Navigation path

Left navigation

Additional tools

Other available languages: FR DE

MEMO/03/58

Brussels, 19 March, 2003

The cost of non-social policies

A widely held view of social policy is that it performs two main functions:

  • Re-distributing resources from richer to poorer households so as to reduce poverty and improve life opportunities

  • Supporting aggregate household spending during economic downturns by maintaining the incomes of the poorest a macro-economic stabiliser.

In both cases, it is traditionally argued that the financial spending should be held firmly in check since these expenditures while socially necessary will not add to the flow of incomes, or the stock of wealth, in the economy.

Creating 'more and better jobs' is a key component of the Lisbon strategy. The objective of an employment rate of 70% and 60% for women by the year 2010 is defined as the full employment goal. The European Employment Strategy plays a crucial role in reforming labour markets and releasing Europe's potential. However, there remain major structural weaknesses.

Over the past half a decade, our understanding of the role of employment and social policy has been deepened and changed as we better understand the multiple factors behind economic and social success, and the complex relationships between social policies and economic performance.

The EU has taken the lead in addressing these issues. The progress has been marked by the following milestones:

  • The 1997 Amsterdam Conference on Social Policy as a Productive Factor organised by the Dutch Presidency of the Council which provided the first comprehensive over-view of the issues and data.

  • The launch of the European Social Policy Agenda in mid-2000 and its endorsement by the European Council of Nice which highlighted the inter-dependence between economic, social and employment policies.

  • The publication of the Commission's Communication of Quality of Social and Employment Policies in 2001 which led to the subsequent adoption of Quality indicators in relation to labour markets and social inclusion.

In this policy work, the EU has been supported by the work that the OECD has pursued with regard to Social Policy, and which has served to correct many misconceptions with its emphasis on detailed quantitative analysis.

As a result we are beginning to see a much greater appreciation, at national and international level, of the wider, positive, contribution of employment and social policy to raising productive potential investing in human resources, preventing market failure and minimising costly social failure.

In the light of these analyses and debates, it is now easier to appreciate that the role of social policy is much wider than traditionally thought; that it is integral to the dynamic development of modern, open economies and societies; and that it brings cumulative benefits through time.

Social policies cover a variety of areas:

  • Investments in education and training which directly raise productivity and reduces social failure. Research for the European Commission, as well as for international agencies, demonstrates how increased educational attainment substantially increases productivity and life-time earning. Moreover, increased literacy and competence also serves to improve labour market job matching, and reduce wage differentials.

  • Investments in high performance standards (including health and safety) at the workplace which raise productivity and reduce accident losses. Poor or unsafe working conditions are estimated to cost the EU economy some 3 per cent of GNP a year, with some 500 million workdays a year lost.

  • Investments in active inclusion policies - to increase the prospects of bringing into economic life those groups and individuals who risk being unable to participate without help. It has been estimated that the under-use of available human resources in the EU and the wider costs of wastage in the economy (including ill health, crime, and the related costs) could be between one and two thousand billion euros a year (12-20% of GDP). Work undertaken in the OECD suggests that increased active social spending - on active labour market policies, payments to low income households, expenditures on family and child care, and investment in health may have a significant impact on productivity and economic growth.

  • Investments in social peace minimising costly social or industrial conflict. Social dialogue is at the heart of the European Social Model, and is seen as crucial in facilitating change and helping in the effective transformation of the economy. Such social partnership strengthens the social capital and institutional infrastructure that enables other policies to be effective. A recent World Bank case-study report shows how social partnership can lead to reduced earnings inequalities, lower unemployment and inflation, as well as higher productivity and a more rapid adjustment to shocks.

Overall, this evidence points to the conclusion that social policy is a productive factor, and that an efficient, dynamic, modern economy needs to be built on solid social foundations and on social justice.

Moreover, there is now good evidence that the traditional and simplistic comparisons of the US and EU social models with one seen as low cost and the other as high cost are misleading. Spending on health, education, social protection and other social needs are rather similar across all developed market economies of the order of 30% of GDP.

The big difference between the EU and the US is not in the level of expenditure on social matters, but in the extent to which this is paid for collectively through public taxation and insurance - rather than individually through private spending and insurance, after tax. On this basis, the EU does not have any economic fundamental competitiveness disadvantage since take-home pay tends to adjust to reflect the presence or absence of public social provisions - as seen in the fact that the total share of wages in GDP is no higher in the EU than the US.

However, the EU does have a real social advantage, with the benefits of our social systems being more evenly shared across our populations, and with fewer social problems in consequence.

The main structure of the European social model has proved very resilient. There is strong popular support, and it has been shown that the most dynamic, high performance economies in the EU are those where economic and social policies inter-act in positive ways.

It has been shown that labour market reform and investment in quality in work is a necessary precondition to bring more people into work and improve productivity.

Under static conditions, substantial increases in employment could imply a lowering of the average productivity per employee. Therefore, a dynamic nexus between the quality and quantity of employment pleads for quality improvements. They are both a necessary complement to structural change and increased labour market flexibility and a precondition for the sustainability of the improved employment performance.

The evidence of past achievements and simulations show that quality improvements in European labour markets are a precondition for further reductions in the various age, gender in particular for people with care responsibilities - and skill-related gaps that continue to be among the main obstacles to improved employment performance in the EU, as well as for tackling the regional employment performance gap.

Those employed in jobs of relatively low quality jobs that do not offer training and career development opportunities or job security - remain at much higher risk of unemployment and social exclusion. Moreover, the risk to be trapped in a vicious circle of low quality - low productivity employment, unemployment and social exclusion is real.

In general, it can be seen that most critics of the EU model fail to take account of the counter-factual alternative what would happen without social policies. And here the evidence shows that the absence of adequate social policies can bring significant economic costs hence the cost of non-social policies.

The selection of papers, listed below, attempt to address these diverse issues in a variety of ways. Some are relatively well developed. Others are more exploratory. All seek to throw a better lights on the issues, and to contribute to establishing an appropriate analytical framework for more scientific, quantitative, work to under-pin the future development of social policies across the European Union.

Useful references

    Lead paper for the conference:

D. Fouarge (2003): Costs of non-social policy: towards an economic framework of quality social policies and the costs of not having them. Study for the European Commission.

    Selection of other background literature

Business Decisions Limited (1999): New forms of work organisation and productivity. Study for the European Commission.

Centre for Strategy and Evaluation Services (2003): Methods and indicators to measure the cost-effectiveness of diversity policies in enterprises. Interim Report for the European Commission.

European Agency for Safety and Health at Work (2003): Fact sheets.

European Commission (2001): Employment and social policies: a framework for investing in quality. COM(2001)313.

European Commission (2002): Employment in Europe 2002. Recent Trends and Prospects.

European Commission (2003): Social situation report 2003.

D. Gallie and S. Paugam (2002): Social precarity and social integration. Report for the European Commission.

A. de la Fuente (2002): Human capital in a global and knowledge-based economy. Study for the European Commission.

Reflection paper on quality in industrial relations (2003).

J. Rubery et al. (1999): Equal opportunities as a productive factor. Study for the European Commission.


Side Bar