Does the State Benefit Labor? A Cross-Country Comparison of the Net Social Wage

Abstract

This article discusses the empirical literature on the net transfer between labor and the state. It also provides international comparisons of the net social wage in the United States and other advanced capitalist economies on a consistent basis. The results indicate that the welfare state in the United States differs significantly in its impact on the income of labor from other advanced capitalist countries. This claim is based on the fact that the net social wage ratio in the United States is much smaller than that of other countries when all are estimated by the same empirical method.

Keywords

welfare state net transfer net social wage

1. Introduction

One of the most prominent phenomena of postwar capitalist development was the growth of state expenditure, especially public spending for functions related to social security and social welfare, or the reproduction of labor power in general. This increase was accompanied by a rise in total taxation which for the most part financed those expenditures. The extensive use of the term welfare state during the same period was a reflection of this increased role of the state in economic and social reproduction. The term was also meant to express the switch from predominantly military expenditures (the “warfare” state) and expenditures for general administration, police, courts, and so on, to all kinds of civilian expenditures such as health, education, social security, and welfare.

It was inevitable that certain issues related to the possible impact of the increased economic role of the state would be investigated in both the mainstream and the radical literature. Those issues included aspects of economic life such as aggregate economic performance and growth, the income and standard of living of workers, and the balance of class struggle. During the past two decades, a substantial number of studies have attempted to evaluate the role of the welfare state’s taxation and social spending on labor income and the standard of living of workers in a number of advanced capitalist economies. In these empirical studies the impact of the state on the income and standard of living of labor is gauged mainly by estimating the net social wage for labor. This measure is defined as the benefits in cash and in kind received by workers from state expenditures minus the total taxes paid by those workers to the state.¹ The net social wage ratio is the ratio of the net social wage to either total employee compensation or the gross domestic product.

The empirical method for estimating the net social wage was originally developed by Shaikh (1978) and Shaikh and Tonak (1987). It was used in the debate about the role of the U.S. welfare state in distributing income among classes, in order to clarify the state’s effect on labor income and therefore on capitalist profits and crisis (Shaikh and Tonak 1987, 1994, 2000; Shaikh 2003; Tonak 1987; Miller 1989, 1992). Subsequently, researchers tried to apply this same framework to other capitalist economies² and soon a body of literature emerged, comparing the net social wage in other countries with the net social wage in the United States.³

This paper brings together and discusses the entire literature on the net social wage. It does so by taking into account those studies which attempt international welfare state comparisons but were not included in Shaikh’s latest contribution (2003) on the issue. One of the major conclusions reached by those studies was that the estimated net social wage in the United States is similar in magnitude to the estimated net social wage measures in the other countries examined.⁴

It is the claim of this paper that this conclusion is unfounded since it is based on inter-country comparisons of net social wage measures which have been estimated by different empirical methods. The second section below briefly reviews the literature on the net social wage. The third section outlines the method for estimating the net social wage and discusses the three papers which compare the net transfer between labor and the state in Canada, the UK, and New Zealand with that in the United States. Using the same method on a consistent basis, I estimate the net social wage ratio for all four countries and perform the same comparisons. The fourth section repeats the comparison of the four countries in terms of a similar measure, the transfer ratio, and the final section reports some conclusions on this issue.

2. History

The growth of state spending and social spending in particular during the “golden age” of capitalist accumulation created notions of a state benevolent to the working class. Even radical authors adopted this argument,⁵ either because of the very nature of the state in parliamentary democracies, or because labor was supposedly able to exercise its influence more effectively in the public sphere than at the market level, and affect state tax and spending decisions in its favor. That claim became part of a more general argument which regarded postwar capitalist development as having a distinct socioeconomic structure. One of the pillars of this structure was the integration of the working class into the capitalist system through a generous social wage. More specifically, in the terminology of the social structures of accumulation (SSA) school, a “capital-labor” accord along with a “state-citizen” accord resulted among other things in the subsidization of the income of labor by the state.

Initially, a debate emerged around the role and impact of the welfare state a) on the standard of living of workers (mainly in the United States and the UK), and b) in the creation of the crisis conditions that undermined and eventually ended the postwar boom. Bowles and Gintis (1982a, 1982b) argued that a high and growing “citizen wage” (their term for the net social wage obtained by workers) enhanced considerably the standard of living of workers in the United States. In addition, it was instrumental in creating a profit squeeze in the 1970s as the state through its taxation and social spending policies shifted the distribution of final disposable income in favor of labor.⁶

This claim generated an initial (unpublished) response by Shaikh (1984), in the context and spirit of Shaikh (1978). Then, Tonak (1987) and Shaikh and Tonak (1987), addressing in more detail Bowles and Gintis’s claims, argued that the transfer between the state and labor was actually a net tax on workers; the net social wage in the United States was negative. According to Shaikh and Tonak, the Bowles and Gintis measure of the social wage was doubly inflated due to the overestimation of social welfare expenditures directed at workers, and the underestimation of taxes paid by them (Shaikh and Tonak 1987: 185). Miller (1989, 1992) tested the proposition that the state subsidizes the income of the working class in the United States under the assumptions about the class incidence of state expenditures and taxes implied by three different Marxist schools. Those included the classical Marxist view (Shaikh and Tonak 1987), the social structures of accumulation approach (Bowles and Gintis 1982a; Bowles, Gordon, and Weisskopf 1986) and that of the monopoly capital school. The latter claimed that the state through its fiscal policy exercises “tax exploitation” on the working class (O’ Connor 1973).⁷ Miller concluded that the net social wage in the United States was negative, no matter what empirical method was employed.

