Country Case Studies and Links


by Patricia Dinsmore


The Germans have traditionally regarded their model as "Sonderweg", that is a middle of the road approach between free market liberalism and state-centered socialism. The welfare system is an integrated part of Germany's "social market economy." Particularly significant is the fact that in Germany, more than in most countries, welfare policies have been mechanisms of economic governance. That is welfare policies are designed to enhance employment effects by withdrawing surplus labor from the economy. In short, early retirement schemes or long university programs serve to constrain the supply of labor when unemployment rates are high. This has prompted critics to charge that Germany has the oldest students, youngest retirees and longest vacationing workers in the world.


The German Welfare Model has been a pioneer in Welfare Policy since the Bismarck Era. In 1873, Bismarck created a social insurance system that was stratified along occupational and class lines. This pay-as-you-go system is based on contribution through which an employee acquires claims to later benefits. The modern welfare system underwent periods of expansion, such as under the Nazi regime (pension benefits), and especially after World War II by successive Christian Democratic-led and Social Democratic governments.

Both major German parties have been committed to expansive social protection and to politics promoting job security and codetermination (labor's participation in company decision making) in enterprise. The Christian conservative parties (CDU/CSU) contain a powerful free market-oriented wing that also supports an individualistic, democratic culture rooted in political and economical liberalism. These "neo-liberal" elements have been important in constraining the more egalitarian trends, especially through their insistence that social intervention should be "market conforming". It was between the 1950's and the 1970's that these influences on West Germany's social state took place.

German social policies have been characterized by their distinctive social priorities and not by high levels of expenditures. What has been important about the German social policy is the unusual policy profile that placed a greater emphasis on social security transfer payments and less emphasis on the role of directly provided public social services. Instead of getting national minimum standards for all of its citizens, the social state consisted of a wide range or work-oriented social insurance schemes that contained strong elements of compulsory self-help. The purpose of this type of system was to provide the majority of the workforce with a high degree of security and predictability by securing an individual's position in the income hierarchy or their social status acquired through work.


There were two goals of the German Welfare State. Germany wanted security for all of their citizens and predictability in economic development outcomes. A compromise had to be made between Labor and Capital to achieve these two goals. They agreed to compromise in limiting the movement of capital across boarders nationally, to create institutions/frameworks to work out differences between Labor and Capital in order to prevent a breakdown in their relationship and they agreed to Institutional Self-Regulation. That meant the government would let the Unions/Labor and the Employers/Capital work things out amongst themselves and the government would not intervene. Government agreed to support the decisions made by Labor and Employers with legislation. This is the only area of government involvement. The government felt this was the best solution because unions and employers have similar economic needs. This Labor/Capital Model has been envied throughout the world. Finally, government promised to keep the supply of unskilled labor low and to create a high wage. The government planned on achieving this by investing heavily in education.

The German Labor Market

A social partnership developed between Unions and Employers. The Unions promised wage restraint and labor peace, while the Employers, in return, committed themselves to sharing productivity gains in the form of added employment and wage increased. This system was very effective, raising the general standard of living as well as the economic security of the workforce. Migrant guest workers ("Gastarbeiter") were brought in, notably from Jugoslavia and Turkey, to overcome labor shortages that tended to appear in sectors with low wages and monotonous jobs that were unskilled and dirty. Theses were the jobs the Germans were increasingly unwilling to take. It is interesting to note in this context that the Christian-conservative government at the time thought it preferable to import foreign workers to overcome labor shortages than to encourage women to enter the workforce – a marked difference to the countries of northern Europe. As a result a two-tier labor market began to emerge in Germany consisting of a well-organized and socially well-projected, highly skilled and highly paid market of (typically male) German workers and more marginalized low skills sector of foreign or female workers.

Philosophical Background

There were three traditions that influenced the German Welfare System. The first was a Catholic Social philosophy, which stressed the importance of self-help as well as the important role of the family. This gave precedence to voluntary organizations over state agencies. Because of this practice, charitable organizations, including the "social arm" of the major churches and the Labor Movement Workers Welfare Association, came to play a more important role in the provision of social services than in most other welfare states. The second tradition was that of conservative state-paternalism that wanted people to be healthy. Thirdly, there is also a more liberal tradition promoting a market economy and a free enterprise system.

