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ally bring about unemployment and higher burdens on public budgets, tend to threaten its
basic workings. In the following, I will refer to the difficulties of adjustment that relate to
the characteristics of Continental welfare states in general. At the same time, these problems
are particularly relevant for Germany, given that the country has had to cope with a particu-
lar challenge, in many respects comparable to an external economic shock, namely reunifi-
cation (Czada 1998). The fiscal and economic implications of integrating Eastern Germany
into the Federal Republic were heavy burdens on public budgets and social security systems
- which other countries did not experience - and which exacerbated or intensified other sorts
of pressure.
In reaction to the challenges described above (and in particular economic pressures), the
Continental model seems to be unable to generate employment growth. Instead, labour
markets are characterized by high and chronic unemployment levels, especially among the
young, low female participation in the work force and sluggish service sector growth. All of
these factors combine and make labour markets into typical ‘insider-outsider’ markets
(Esping-Andersen 1996: 78f.). Esping-Andersen argues that the model
„(...) has an inbuilt tendency to eat the very hand that feeds it. Unable to promote employ-
ment expansion, it reverts to labour supply reduction policies which, for males, mean un-
employment and pension costs; for women the necessary continuation of male breadwinner
dependencies. This translates into extremely high labour costs and labour market rigidities
because the ‘insiders’ are compelled to defend their employment security’” (Esping-
Andersen 1996: 80).
Such an inbuilt tendency towards ‘self-destruction’, to put it somewhat bluntly, has also
been identified by other analysts. For instance, in discussing the Continental model, Scharpf
notes their ‘low or very low rates of total employment’, and ‘low or very low rates of fe-
male participation in the labour market’ and he stresses that ‘the comparatively high de-
pendence of Continental welfare states on social insurance contributions also creates spe-
cific vulnerabilities’ (Scharpf 2000a: 219ff.). This vulnerability works two ways: employ-
ment losses weaken the financing base of social security programmes while putting higher
burdens on them, especially in the case of unemployment insurance. On the other hand,
insurance-based benefits tend to be more resistant to retrenchments or replacement by
means-tested benefits than are a tax-based benefit, which explains why higher burdens usu-
ally translate into higher contributions for benefits. Thus, ‘Continental welfare states are
vulnerable to a vicious cycle in which rising unemployment will lead to increases in non-
wage labour costs which will further reduce employment opportunities in private sector
services’ (Scharpf 2000a: 222).
The ‘vicious cycle’ described by Scharpf has also been described, from a more distinctly
political economy perspective including firm behaviour in reaction to economic shocks, as a
‘pathological spiral of welfare without work’ (Hemerijck et al. 2000). It implies that in reac-
tion to competitive pressures; firms try to increase labour productivity, which not only
means investments in training, but also dismissing workers, and mostly those who are less
productive and most costly. Given the Continental welfare states’ dependence on male