Therefore, at this stage of the debate, the sign, and to a lesser extent the absolute magnitude, of the social wage were firmly established.⁸ Miller (1989) discussed the implications of the negative net social wage for the accumulation crisis of the 1970s. However, this measure was not compared with some other aggregate macroeconomic magnitude in order to assess its weight and significance for the whole economy, for public finances, or for the standard of living of the working class (see Shaikh 1984, 2003).

As we saw above, the debate started because the SSA school was arguing that the social wage was positive, significant, and growing, whereas Shaikh and Tonak had argued that it was negative and therefore it was basically a myth, or rather a social subsidy by the workers to the state. However, Miller found the generally negative net social wage to be substantially greater following the framework proposed by the SSA school, than the net social wage calculated using the classical Marxist approach proposed by Shaikh and Tonak.⁹

Naturally, the social wage empirical literature expanded. Other authors started to apply Shaikh and Tonak’s empirical method in order to estimate the net transfer between the state and labor in other countries. International comparisons of the redistributive effect of different welfare states started to appear in the literature. Three separate studies have concluded that the U.S. welfare state is no different, and in some cases it is more benevolent, to the income of labor than the welfare state in the UK, Canada, or New Zealand. This conclusion contradicts widespread views and other empirical findings in the literature on this issue (Huber and Stephens 2001; Shaikh 2003; Skocpol 1987; Esping-Andersen 1990). In fact, Shaikh (2003) reasserted in his latest contribution that the U.S. welfare state differs in a significant way from other advanced welfare states as far as its effect on workers’ incomes is concerned.¹⁰

What is the source of those contradictory conclusions? This question is especially perplexing since all authors claim that they follow the same method as Shaikh and Tonak do. I present briefly Shaikh and Tonak’s method of calculating the net social wage below and try to identify the point where the applied methods diverge. It turns out that the confusion in the literature stems from the treatment of indirect taxes in Canada, UK, and New Zealand which differs from its treatment in the U.S. studies. This inconsistency makes the reported inter-country comparisons of net social wage measures inappropriate, and the conclusions about the redistributive effects of the different welfare states misleading.

3. International Comparisons of the Net Social Wage Ratio

3.1 The method of measuring the net social wage:

In the work of Shaikh (1978, 1984, 2003) and Shaikh and Tonak (1987, 1994, 2000) the effect of the tax and spending activities of the welfare state on the income of labor is measured by the net social wage (N), which can be either positive or negative. This measure is labor benefits (B) received from the state, minus taxes (T) paid by labor to the state.

N = B - T

There are three crucial issues in Shaikh and Tonak’s method: the definition of labor, the determination of the portion of state expenditures which become labor benefits, and the determination of labor taxes.

Labor: The working population, or labor, is approximated by the total population of wage and salary earners who have to sell their labor power in order to reproduce themselves and their dependants. Labor benefits are those state transfers and in-kind benefits directed to workers, and labor taxes are the various taxes paid by workers to the state. The net social wage ratio (n) is the ratio of the net social wage to the total wage bill (W), or employee compensation.¹¹ Alternatively, it can be expressed as the labor benefit ratio b = B/W minus the labor tax ratio t = T/W:

n = N / W = B / W - T / W = b - t

Labor benefits: Taking total state expenditures classified by economic function, we can distinguish three categories according to their relation with labor income.

The first category (B₁) includes public expenditures which are not directed at wage and salary earners like general administration expenditures, public order, defense, economic services to businesses, and net interest.

The second category (B₂) includes public consumption in general, directed at both labor and non-labor; this includes public spending on health, education, recreation and culture, energy, natural resources, transportation, and postal services.

The third category (B₃) consists of public spending on housing, labor training, income support, social security, and welfare which are allocated entirely to labor. Labor benefits B, then, are estimated as the sum of the third and the relevant part of the second category. The share of B₂ that goes to labor is estimated by the share (s) of labor income (W) in personal income (Y). That is,

B = s B_{2} + B_{3} w i t h s = W / Y

Labor taxes: Similarly, total taxes are classified into three groups according to their relation with gross labor income.

In the first group (T₁) belong the social security taxes that are paid entirely by labor.

In the second group (T₂) are taxes levied on both labor and non-labor, such as personal income taxes, motor vehicle licenses, property taxes on homes, and other taxes. The portion of this category which is paid by labor is estimated as the share of labor income in total personal income (s).

The third category (T₃) includes corporate profit taxes, estate and gift taxes, and indirect business taxes (or sales taxes, or consumption taxes in the terminology used by the national accounts of countries other than the United States). In Shaikh and Tonak’s method all those taxes are assumed to be paid entirely by businesses.¹² Labor taxes (T) are defined as the sum of the first and the relevant part of the second category.

T = T_{1} + s T_{2}

The case of indirect taxes: The first effort to apply Shaikh and Tonak’s method in another country appeared in Sepehri and Chernomas (1992) for the case of Canada. Even though they explicitly state that they follow the empirical method employed by Shaikh and Tonak (1987) and Tonak (1987), they differ in a crucial aspect from this method, the treatment of the incidence of indirect or consumption taxes, a subcategory of T₃. Sepehri and Chernomas state that

The least straightforward effect of taxes in terms of their burden on labor and non-labor income are those grouped under category III (personal income taxes, property taxes -real property and others-, consumption taxes, and privileges, licenses and permits). These taxes are generally levied on both labor and non-labor income, wealth and consumption. Following Tonak (1987) and Shaikh and Tonak (1987) we have chosen the labor share of personal income as a proxy to estimate the portion of these taxes paid by labor. (Sepehri and Chernomas 1992: 75)

As noted above this is not what Shaikh and Tonak do. They clearly allocate indirect taxes to non-labor in all of their studies.

