Minouche Shafik: We need to rewrite the social contract to meet new demands

Minouche Shafik: We need to rewrite the social contract to meet new demands
A climate change protest: The young resent the old for a legacy of environmental damage, while the latter say the former are ungrateful. Picture: Daragh McSweeney/Provision.

The welfare state is based on men going to work, women staying at home, jobs for life, and secure pensions. All of those certainties have disappeared, says Minouche Shafik.

Every society has norms, institutions, policies, laws, and commitments to people who need support. In traditional societies, such obligations are borne mostly by families and kin groups.

In advanced economies, there is a greater burden on the state and markets (through health insurance and pensions).

Yet, even in the latter, much of the social contract is still upheld by families (through unpaid care work), civil society (voluntary and charitable organisations), and employers, who often provide health insurance or contributions to unemployment insurance.

The social contract is not synonymous with the welfare state. Rather, the welfare state refers to the dimensions of a social contract that are mediated through the political process and subsequent state action, either directly, through taxation and public services, or indirectly, through laws requiring the private sector to provide certain benefits.

As such, the welfare state is best understood not as a redistribution mechanism, but as a source of productivity and protection over the course of a person’s life cycle.

As John Hills, of the London School of Economics, has shown, most people contribute as much to the state as they receive.

Nonetheless, much of the anger that defines politics in the developed world is rooted in people’s sense of having not received what they are owed.

Those born into disadvantage feel as though they never had a chance. Those living in rural areas believe that policymakers have overwhelmingly favoured cities.

The native-born fear that immigrants are receiving benefits before they have paid their due. Men sense that their historic privileges are eroding.

Older people regard the young as ungrateful for past sacrifices, and the young increasingly resent the elderly for straining social-security programmes and leaving a legacy of environmental destruction.

All of this distrust and animosity is fodder for populists.

So, too, are the effects of technological change and globalisation. The integration of global supply chains has delivered huge gains to the middle classes in emerging economies and to the top 1% globally; but it has hollowed out the middle and working classes in advanced economies.

The conventional wisdom is that workers in advanced economies have had to sacrifice wages or social protections to compete with emerging-market labour, and that these pressures have intensified as capital has become more mobile. Worse, the social mobility that once made inequality politically tolerable has stalled or declined.

In principle, the provision of adequate insurance against economic displacement should make the pressures from technological change and globalisation manageable.

But many aspects of today’s welfare states are still designed for the old economy, where male breadwinners paid into reliable pensions over a lifetime, while women stayed at home to raise children and care for the young and the old.

For the first time in history, there are now more women in higher education than men. Educated women have fewer children, are more likely to be in paid work, and will increasingly feel tensions between their participation in the labour market and their traditional, caring responsibilities.

Yet, recent research from the International Monetary Fund shows that closing the gender gap has significant benefits for growth.

The challenge, then, is to redefine the social contract, so that women can make full use of their talents without any loss of social cohesion.

In advanced economies, this tension is at the centre of debates about childcare and declining birth rates. Societal aging means that a shrinking working-age population must cover rapidly rising health-care and pension costs.

Worse, today’s working-age population already has less security than previous generations had, owing to the decline of defined-benefit pensions and a lack of access to many employment perks or training opportunities.

Likewise, climate change represents a breakdown of the intergenerational social contract.

This year, young people staged massive protests against an economic model that does not take adequate account of the environment.

As the evidence of an impending climate disaster mounts, so, too, has support for alternative economic models that would enable more sustainable development.

Once we have acknowledged these global challenges, we can begin to envision what a new social contract might look like.

For example, education will need to start earlier in life, when the foundation for subsequent learning is established, as well as later, to meet the demand for reskilling.

It also will need to focus on tasks that complement what robots can do. Serious investments in reskilling — on the order of 1-2% of GDP, as in Denmark — must be central to any modernised social contract.

A new social contract also may need to provide a minimum income for all, but in a way that preserves the incentive to work and retrain.

Earned income tax credits, mandatory training and work placements, and employment guarantees should all be considered.

And to tap into the world’s growing pool of female talent, large investments will be needed to expand childcare and eldercare, provide shared parental leave, and counter the effects of formal and informal biases that place women at a disadvantage.

For example, if benefits were made portable and provided pro rata, more workers would be able to rely on part-time work to balance other commitments.

As for sustainability, we need to adopt an entirely different way of thinking about aging and the environment. If a shrinking labour force is going to have any chance of supporting an aging population, the investments needed to boost future productivity must be made now.

In the meantime, aging populations may have to commit to working longer — with retirement ages pegged to life expectancy — and demanding less medicalised health care at the end of life.

Finally, current and future environmental costs will have to be incorporated into economic decisions.

We need massive investments in green technologies to transform cities, transportation, and energy systems. Considered together, such a new social contract has the potential to restore a sense of hope and optimism.

Minouche Shafik, a former deputy governor of the Bank of England and deputy managing director of the International Monetary Fund, is director of the London School of Economics.

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