The German social and economic model, including the Welfare System, is what we call "corporatist," which is defined typically by interest group cooperation rather than competition as in the pluralist Anglo-American systems. Corporatist systems tend to be highly stratified, delivering specific benefits to targeted groups. The overall goal is to achieve a balance in society by avoiding social competition that would lead to groups of winners and losers and thus threaten the stability of the state (as it happened in Germany's Weimar Republic in the 1920s). Ideologically, corporatism has been influenced by both religious and state traditions emphasizing social harmony, order and stability. Economic actors (e.g., craftsmen, employers, professionals, workers, etc.) are typically members of centralized associations, which engaged in collective bargaining with each other to (a) set standards governing the industry, (b) influence legislation, (c)determine social provisions, and (d) pass regulatory rules. In short, not the state as in France or the US but rather the autonomous associations in a respective segment of the economy determine the qualifications necessary for a given profession and the minimum wage to be paid in that sector.

Features of the German Welfare System

There are four features to the German Welfare Model. These are

  1. the Social solidarity insurance model where different funds support one another (cross-subsidation);
  2. economic governance intended to reduce labor costs, provide for a high-skills labor force, and absorb surplus workers (early retirement, longer vacations, shorter work weeks);
  3. a low-skilled workforce in occupations Germans are reluctant to pursue (usually serviced by migrant workers);
  4. under-developed social assistance schemes for those who fall through the cracks of the social insurance model.

In a contribution based system benefits are supplied in one of two ways: Service in-kind transfers and cash-transfers. An example of service in-kind transfers is the housing system. The qualifications for receiving housing include meeting a certain social profile (e.g., number of children, age, marital status) and income level. Social housing is either provided by municipal governments (usually in social democratically governed cities), or through voluntaristic housing associations. An example of cash-transfers can be found in the German health care system. Public (association-run) health insurance providers supply cash vouchers for the services of a doctor in the private sector. Cash-transfers are also paid out through the associations in the form of pensions, retirement and unemployment.


There are several structural problems with the German Welfare system. This includes the fact that the system has recently shown too little innovation in industry. Germany has a highly skilled workforce producing high quality items, yet its labor force is also the most expensive with the highest labor cost in the world making German products increasingly less competitive.Capital flight is also a problem as German companies increasingly invest abroad. Germany's cash-transfer/benefit social system has the added disadvantage that German recipients can consume these benefits abroad (e.g., retired Germans living in Spain).

Germany's chief problem is that its reliance on contributions, especially for pension and unemployment, coupled with unfavorable demographics (aging population)and persisted high unemployment makes it increasingly difficult to finance the system. Mandated by European Union rules and fiscal prudence, the government can no longer as easily service these social security deficits through government transfers from the budget as in the past. As a result, social security taxes(contributions in the form of payroll taxes) have steadily increased, making German labor increasingly expensive and pricing low-skill/low-income workers out of the market. This in turn has added to the unemployment problem, creating a vicious circle of sorts.

Finally, the system has difficulties coping with an economy that demands flexibilization and change. As a result, an increasing number of German workers is no longer employed in well-protected life-long stable occupations but short-term jobs, or atypical employment. To the extent that the contribution system rewards stable employment and long term contributions, an increasing number of workers tends to fall through the cracks of the system. As a result, a large but shrinking segment of highly-paid and well-protected, typically older male workers in traditional industries (in-group) is confronted with an increasing number of people (out-groups) in less-regulated, non-traditional, often low-skilled service occupations (typically young people, women, migrant workers.)

Many of the aforementioned problems have been exacerbated by German reunification after the fall of the Berlin Wall in 1989. The steady reduction of public expenditures and efforts to reduce taxation in the 1970's and 1980's have been reversed as massive subsidies have been directed towards the imploding East German economy. Personal dependency on state support has grown markedly especially in the East where the standards of work skills were not nearly as high as in the West. This has led to a surge of unemployment among East Germans, compounded by an increase in job losses in the West during the recession in the mid-1990s. Germany is in a state of transition between its post-war social and economic mold and a more free-market oriented system. As economic conditions have improved in recent years, the new Social Democratic government under Chancellor Schröder has embarked on a series of (unpopular) reforms of the pension and tax system. Reforms in Germany's multi-level governance and highly consensus-oriented system (state-level, federal level)are notoriously difficult. As of yet, it remains to be seen how successful the SPD-Green government will be. Some say "only Nixon could go to China" perhaps only a leftist-Green government can get away with market-oriented reforms.


Chapter 2 in Vic George and Peter Taylor-Gooby (1996). European Welfare Policy; Squaring the Welfare Circle St.Martin's: New York.

See also: MISSOC Country Tables