market and on other parts of the welfare state. From hindsight, it is not obvious that New Zealand was a homogeneous society in the 1950s. But it was perceived and governed as such, with the most common social situation – an (implicitly white) couple with the man working outside the home and his wife looking after the house and some children – taken as a social norm, around which social discourse and policy were built. But increasingly, from the 1960s, diversity became publicly expressed and accepted. Here are a couple of crucial illustrations.

In the 1950s married women were mainly in the home, with most giving up paid work on marriage and some employers even requiring that. Housework was more demanding then – there has been a productivity lift in domestic services too – while typically there were more children. Today most women expect to be employed after marriage and even when they bringing up young children, although often only part-time.

A second dramatic change was the breakdown of marriage-for-life and the concomitant parenting. The consequences of the change became serious enough to lead to the introduction of a non-statutory domestic purposes benefit in 1968. But even when the child remained in a two-parent family, the caring parents might serially change.

These changes steadily undermined the policy – established in the early part of the twentieth century – of a living wage sufficient to maintain a reasonable standard of living for a man, his wife and two (or sometimes three) children, a principle which was enacted in legislation as recently as 1936.

The notion that a basic wage should be sufficient for some standard family is now a nonsense. Most workers do not head a ‘standard’ family, so what might be sufficient for a family man with two children would be generous for a single man or woman and inadequate for a family man with more children. Nor is it clear how it relates to the increasingly common two-earner family (in practice it is often a one-and-a-part earner family) or the 20 percent of women who seem to be choosing not to have children at all.

While it had been long accepted that the state should, to some degree, be responsible for paying for children’s health care and education, by the 1940s there was the realisation that this was not sufficient, and in 1946 the selective ‘family allowances’ of 1927 were replaced by a universal ‘family benefit’. State assistance for the maintenance of children was extended with the (at first discretionary) domestic purposes benefit for single parent families from 1968.

Thus the increasing diversity of family and earnings patterns put increasing expenditure pressures on the welfare state, as did the rise of other types of social diversity.

The Great Export Diversification

It would be too much to expect that New Zealand in the late 1960s grasped the enormity of the economic change it was about to experience, but fortunately it was a market economy – albeit a heavily intervened one – so the external sector followed the price signals.

It is common sense that where there is a collapse in the returns for a key industry, the task is to find alternatives. Which is what happened to New Zealand after 1966. While meat and dairy products remain principal exports (although their composition was changing) today the largest export earner is the tourist sector and exports of energy-based products, fish, general manufactures, horticulture, wood products and professional services exceed wool. Export destinations changed too, with Australia, the USA, Japan, China and sometimes South Korea more important than Britain where two thirds of exports had gone as recently as 1966. (Gould 1982; Easton 1997)

Such an external change impacted on the internal mechanisms which regulate the economy. But these were more under the influence of the government, which was reluctant to change them, since that infringed the power and prerogatives of significant pressure groups.

The most evident breakdown was in wage fixing. The system based on the Arbitration Court lost its authority following the nil wage order of 1968, but was not replaced by a coherent framework until – possibly – the 1990s by which time remuneration (for wages were becoming a smaller part of employee rewards) was set more by negotiation in open markets. In the interim the economy experienced high inflation as the various parties fought to maintain their share of a slower growing economy.

The slow growth also slowed real tax receipts while social change and poor economic performance increased spending pressures, especially those of the welfare sectors. The welfare state was changing.

The New Labour Market

The effect of the export diversification was to expose more sectors directly to the international market. It is not even obvious that the economy could now be divided into the exposed and sheltered sectors. The traditional linkages between wages could no longer be maintained since each factory or skill was experiencing different market conditions. Technical skills became more specialised, increasing heterogeneity and making fixed relativities even more difficult to manage.

The labour market became more dynamic. The Linked Employee-Employer Data base records 1.2 worker accessions (and slightly fewer separations) in the year ending March 2006, when total filled jobs averaged 1.7 million. (SNZ 2007) This, of course, involves some people being involved in more than one accession and separation during the year, but as John McMillan concluded in a review of the flexibility of the New Zealand economy ‘the data indicate that, by and large, the labour market and the financial market are doing their job’. (McMillan 2004)

Moreover, as the rate of technological change accelerated, skill requirements were continually changing, as do international markets, so the incumbent supplier might lose the market and have to lay off workers. Both impact on work practices. The jobs-for-life and a skills-for-life approach of the past has become obsolete. Today’s workers can find themselves involuntarily redundant with a likelihood of a period of unintended unemployment, unlike the 1950s.

The, perhaps unpalatable, fact is that an economy which is engaged in the globalised economy of the world is going to be subject to greater dynamic change and shocks than one which insulates itself. On the positive side, the globally connected economy is also going to produce a higher material standard of living. New Zealand chose the option of greater insecurity and higher incomes. The challenge becomes that as the labour market becomes more dynamic, the extent to which greater protection can be afforded to poorer workers.

