Child Poverty, The Labor Market and the Welfare State in the Industrialized Countries*

Giovanni Andrea Cornia and Sheldon Danziger

The living standards and social well being of children throughout the industrialized world improved remarkably between the end of World War II and the mid 1970s. However, child welfare is now at a turning-point, most clearly in Eastern Europe, but also in the West. While economic and social progress continues in many domains in many countries, deteriorations in social safety nets have emerged. Uncertainties about the future of the welfare state that has helped protect children and families from the vicissitudes of the economy in the past 50 years raise concerns that the beginning of the twenty-first century may represent an era of retrogression and inequality.

Economic and Political Changes

Changes in the global economic environment, especially technological changes, have reduced the demand for less-skilled workers and increased economic hardships. In addition, there are important economic and political effects of the collapse of communism. Its most immediate effect was a severe recession and social crisis in Eastern Europe and the countries of the former Soviet Union which have lowered living standards, increased inequality, and reduced children's well-being quite dramatically.

In the advanced Western economies , the ramifications of these events are still working themselves through the international economic and political systems. The collapse of communism has already contributed to political system changes (as in Italy), recessionary trade shocks (as in countries such as Finland that were heavily dependent on trade with the socialist bloc), frictional unemployment increases associated with reductions in military expenditures (as in California, resulting from reductions in defense contracting and military personnel), and large fiscal effects entailing increased taxes and declining real wages (as in Germany, where huge subsidies were required to integrate the former East German economy and to support large numbers of migrants and refugees from beyond the former 'iron curtain').

The fall of communism has also undermined public support for governments in general and social policies in particular. Critics of the 'social welfare state' have equated it ideologically with the 'failed socialist state' and have challenged the credibility of policies which rely on the state, rather than the market, to promote social needs.

We do not defend the status quo in welfare states. Indeed, we believe that the welfare state in some countries should become more market-oriented. None the less, the sharp decline in living standards and the rapid increase in poverty in the East following the demise of communism demonstrates that market mechanisms cannot, on their own, alleviate poverty.

The Welfare State and Child Poverty

In the first 25 years following World War II, a combination of government income transfers, labor market policies, and social policies regarding public health, education and child care combined with rapid economic growth to dramatically reduce child poverty in most industrialized countries. Since the early 1970s, however, there has been a slow-down in the rate of growth of public expenditure for children, benefit erosion, increasing selectivity, and growing policy biases in favor of other social groups. For example, even Sweden is under pressure to reduce public spending. Its low level of poverty and inequality are due primarily to its activist labor market policies and generous welfare state programs; but in a period of globalization and technological change, these policies have become "too" expensive.

Given the broad variations across the industrialized countries of the East and West in economic conditions, the nature of the welfare state, societal norms, and ideological orientations, there are no universal lessons that can be applied in all countries to reduce child poverty. What is feasible in Sweden may be ideologically impracticable in the USA and economically impossible in Russia. Therefore, we suggest several key policy agendas for industrialized countries:

Labor market policies. Much of the recent increase in child poverty is due to technological changes that have reduced the demand for less-skilled relative to more-skilled workers and to the increased globalization of the market economies. These changes caused rising unemployment in many high-wage European countries, especially those with less-flexible labor market institutions (e.g., France and Germany) and increased work at low wages in economies with less labor protection and more wage flexibility (such as the USA). As a result, most children in low-income families have parents who can not be expected to earn enough to keep their families out of poverty. Thus, active labor market policies are needed to augment the skills of the long-term unemployed, to encourage employment in the private sector, and to create jobs of last resort when structural unemployment is high. Some countries might increase the minimum wage, whereas others need more flexibility in their labor market institutions

Strengthening social safety nets. Remarkable progress has been accomplished in most industrialized countries over the last fifty years in the areas of old-age pensions and unemployment compensation. In contrast, implementation of child and family policies has been less complete. In many countries this has contributed to dramatic declines in the birth rate, with the number of people under 20 years of age falling below that of the elderly. Life-cycle events like divorce, birth or illness of a child are typically associated with a high risk of falling into poverty. Benefits promoting child well-being, such as paid maternity leave, child allowance, ensured child support, and free health care are either non-existent, means-tested, or insufficient in amount.

Thus, many countries need to formulate or preserve a comprehensive social welfare policy for children and families. The necessary resources can be obtained by reordering public spending priorities, and in countries where recent tax changes have been regressive and income inequality has increased, through higher taxation of the rich. In several of the formerly centrally-planned economies, this requires the establishment or redesign of the entire system of taxation.

Child support policies. In an era of increased divorce and out-of-wedlock child-bearing, there is also great need for increased private transfers from absent parents (usually fathers) to the custodial parent because, in most countries, single-mother families are among the poorest groups.

The Future of Child Poverty

If these policies are to be successfully implemented, families, employers, unions, and governments must all be prepared to make changes. Families must be willing to work in the market to support their children, and to maintain this support even when marriage and living arrangements change. Employers must be willing to assume some training costs and to support flexible labor markets and family benefits. In Western Europe, trade unions must be willing to be more flexible in wage negotiations. Governments must be willing to provide basic health care, education, and preschool services, employment-related services such as job training and retraining, and job search, and family leave. Governments must also adopt tax policies that do not discourage employment, and which, when combined with safety net benefits, do not yield cumulative tax rates that unduly reduce incentives to work. Even though most advanced economies have experienced similar changes in family structure and in the structure of labor markets during the past two decades, their child poverty rates vary dramatically, from less than 3 per cent to more than 20 per cent. Differences in public policies and employment rates account for a significant portion of this variation. Our analysis suggests that these differences reflect differing social and political values and choices, not technical economic constraints. There are enough choices that can be made so that all modern advanced countries and eventually the transitional economies of Eastern Europe can achieve both a dynamic, growing economy and a lower child poverty rate.