Subsequently, Akram-Lodhi (1996) estimated the net transfer between the state and labor in the UK. He stated that “in order to assess the role played by the British state in the distribution process with regards to labor …the method outlined by Sepehri and Chernomas (1992) is carried out …” Akram-Lodhi (1996: 181). Thus, he also included consumption taxes or indirect business taxes in the group of taxes that are paid by both labor and non-labor, inflating labor taxes and lowering the net social wage in comparison to Shaikh and Tonak’s measure for the United States. As we saw above in equation (4), Shaikh and Tonak (1987) define labor taxes as T = T₁ + sT₂. If we express the third category of taxes (T3) as the sum of indirect business taxes (IBT) and the rest of the third category (RT₃)

T_{3} = I B T + R T_{3}

then Sepehri and Chernomas (1992) and Akram-Lodhi (1996) defined labor taxes T* as

T * = T_{1} + s T_{2} + s I B T = T + s I B T

(while claiming to use Shaikh and Tonak’s method). Clearly, by definition T* > T. Using T* gives a higher estimate of the taxes paid by labor, and this reduces the estimated net social wage. That is, if we define

N * = B - T *

then, N* < N. In other words, the Sepehri and Chernomas estimate of the net social wage in a given country is by definition lower than the Shaikh and Tonak estimate of the net social wage in that same country.

Reveley (2006), in trying to estimate the net transfer between labor and the state in New Zealand, also notes that he follows the empirical method developed in Tonak (1987). However, when he comes to the treatment of the indirect tax incidence, he states that “The studies on which this article is modeled are weak in this area. Freeman simply assumes that workers pay the same percentage of indirect tax as their ‘share in income tax’ and allocates indirect taxes to labor on that basis. Tonak takes the same approach for a portion of total indirect tax” (Reveley 2006: 200). In fact, Tonak makes clear that this applies only to a very small portion of indirect business taxes, namely property taxes, which are listed in the U.S. NIPA under the category of indirect business taxes, and he assumes that the rest are paid by businesses.¹³ Thus, Reveley too allocates the biggest part of indirect taxes to labor, in contrast to the method he claims to follow. It should be noted that he differs from Sepehri and Chernomas and Akram-Lodhi in that he uses the share of wages in total personal consumption expenditures (s₁ = W/C) instead of the labor share in personal income (s) in order to determine the portion of indirect taxes paid by labor. Thus, for Reveley labor taxes (T**) and the net social wage (N**) are defined as

T * * = T 1 + s T 2 + s_{1} I B T w i t h s_{1} = W / C, a n d

N * * = B - T * * = (s B_{2} + B_{3}) - (T_{1} + s T_{2} + s_{1} I B T) = N - s_{1} I B T

and since T** > T, then by definition, N** < N.

Table 1 presents the different measures of labor taxes and the net social wage which have been estimated in the different studies in the literature.

Table 1.

Different estimates of labor taxes and the net social wage.

Net social wage studies	Labor benefits	Labor taxes	Net social wage
Shaikh and Tonak	sB₂ + B₃	T = T₁ + sT₂	N = (sB₃ + B₁) - (T₁ + sT₂)
Sepehri and Chernomas, Akram-Lodhi	sB₂ + B₃	T=T₁ +sT₂ + sIBT*	N = N - sIBT*
Reveley	sB₂ + B₃	T=T₁ + sT₂ + s₁IBT	N* = N - s₁IBT*
		s = W/Y s₁ = W/C

It is obvious from the above that the difference in the treatment of the class incidence of indirect taxes is not a theoretical issue. It is rather a careless mistake in the application of a particular empirical method which is accentuated by the international comparisons that follow. Indirect taxes constitute from one-third to one-fourth of total taxes in every OECD country. Therefore, international comparisons of different welfare states on the basis of estimated measures of the net social wage which differ in this significant respect are necessarily flawed and misleading.

In the following section I calculate the net social wage in the United States using the results of Shaikh and Tonak (2000), under the assumption that indirect taxes are partly paid by labor. I do this by allocating indirect taxes to labor, first according to its share in personal income, s, and then according to the share of wages in total consumption expenditures, s₁. The net social wage ratio is estimated as the ratio of the respective net social wage over employee compensation (n* =N*/W and n** = N** /W respectively).

Also, using the estimates of labor benefits and labor taxes provided in the studies for the UK, Canada, and New Zealand, I calculate the net social wage ratio (n* for Canada and the UK, and n** for New Zealand) in these countries. These measures of the net social wage ratio in different welfare states can then be compared on a methodologically consistent basis.

3.2 The net social wage ratio in the United States, Canada, UK, New Zealand

Canada and the United States: Sepehri and Chernomas (1992) are interested not only in investigating whether social welfare expenditures were responsible for the profitability crisis and stagnation of the 1970s in Canada, but also in comparing the net transfer between labor and the state in Canada and the United States.¹⁴

By including consumption taxes (which were 20.3 percent of total taxes in 1986 in Canada) in the group of taxes partly paid by labor (consumption taxes were 25.5 percent of total labor taxes according to their calculations in 1986), Sepehri and Chernomas inflate considerably their estimated measure of labor taxes. Thus, they downwardly bias their measure of the net social wage for Canada compared to the measure Shaikh and Tonak estimate for the United States. In effect, Sepehri and Chernomas compare n* for Canada with the (generally higher) n for the United States.

Using Shaikh and Tonak’s (2000) results for labor benefits (B) and labor taxes (T) and assuming that indirect taxes are partly paid by labor¹⁵ I re-estimate labor taxes (T*), the net social wage (N* = B – T*), and the net social wage ratio (n* = N*/W) for the 1952-1997 period in the United States. I also calculate the net social wage ratio (n*) in Canada for the 1955-1988 period using the labor benefits (B) and labor taxes (T*) in Sepehri and Chernomas (1992) and the data for wages and GDP from OECD national accounts.

