A new social contract

Rolph van der Hoeven

At the beginning of the 19th century, Europe stood at the birth of thinking about a social contract between citizens and their governments.  In the 20th century, in the wake of the industrial revolution and its dramatic effects in the realm of work, and through cooperation between workers, employers, citizens and the government, Europe achieved steadily shared progress with improved income and working conditions of workers. After the Second World War the social contract, though in different forms of concertation and of providing full employment, was in many countries in Europe a key element for prosperous development. Since the 1990s, drastic changes took place in the world and in particular in the European and Central Asian region. These changes are caused by rapid technological development, a rapid integration process – where economies are becoming more and more entangled with each other – and stark geopolitical shifts that affect economies and people, most dramatically pictured by huge number of refugees and migrants escaping destabilized countries in Europe’s periphery, as well as an alarmingly fast deterioration of the Earth’s capacity to sustain future development. In 2014 the World Commission on the Social Dimensions of Globalization[1] therefore called for “a new social contract”. However, now more than ever that social contract is under threat. Technology, globalization and ensuing societal reactions have changed the position of households between and within countries. Looking at who globally are the winners and the losers over the last decades a seriously worrying picture for Europe emerges. One can detect two groups of losers of globalisation: firstly the very poor in Sub-Saharan Africa and elsewhere that are situated at the bottom of the world’s income scale and, secondly, a group, though situated around the 80 per cent richest of the world, that saw regress in real income. This group comprises households in rich countries with stagnating incomes, in major parts of Europe and many of the former communist countries. The two groups of winners are firstly the middle classes in emerging economies, particularly India and China, situated in the group of the 50 per cent richest in the world, and, secondly, the super-rich, which includes the 3-6 per cent richest in major European countries.

Thus Europe is a region where one finds important numbers of losers and winners together and which manifests a widening of the income gap between labour and capital, between lower skilled and higher skilled labour and between households, signalling the weakening or even breaking up of the social contract in the region and putting the achievement of global cooperation and global social justice under serious strain.

Vaughan-Whitehead[2] concludes that the recent increase in inequalities in developed countries in the European region has been accompanied by an erosion of the middle class and that uncertainty and fear of social decline and exclusion have reached the middle class in many societies. For several countries in the region there is need for two working adults per household to remain in the middle class. Also the very high youth unemployment rates explain a lower probability of being part of the middle class in the future. The demise of the middle class in many European countries can not only be traced back to changes in the world of work (labour market participation, dual household earners, changing structures of jobs, new forms of work contracts, growing wage and income inequality, as well as decline in collective bargaining and social dialogue) but even more to wider societal trends such as changes in tax-burden, which increased for the middle income classes, but declined for the lowest paid (because the most vulnerable are unable to pay) and the richest paid (because of the assumption, unproven, that this group creates jobs). Cuts in expenditure on education, combined with lower spending by employers on training have led to a rapid deterioration of human capital in Europe, reducing access to middle class status.

This has strong ramifications for social justice in the future. The widening disparities, the hollowing out of the middle class and the decline in opportunities such as good education, attest to a breaking down of the social contract, not only within countries, but also between countries as the winners and losers of globalisation have shown. If the social contract is not honoured (anymore) societies become strained and the provision of decent work and social justice will falter. A social contract is more than a categorization by social scientists. It is the backbone of healthy societies working together. A breaking down of the social contract bodes ill for a healthy development of societies and the future of work, as the outcome of various elections are showing. In striving for a better future of work, the European region is thus challenged to restore the social contract and to heed to the full enjoyment of global social justice and decent work.

The breaking down of the social contract is deplorable not only from a viewpoint of declining social justice, but also as a renewed social contract, acknowledging societal and technical changes, can hold the solution to growing inequalities and growing insecurity, provided that a new social contract is inclusive and goes beyond the more narrow interpretation of a social dialogue that includes only workers, employers and the government. New technologies and societal development are so pervasive that groups of citizens outside the classical triad of workers, employers and governments need to be an integral part of the contract, as the defining line between who is a worker and who is an employer becomes more hazy. This puts more responsibility in the hands of the governments, especially at times when in certain societies a notion redevelops that government is the problem and not the solution. Such a notion, however, is wholly erroneous in times of technological change and globalization, when more is expected of governments in terms of managing change and globalization, and of dealing with distributional consequences of these processes. Neglecting such distributional consequences – which for many people turned out to be negative as a consequence of too little attention at the national level and of a deficient system of global governance – has led to alienation and to the rise of undemocratic forces which are becoming reminiscent of the dark developments in various European countries in the 1930s. These tendencies may be reinforced by the waning international clout Europe will have in a future world.

Why have politicians, or their representatives in international organizations, often not taken these concerns seriously? Why is the concern that so many people have for a decent job, neglected in politicians mind? Why could governments (rightfully) act as bankers of last resort, which engaged trillions of dollars, but could government not act as employer of last resort as an answer to the 2008 financial crisis? Why are we witnessing such an asymmetric approach to capital and labour?

A first explanation seems ideological: the thinking of a broad group of politicians is still based on neo-classical thinking that was the basis for the so-called Washington Consensus: trust financial and economic markets and make the labour market more flexible. A second reason is that some political parties are afraid to put creation of employment central. They are afraid to fall back to class antagonism or to be regarded as old fashioned. A third, and very important reason, is that continuing liberalization is a politically easy solution. It requires less policy making: reducing the public sector, spending more money to keep up the financial system, and translating comprehensive social policies into safety nets and training programmes. A fourth reason is the unwillingness of various actors to acknowledge that constructs of the past need to be actualized.

Attention for the future of work and for decent work, however, requires more attention from the government and requires greater policy coherence in these times of globalization between almost all aspects of socio-economic policy: macro-economic policy, sectoral and structural policies, education policies and social security policies. This requires that attention for work, and especially decent work, is not only of concern to the ministry of labour but needs to get attention at the highest political level, not only in word but also in deed.

National governments and international financial agencies should not only be accountable for how they contribute to growth and stability, but also for how much decent jobs have been created. It is imperative to have an integrated regional and global vision on labour markets and precise goals for that. It does not make sense anymore to speak of a national labour market. This requires another way of thinking. Exact blue prints are not available, but if rethinking the contours of a renewed social contract and acting in the spirit of a social contract does not start now, it could be too late. The world is changing very rapidly in the context of technological development and globalization. The European region, confronted with geopolitical shifts, should now rise to challenge that change.

[1] World Commission on the Social Dimension of Globalization. 2004. A Fair Globalization -Creating Opportunities for All. Geneva, ILO.
[2] Vaughan-Whitehead, D. (ed.) 2016. Europe’s Disappearing Middle Class? Cheltenham and Geneva, Edward Elgar and ILO.

Rolph van der Hoeven
Emeritus professor in Employment and Development Economics at ISS of Erasmus University in Rotterdam, the Netherlands

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