Taxing for the Welfare State

Given the increased turbulence in the labour market from the late 1960s, we might expect the spending provisions of the welfare state to change and increase to compensate for the insecurity. But other changes were creating additional demands for spending so that, arguably, the welfare state today provides less of certain sorts of security than it did fifty years ago, primarily because of the difficulty of funding all the demands.

Many of the other expenditure pressures have already been mentioned: longer education (it is more expensive at the older end); the aging population (which has been politically more effective at ensuring its share of national income); healthcare, which is getting increasingly more expensive as its technological possibilities expand; and the needs of increasing diversity.

If in the 1950s the welfare state took up just over a fifth of central government spending today it takes up nearer three fifths (although changes in measurement practices make exact comparisons difficult). Despite reductions in some other components of state spending, the rise in welfare spending has meant there has been a rise in tax revenue as a proportion of national income, and hence of tax rates.

There has been a vigorous lobby which argues that the levels of taxation are too high and are inhibiting economic growth. However, the actual situation is more ambiguous. The pragmatist is likely to conclude that below certain limits the impact of tax levels, if any, is of uncertain sign (it may be positive, it may be negative) but in any case it is very small. What that maximum level is, is unclear. One cannot but observe that the prosperity of high-tax European countries does not seem to have suffered that much. By their standards New Zealand is not a high tax country so it seems reasonable to conclude it is well below the threshold. Moreover, the efficiency of the tax system matters, even if it is difficult to make cross-national comparisons. New Zealand probably has a more efficient tax system than most.

Nor does the international research evaluate much whether it matters what the tax revenue is used for. The public may want the collective services supplied. Some public expenditure may boost economic performance. Some displaces private expenditure: in the case of health services, public funding may be more efficient that compulsory private insurances. For all practical purposes the level of taxation (and its parallel proportion of public spending) is a social choice about the relative balance of the public and private funding of goods and services (and transfers). Within wide limits there appears to be no economically ‘right’ balance: rather it is an ethical judgement.

Given that spending on the welfare state has risen as a proportion of GDP over the last fifty years, the political conclusion must be that the public desires to have a more comprehensive welfare state – or, at least, one which responds to some of the rising pressures. Their voting shows a willingness to accept higher taxation to pay for those desires, even if it reduces their private spending.

But the rising spending alters the political calculations. When the welfare state was smaller (as a proportion of GDP) it could be funded largely by ‘vertical’ transfers from the rich to the poor. As its funding requirements increase, there was greater recourse to ‘horizontal’ funding, that is, transfers between people of roughly the same class in different circumstances, so the current welfare state has more of a social insurance aspect (best captured in the Accident Compensation system) than it did in its earlier form. (Snively 1986, 1988, SNZ 1990, Crawford & Johnson 2004)

There remains a nostalgia for returning to – or at least intensifying – vertical redistribution. While perhaps a different governing coalition might be able to increase the imposition on the rich, there are practical limitations, since in a globalised world the wealthy, corporations and the high skilled are more mobile, and can avoid what they consider onerous taxation by migration. In any case, the rise in the size of the welfare state outlays – almost doubling from about 12 percent of GDP in the 1950s to near 23 percent today – would mean that there would be a substantial rise of the burden of taxation on those on high incomes, were not a greater share born by horizontal distribution.

The Counter-Revolution of the Early 1990s

In contrast to the cautious responses following the 1966 terms of trade collapse, which aimed to maintain the broad principles of the welfare state, the ‘redesign of the welfare state’ in the early 1990s was a counter-revolution, justified as a response to globalisation. The changes in the employment law, the cuts in benefit levels criteria for eligibility, the shifts towards user pays and the privatisation of supply aimed to increase the flexibility of the economy in responding to external change. But the measures also shifted the income distribution towards the rich, and reduced the social protection of workers and the poor. They represented a concerted effort to move to a minimalist (or residual) welfare state. But so radical were the changes, so brutal were the reductions, and such was the reaction of the public to the undermining of ‘their’ welfare state, that measures were subsequently implemented to soften their impact.

Much of this ‘redesign’ of the welfare state has since been reversed. The biggest exception is that benefit levels have been maintained at their 1991 real values (ie. adjusted only for inflation) despite the cuts to well below the 1990 real levels and despite the general rise in real incomes since. This is one of the sources of the increasing inequality that was happening in the early 2000s. Beneficiaries unable to get a job have missed out on the rising prosperity.

The rejection of the redesign program reflects a social decision about the sort of society New Zealanders want to live in, recognising that other economies exposed to the external pressures of globalisation – most notably in northern Europe – have nevertheless been able to maintain a welfare state. Even so the changes which globalisation has caused to the New Zealand economy means the welfare state has to evolve.

A New Welfare State?