In Figure 1, the difference in the way the two welfare states affect labor income can be gauged by the difference in the level of the net social wage ratios (n*). The average value of the Canadian n* is approximately equal to zero (positive and negative transfers from workers to the state cancel each other out over the whole period) whereas it is -10.8 percent in the United States for the 1955-1988 period.

Figure 1.

The Net Social Wage Ratio (n*) in the United States and Canada.

We can distinguish three periods in the movement of the net social wage ratio in the two countries. During the first period (1955-1975) both ratios are rising and their difference remains more or less constant, around 8-9 percent of total wages. Then, during the 1976-1982 period, the net social wage ratio in Canada keeps rising whereas in the United States it starts falling; the difference in the two measures grows and reaches 18 percent of total wages in 1982. After that year, though, in the third period (1983-1988) the Canadian n* starts to fall also, and their difference tends toward its average value for the entire period. This large difference is approximately 11 percent of total wages on average, and 6 percent of GDP respectively (see Table 2 below).

Table 2.

Net social wage ratio (= net social wage/GDP) in the United States, Canada, UK, New Zealand percent.

Year	USA (n*)	Canada (n*)	UK (n*)	USA (n**)	New Zealand (n**)
1952	−8.6			−10.0	−1.5
1953	−8.4			−9.8	−1.0
1954	−7.2			−8.5	−1.6
1955	−7.5	−3.1		−8.7	−1.6
1956	−7.8	−3.6		−9.2	−1.5
1957	−7.6	−2.3		−9.0	−0.3
1958	−6.2	−1.0		−7.6	−1.6
1959	−7.0	−0.9		−8.4	−0.5
1960	−7.7	−0.8		−9.1	−0.1
1961	−6.8	−1.2		−8.4	−0.5
1962	−7.6	−0.8		−8.9	0.0
1963	−7.6	−0.8		−9.1	−0.3
1964	−6.8	−1.7		−8.3	−1.2
1965	−6.5	−1.4		−8.0	−1.1
1966	−6.6	−2.6		−8.4	−1.6
1967	−6.7	−1.3		−8.4	−1.2
1968	−7.3	−1.7		−9.0	−1.6
1969	−8.4	−2.1		−10.2	−1.9
1970	−6.8	−1.6	−5.2	−8.7	−3.2
1971	−5.6	1.8	−4.2	−7.4	−3.5
1972	−6.3	−0.1	−3.3	−8.1	−3.2
1973	−6.3	0.3	−2.5	−8.2	−3.7
1974	−5.7	0.5	−1.9	−7.6	−4.6
1975	−3.0	2.2	−1.3	−4.7	−3.2
1976	−3.9	1.5	−1.5	−5.5
1977	−4.7	2.2	−1.7	−6.2
1978	−5.1	2.4	−1.8	−6.6
1979	−5.4	2.0	−2.0	−6.9
1980	−4.6	2.5	−2.5	−6.2
1981	−5.4	1.4	−1.3	−7.1
1982	−4.8	5.3	−1.9	−6.5
1983	−4.6	3.2	−1.4	−5.9
1984	−5.4	2.6	−1.9	−6.9
1985	−5.8	1.8	−1.6	−7.2
1986	−5.8	0.6	−2.0	−7.1
1987	−6.3	−0.7	−2.8	−7.6
1988	−6.3	−1.0	−3.5	−7.6
1989	−6.3		−3.0	−7.5
1990	−5.5		−2.7	−6.8
1991	−4.6			−5.9
1992	−3.8			−5.1
1993	−3.6			−4.8
1994	−4.0			−5.1
1995	−3.9			−5.0
1996	−4.2			−5.3
1997	−4.8			−5.9
Average	–6.0	0.0	–2.4	–7.4	–1.6

Sources: Shaikh and Tonak (2000); Sepehri and Chernomas (1992); Akram-Lodhi (1996); Reveley (2006); OECD National Accounts.

Note: n*=N*/GDP, n** = N**/ GDP.

Sepehri and Chernomas compare n for the United States with n* for Canada and conclude that the net transfer between labor and the state is similar in the two countries, except for the 1976-1983 period. Thus, they refer to the developments in the last stage of their inquiry (1984-1988) as the “harmonization” of the Canadian welfare state in the sense of restoring the previous similarity of its net social wage ratio with that of the U.S. welfare state. In fact, though, what really happened was the restoration of the difference in the net social wage ratios of the two countries at its average value for the entire period.

UK and the United States: Akrahm-Lodhi (1996) also included in labor taxes a portion of indirect business taxes in his estimate of the net transfer between labor and the state in the UK for the 1970-1990 period. Consumption taxes were 30.4 percent of total tax revenue in 1990 (the biggest tax category) and as the author notes, in “… the portion of total taxation paid by labor … the largest contributions came from consumption taxes and social security contributions” (Akram-Lodhi 1996: 183-4, Table 3).¹⁶ It is no accident, therefore, that in his results, labor was paying a net tax to the state in the UK for every year of the 1970-1990 period. Furthermore, comparing his results with those of Shaikh and Tonak (1987) for the United States, he concludes that the transfer from labor to the state was bigger in the UK than in the United States.

Table 3.

Net social wage ratio (n) and transfer ratio (tr).

Year	Labor taxes T	Labor benefits B	Net social wage or net transfer N = B - T	Wages W	Transfer ratio tr = T/B	Net social wage ratio (n = N/W)
Country A	400	500	100	1000	0.80	10%
Country B	100	200	100	1000	0.50	10%
Country C	130	100	−30	1000	1.3	−3%
Country D	650	500	−150	1000	1.3	−15%

However, when we calculate the net social wage ratio (n*) for the two countries using the same assumptions for the incidence of indirect taxes, the picture is rather different. In Figure 2 we see a significant difference in the level of the net social wage ratios of the two countries, with the U.S. measure being consistently much lower. The average value of the n* (N* as a percentage of total employee compensation) is -9.3 percent for the United States and -4.2 percent for the UK over the 1970-1990 period. The corresponding average values for the net social wage as a percentage of GDP are -5.0 percent and -2.4 percent respectively (see Table 2).

Figure 2.

The Net Social Wage Ratio (n*) in the United States and the UK.

Also observe in Figure 2 that the two net social wage ratios fluctuate in a similar way, rising from 1970 to 1975 and then falling modestly until 1990.

New Zealand and the United States: More recently, Reveley (2006) attempts the same international comparison with the U.S. welfare state by estimating the net transfer between labor and the state in New Zealand. He uses his results in order to draw more general conclusions about the content and the terms of the “postwar compromise” or the “accord” between capital and labor and the way it was mediated by the state.¹⁷ Furthermore, his international comparisons involve four countries (New Zealand, Canada, the United States, and the UK) making the picture more interesting but also more complicated in the presence of the methodological inconsistencies mentioned above.¹⁸

In order to make the comparison between the United States and New Zealand as accurate as possible, I re-estimated labor taxes (T**) for the United States, using Reveley’s method. That is, in estimating indirect taxes paid by labor I multiplied indirect taxes by s₁, the share of wages in personal consumption expenditures. It turns out that using Reveley’s assumption for the United States, labor taxes T** are bigger than T* and therefore the net social wage ratio n** is lower than n*. For the 1952-1997 period, the average value of the net social wage as a percentage of total wages n** is -13.1 percent compared to -10.5 percent for n*, and the average value of the net social wage as a percentage of GDP n** is now -7.4 percent compared to -6.0 percent for n*.

Comparing the net social wage ratio over a common period for the two countries, we observe that the average value of n** as a percentage of total wages in the United States for the 1952-1975 period was -15.0 percent (and -8.5 percent of GDP). For New Zealand, it was negative as well, but much smaller in magnitude than that in the United States. It was on average -3.3 percent of total wages and -1.6 percent of GDP.

In Figure 3 observe that during the 1952-1962 period the two measures remain more or less constant and differ significantly in magnitude (more than 10 percent of total wages). This difference narrows during the 1963-1968 period as the n** in New Zealand falls while it remains constant in the United States. Then the two measures approach each other as n** in the United States rises significantly during the 1969-1975 period while n** keeps falling in New Zealand. Overall, however, the results clearly indicate that the welfare state in the United States extracts a much greater net tax from workers than the welfare state in New Zealand.

Figure 3.

The Net Social Wage Ratio (n**) in the United States and New Zealand.

Consistent international comparisons of the net social wage: In a recent paper, Shaikh (2003) discusses the U.S. studies mentioned above by Shaikh and Tonak (1987, 1994, 2000) and a number of empirical studies on the net social wage N in Australia, Canada, Germany, Sweden, and the UK which consistently used the framework originally applied to the United States. One of Shaikh’s principal findings is the relatively small size of the positive net social wage ratio in all countries except the United States, where it is negative. That was true especially during the boom years of the postwar period which meant that social subsidies to labor could not have caused public budget deficits and hurt growth.¹⁹ He also says of the net social wage that “while it is generally positive in the five OECD countries studied, it is generally negative (that is, a net tax) in the United States” (Shaikh 2003: 538). The U.S. welfare state is clearly distinguished from the rest on the basis of its adverse distributive effect on labor income.²⁰

On the contrary, in Reveley’s comparison of the four aforementioned countries the two things that stand out are first, that labor loses the most in New Zealand during the 1970s compared to the other three countries, and second, that the net transfers between labor and the state for the UK, Canada, and the United States, especially during the 1970s, are roughly equal. In fact, in two years (1975 and 1976) the U.S. welfare state appears to have created the lowest transfer away from labor compared to those in the UK, Canada, and New Zealand (Reveley 2006: 210, Figure 7).

Reveley reaches those conclusions even though he cites the study by Shaikh (2003) where it is clear that the net social wage ratio in both Canada and the UK is much higher than that in the United States.²¹ Reveley’s disregard of those results is symptomatic of the erroneous but firmly established belief in the literature that the U.S. welfare state is no different than the others in its effect on labor income. Thus, Sepehri and Chernomas focus only on the late divergence in the net transfers between labor and the state in the United States and Canada. They unquestioningly accept that the U.S. and Canadian states are similar in their effects on labor income. Akrahm-Lodhi even concludes that the welfare state in the United States is friendlier to the interests of the working class than the UK welfare state. Reveley accepts the approximate equality of the net tax on labor in the United States and New Zealand and notices only their different trends in the later period of his study.

In contrast to all this, in Figure 4 we observe the effect of the welfare state on labor income in the United States, Canada, and New Zealand when indirect taxes are assumed to be paid partly by labor in all countries. Whether we consider n* or n**, the United States clearly has the lowest net social wage ratio (lower than both other countries by around 10 percent of total wages on average) throughout the whole period. Canada’s n* and New Zealand’s n** are almost equal in magnitude for the 1955-1969 period with the New Zealand measure falling as the Canadian measure rises for the first half of the 1970s.

Figure 4.

The Net Social Wage Ratio (n* and n**) in the United States, Canada, and New Zealand.