It is easy to urge spending more on welfare state activities, ignoring the fiscal constraints. The Labour-led governments of the early 2000s have prioritised job creation, spending on health and education and support for employed families with children, with less attention to social security benefit levels. Even so they may not been entirely successful. There remains a rump of long-term unemployed who seem resistant to both push-into and pull-from the labour market, while the failure to increase the real level of benefits since the cuts of the early 1990s is a contributor to the increasing social inequality. (Perry 2007)

However, to focus only on additional spending – especially if it ignores the fiscal limitations – is to overlook the primary lesson from this chapter. Globalisation has changed the functioning of the labour market, a change to which the traditional welfare state has not sufficiently adapted. The most important change is that there is going to much more involuntary labour turnover. The challenge is how to provide workers with some security, without preventing the necessary turnover that changing technology and demand conditions require.

Yet, it is surprising how little attention, including by workers, has been given to earnings-related transition benefits and to labour market measures designed to upgrade redundant workers job prospects, by – for instance – upskilling.

Of course clumsy policies have evolved, like employer-based redundancy payments and vocational training assistance. But whenever there is an announcement of works closure and job redundancy, the public outcry is as if this is one-off and should be stopped, rather that this is but one of an ongoing sequence of such layoffs , that it will continue, and what is required is the practical response of redeploying the redundant with the minimum of pain.

For the target can no longer be the minimisation of unemployment as it was conceived in the 1950s. The aim today has to be to minimise the stress on the unemployed during the transition between jobs, with an acknowledgement that jobs are no longer guaranteed for life and all workers face the possibility of arbitrary redundancy.

It may be that any employment transition benefit (and also a short term earnings related sickness benefit) could be integrated with the Kiwisaver scheme which provides a long-term second tier (i.e. top-up on New Zealand Superannuation) contribution-related benefit for retirement. (Cabinet Policy Committee 2007) Particular attention would need to be given to the integration between the first-tier (flat-rate, entitlement by need) and the second-tier (earnings-related, entitlement by contribution) components of the welfare state. However these are firmly second tier proposals. As in the case of the Kiwisaver retirement scheme, it is highly unlikely that they will ever generate sufficient income to end the need for a first tier. They are top-ups.

Earnings-related top-ups acknowledge that the loss of income by a high-paid worker shifting onto the unemployment benefit is more immediately severe than the loss by a low-paid worker. Moreover, unlike the existing arrangements, they recognise the existence of two-income families who currently get no social security cover if one loses a job.

Because it is an earnings-related scheme, such a top-up system has to be horizontally redistributive – based on social insurance – and contributory, rather than vertically redistributive. Indeed it is difficult to see how one could construct a comprehensive vertically redistributive earnings-related scheme which would be politically robust.

Distributional Considerations

There is no question that in recent years that on some measures income inequality seems to be rising in market terms, and also in disposable (when taxes are deducted and benefits added) terms, although the latter may be in part be due to the failure to increase social security benefits. (Easton 1996, Perry 2007) It is probably due to globalisation or technological change (or both) although it has to some extent probably been moderated by the rising employment during the 2000s.

However, it is less clear whether inequality is today higher or lower than it was in the 1950s. The fragmentary evidence suggests there may have been reductions in income inequality in the 1960s and even the 1970s which would contradict the nostalgia that the 1950s were a time of low inequality. (Easton 1983) That probably arises from the same source as the belief in social homogeneity: a lack of data and a lack of social perceptiveness. Undoubtedly today people are more aware of social inequality and there is the data to give empirical content to that awareness. Moreover today there seems to be a willingness of the rich to flaunt their wealth in a manner which was uncommon in the 1950s.

Even so the indications are that we are entering a world of greater income inequality than in the early 1980s, although that may not – and need not – mean that there is also necessarily a increase in inequality of opportunity or a sharpening of class divisions. But they may happen.


Much of the discussion on the welfare state is about education, health and social security, and the level of taxation – about its spending and financing. What this chapter demonstrates is that Wolf Rosenberg’s proposition: the welfare state is founded upon the performance of the economy in which the labour market places a crucial role in both that performance and the way in which it transmits the performance to the welfare of households and people.

Thus as the economy has changed, the labour market adapted, and the welfare state has changed too. In particular the increased openness of the New Zealand economy as it responded to the opportunities and changes in the world economy – to globalisation – has dramatically changed the welfare state as it was known fifty years ago.

Nostalgia will not take us back to that state, nor do the nostalgic evidently want to give up the benefits of the opening up – especially the wider range of goods and services and opportunities that it has made possible. The (selective) indignation which often goes with change be unhelpful, unless there is a careful analysis of its causes and consequences. There is the tendency for the indignant to ignore the upsides and focus solely on the downsides, like the consumer eating an omelette and bewailing the broken eggs.

Of course we need to be aware of the downsides of globalisation – not everyone in the labour market is a beneficiary in the short or, even, medium term. The challenge remains as how to minimise the resulting social distress, while maintaining the dynamism and flexibility in the labour market that is necessary to seize the opportunities that globalisation offers.

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I am grateful to Elizabeth Caffin, Peter Conway, Jas McKenzie and the editors for comments on earlier versions. Unless otherwise cited all statistics come from official sources, especially the New Zealand Official Year Book of Statistics New Zealand.

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