Similarly, in Figure 5 we observe that for the years 1970-1990 (the period for which UK results are available) the UK n* consistently falls between the U.S. and Canadian n*, with all three measures following roughly similar fluctuations. The U.S. n* is negative throughout the whole period and it is the lowest of the three by a significant margin: 5 percent lower than the UK n* and 9 percent lower than the Canadian n*.

Figure 5.

The Net Social Wage Ratio (n*) in the United States, Canada, and the UK.

Finally, Table 2 presents n* and n** for the United States, n* for the UK and Canada, and n** for New Zealand, all expressed as a percentage of GDP. The table makes once again clear that the U.S. welfare state is substantially different than the other welfare states, in the sense of imposing a much heavier net tax on labor.²²

4. International Comparisons of the Transfer Ratio

4.1 Net social wage ratio and transfer ratio

The transfer ratio (tr) is defined as the ratio of labor taxes (T) to labor benefits (B).

t r = T / B

It was introduced in Tonak (1987) and since then it has been almost the sole measure used by other authors. However, Shaikh and Tonak never used it in their earlier or more recent work.²³ Instead they used n, the ratio of the net social wage N to either total wages or total product, as well as the fluctuations over time in this variable. The net social wage ratio n illuminates the impact of fiscal redistribution on labor income or the total economy, while the transfer ratio certainly cannot help in this direction.

However, since the use of the transfer ratio is now widespread, we should note the following: the transfer ratio expresses labor taxes as a percentage of labor benefits. Obviously, when this ratio is greater than one, labor pays a net tax to the state, but the magnitude of the transfer ratio by itself does not reveal the importance of this transfer for workers’ standard of living, for the budget deficit, for profits, or for the economy as a whole. In less developed welfare states, low levels of labor benefits and labor taxes relative to total economic activity or total wages may give misleadingly high or low levels and fluctuations of transfer ratios. For example, in Table 3 we see that hypothetical country A (with benefit ratio 50 percent and tax ratio 40 percent respectively) and country B (with much lower benefit ratio of 20 percent and tax ratio of 10 percent) have the same net social wage ratio while their transfer ratios are dramatically different.

Also, countries C and D have the same transfer ratio while their net social wage ratios differ by a significant 12 percent of total wages. In both cases, n is more informative than tr about the real significance of the net balance between labor benefits and labor taxes.

I placed more emphasis on the level and movement of the net social wage ratio above, and we now turn to the discussion of the behavior of the transfer ratio when indirect taxes are assumed to be paid partly by labor (tr* = T*/B and tr** = T**/B) in the same four countries.

4.2 The transfer ratio in the United States, Canada, the UK, and New Zealand

Canada and the United States: Sepehri and Chernomas (1992) allocate part of indirect taxes to labor while Shaikh and Tonak do not. Thus, when they compare the transfer ratio they have calculated for Canada (tr*) with the transfer ratio calculated by Shaikh and Tonak for the United States (tr) they find that during the 1955-1975 period, not only do they exhibit the same (falling) trend and similar fluctuations but they are also almost equal in magnitude; the average value for Canada was 1.08 and 1.11 for the United States.²⁴

During the 1976-1983 period the two measures diverge both in terms of magnitude and trend (the Canadian measure, tr*, stays more or less constant whereas the U.S. transfer ratio, tr, reverses its downward trend and rises significantly). Given the previous closeness of the two measures, this looks like a significant development and the authors try to find possible explanations for it. But if one compares consistently derived transfer ratios tr* for both countries by estimating labor taxes (T*) and the transfer ratio (tr*) in the United States for the 1952-1997 period, this is not very important. As shown in Figure 6, the important point is the significant difference in the level of the two measures. The average value of tr* is 1.02 in Canada compared to 1.51 for the United States over the 1955-1988 period. The difference of the two measures shrinks and reaches its minimum value in 1975 as the tr* in the United States falls faster (from 2.07 in 1955 to 1.17 in 1975) than tr* in Canada (where it falls from 1.29 to 0.90). Then tr* in the United States starts rising as the attack on labor by the state begins earlier in the United States than in Canada. Thus, the difference in the two measures widens again, even after the state attack on labor in Canada which happens after 1983 (or as Sepehri and Chernomas point out when the expansion of the Canadian welfare state reaches its limits) and raises the transfer ratio there as well.

Figure 6.

The Transfer Ratio (tr*) in the United States and Canada.

The UK and the United States: Akram-Lodhi (1996) also includes consumption taxes in the group of taxes that are paid by both labor and non-labor in estimating the transfer ratio tr* for the UK.²⁵ He compares it with the transfer ratio tr in the United States from Shaikh and Tonak (1987) and finds that in every single year of the 1970-1985 period tr* in the UK is higher than tr in the United States.²⁶ He notes that “over the course of the early 1980s, while the US state was often of no benefit to labor as a whole, the extent of the transfer from labor to non-labor was less than in the UK” (Akram-Lodhi 1996: 189-90).

However, this conclusion is totally reversed if we compare tr* for the UK with tr* for the United States, estimating both by the same method. In Figure 7, we observe first that the tr* in the United States is consistently higher than that in the UK. For the 1970-1990 period, the average value of the transfer ratio for the United States is 1.34, whereas for the UK, as reported in Akram-Lodhi (1996), it is 1.15. Second, the two measures move together, both of them falling from 1970 to 1975 and then rising until the end of the period examined here.²⁷

Figure 7.

The Transfer Ratio (tr*) in the United States and the UK.

New Zealand and the United States: Reveley also assumes that indirect taxes are levied on both capital and labor, and finds for New Zealand that “The most striking feature evident in Table 1 and Figure 4 is that, in all but one year of the period considered (1962) net-tax is positive. In other words, labor paid more taxes to the state than it received back in benefits and income” (Reveley 2006: 106).

In his results New Zealand appears to have the same transfer ratio as the United States from 1964-1970, and a much higher transfer ratio than the United States in the latter period (1970-1975) of his study. The average value of the transfer ratio tr for the United States from Shaikh and Tonak (1987) is 1.12 for the 1952-1975 period, and that for New Zealand (tr**) is 1.15 for the same period, according to Reveley. Thus, the net effect of the U.S. welfare state on the income of labor appears to be the same as that of New Zealand’s welfare state, or slightly more beneficial.

Obviously, general conclusions about the role of the welfare state in distribution are necessarily flawed when based on results obtained in this way. If we compare the similarly derived transfer ratios (tr**) for the two countries, the hostile nature of the U.S. welfare state vis-à-vis labor income becomes evident (see Figure 8). First, we should note that calculating for the United States the transfer ratio tr** using labor taxes T**, we find that for the 1952-1997 period the average value of the transfer ratio (tr**) is now 1.62, compared to 1.51 for tr*.

Figure 8.

The Transfer Ratio (tr**) in the United States and New Zealand.

Second, the average value of the transfer ratio (tr**) in New Zealand is consistently much lower than the average value of the U.S. transfer ratio.²⁸ This difference is decreasing over time, mostly because the transfer from labor to the state is decreasing in the United States and in the last year of the period of comparison (1975) attains its lowest value for the entire postwar period.

We should note here that cross-country comparisons of welfare state distributive effects and other characteristics of social policy are important, and the exact magnitude and macroeconomic importance of the net social wage for each particular country should be accurately estimated. This is a necessary and illuminating step since it is a significant element in the configuration of the trajectory of the postwar process of accumulation in advanced capitalist economies. However, it is one thing to argue that the capitalist state faces strict limits on the extent to which it can redistribute income towards labor, and quite something else to claim that labor organization, class struggle, and the strength of labor parties have no effect whatsoever on the final (post-fiscal) distribution of income. This latter argument is implicit in the findings that the transfer ratio and the net social wage ratio in the United States are no different than in the other advanced capitalist countries with stronger, more organized, and politically involved working classes.

5. Conclusions

The latest attacks on the welfare state and social expenditures have revived interest in the nature of this institution and its economic effects. The thesis that the U.S. welfare state is not adequately developed compared to other welfare states in advanced countries is one of the most common arguments in the welfare state literature (Gough 1979; Esping-Andersen 1990; Huber and Stephens 2001; Shaikh 2003). In advanced capitalism (with virtually no simple commodity production and production for use-value, and near complete proletarianization of the population) the state has to spend a substantial share of the total output for the reproduction of labor power.²⁹ Since profits are the motor of the system, those public expenditures cannot be financed systematically from taxes imposed on them in a significant way. They cannot be financed on a long-term basis by public budget deficits either. This never happened during the “golden age” (see Shaikh 2003) and, given the inclination toward fiscal austerity during the neoliberal period, it also did not happen until recently.

Hence, in almost all advanced capitalist countries, the great bulk of this social spending (and especially the part which constitutes labor benefits or the gross social wage) necessarily comes from gross labor income, that is, from personal income taxes, social security contributions, and other personal and property taxes that are levied on labor. To the extent that indirect business taxes or consumption taxes are assumed to be levied on labor, they finance and usually exceed the remaining part of the gross social wage even in the advanced capitalist countries with more developed welfare states than the United States. Therefore, if we assume that indirect taxes are partly paid by labor, the net social wage is significantly negative in the United States (-6.0 percent to -7.5 percent of GDP over the entire postwar period) and from modestly negative to close to zero in other countries. The U.S. welfare state is radically different in its distributive effect vis-à-vis labor from the welfare states in every other advanced capitalist economy examined so far. Consistently conducted comparative studies seem to indicate that even if labor loses everywhere from fiscal redistribution, it is likely to lose much more in countries like the United States where it is organizationally and politically weaker.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

1

Other similar measures or different terminology have also been used, but all of them involve some comparison of labor benefits received from the state with labor taxes. For example, the transfer ratio for labor is defined as the ratio of labor taxes to labor benefits.

2

See Guerrero (1992) for Spain, Fazeli (1996) and Freeman (1991) for the UK, for Greece.

3

See Sepehri and Chernomas (1992), Akram-Lodhi (1996), .

4

Here refer to the studies mentioned in note 3 above.

5

See Gough (1979), Therborn (1984), .

6

Even before that, Glyn (1975) had argued that the profit squeeze which British capitalism had experienced in the late 1960s (Glyn and Sutcliffe 1972) was really due in great part to the redistributive effects of the state budget. The evidence for that was the fact that the wage share—after direct and indirect taxes had been subtracted from gross wages, and benefits from state expenditures had been added to them—showed a significant rise from 1955 to 1970. : 10) stated that “… such state expenditures …reflecting both the requirements for a more efficient labor force, and the pressure from workers for better social services, …have represented a burden for capital in addition to that imposed by rises in take-home pay. It would have required a faster rate of productivity increase than the capitalists were able to secure for profitability to have been maintained in the face of these improvements in workers’ living standards.”

7

However, O’Connor in his later work adopted the argument made by Bowles and Gintis about a high citizen wage inducing a profit squeeze and a crisis of accumulation ().

8

Miller notes that it should rather be called a social profit: “The results of these calculations of the net social wage are unambiguous. The net social wage is negative. … In the United States, government spending and taxing policies have redistributed income from workers to capitalists, especially in the 1980s. The modern welfare state has provided a social profit for capital not a social wage for labor” (: 85-86).

9

This happened mainly because of the SSA assumption that half of indirect business taxes are paid by labor in proportion to its share in personal income (Bowles, Gordon, and Weisskopf 1986). In contrast, Shaikh and Tonak assume that indirect business taxes are paid entirely by businesses.

10

Citing a number of mostly unpublished empirical studies on the net social wage in different countries, he concluded that the net social wage for labor was much lower in the United States than in the rest of the countries examined, which included Australia, Canada, Germany, the UK, and Sweden.

11

In recent literature, as in , the net social wage is also expressed as a fraction of the gross domestic product. I use both measures below.

12

Shaikh and Tonak (1987: 193, note 8) explicitly state that in their method consumption taxes (or indirect business taxes in the U.S. NIPA terminology) are not paid by labor since they do not flow directly from labor income. They have repeatedly distinguished their method which concerns what they call the observed incidence of taxes from the approach of tax shifting incidence, where indirect taxes are shifted to laborers when they buy commodities in the market. See also Shaikh and Tonak (2000: 248, 249) where they note that “Both are relevant but they ask rather different questions …. This latter, counterfactual ‘tax shifting’ question is important in its own right. But it is a different question than the one we seek to address here.” : 55) states clearly that “Similarly since the corporate profit taxes and indirect business taxes (excluding property taxes) are paid totally by non-labor, they cannot be considered as part of taxes imposed on labor income.”

13

“Similarly, since the corporate profit taxes and indirect business taxes (excluding property taxes) are paid totally by non-labor, they cannot be considered as part of taxes imposed on labor income” (: 55).

14

“This paper attempts to evaluate the distributive activities of the Canadian state vis-à-vis labor…. Our findings are then compared and contrasted with those reported by Shaikh and Tonak for the U.S. This inter-country comparison enables us to evaluate the generality of Shaikh’s and Tonak’s finding” (: 72).

15

The labor share s (wages as a share of personal income) is given in and indirect business taxes are taken from BEA, U.S. NIPA, Table 1.10, line 9.

16

Consumption taxes paid by labor were 34.6 percent of total labor taxes in 1990.

17

“In the predominantly economic interpretation, welfarism was an integral part of the package of measures implemented by the state, which by increasing wage-earner’s living standards ensured their integration into the post-war economic regime…. If the collective income share of wage-earners did not increase due to the redistributive activities of the state, and particularly if there was net transfer of income from wage-earners to non-labor classes, a key focus of future research into the welfare state’s system integration effects during the long boom should therefore be welfare discourse” (Reveley 2006: 196-197). In a recent paper : 245) note that “the existence of such an accord has come to be more or less taken for granted by radical economists” and dispute its existence at least for the United States. The empirical results of the net social wage studies for the United States and other developed countries seem to support their claim.

18

Reveley compares n for the United States with n* for the other three countries.

19

It is true, however, that the net social wage was becoming less and less negative in the United States during the 1969-1975 period and therefore the smaller subsidy from labor to the state and capital affected profitability in a negative way.

20

He notes, “We find that net social wage ratios vary considerably across countries during the long boom, ranging from 5.5 percent in the United Kingdom, 4 percent in Germany, about 2.5 percent in Canada and Australia, a mere 0.4 percent in Sweden, to -1.2 percent in the United States” (: 547). Of course, those results originate from the assumption made in all studies that workers pay no part of indirect business taxes.

21

For example, whereas the average net social wage ratio in the United States is close to zero for the 1952-1997 period, the average net social wage ratio in Canada for the 1955-1983 period is 6.0 % see .

22

Greece, a latecomer in welfare state development, appears to have the same average net social wage ratio n with the United States over the 1958-1995 period; see .

23

Shaikh and Tonak (1987, 1994) used the terms net transfer and net transfer rate before adopting the terms net social wage and net social wage ratio in .

24

In Shaikh and Tonak (2000) the average value of the transfer ratio for the United States during the 1955-1975 period is also 1.08. There are some small differences with the transfer ratios reported earlier in ) and Tonak (1987), but more importantly there are some calculation errors in Shaikh and Tonak (1987) where the transfer ratio is reported as 1.08 instead of 1.01 for 1984, and as 1.50 (!) instead of 1.04 for 1985. Even though the correct values were reported in Shaikh and Tonak (1994, 2000), still there is some confusion in the literature, since all studies that attempted international comparisons used the results in Shaikh and Tonak (1987).

25

Another study which estimates the net tax and the tax ratio (the inverse of the transfer ratio, namely labor benefits over labor taxes) for workers in the UK during the 1951-1987 period is Freeman (1991). The author assumes that part of indirect taxes are borne by labor as they buy commodities, and therefore his results show that “with one exception the tax ratio has always been below unity, implying that there has always been a net transfer of income away from wage-earners as a result of the state’s activity” (: 102). Thus, Freeman follows the opposite approach from Shaikh and Tonak on the issue of indirect taxes. He adopts the tax shifting approach but being aware of the difference with the Shaikh and Tonak method, he does not attempt any comparison between his results and those for the United States.

26

Except for 1985, due to the calculation error mentioned above in that year in ).

27

Akram-Lodhi estimates the net social wage and the transfer ratio for the years 1970, 1975, 1978-1990. I have interpolated the values for the net social wage and the transfer ratio for the missing years.

28

It was 1.15 for New Zealand and 1.85 for the United States on average for the 1952-1975 period.

29

In 2010, public social expenditures were on average 22.4 percent of GDP for the OECD countries and 20.4 percent of GDP in the United States.

Author Biography

Thanasis Maniatis received his PhD in economics from the New School for Social Research. He teaches Marxist political economy in the Department of Economics, University of Athens, Greece and the University of Athens doctoral program in economics (UADPhilEcon). His research interests include empirical work on Marxist crisis theory, the political economy of the welfare state, and absolute poverty.

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