Bringing the State Back In – The Role of Fiscal Federalism for Welfare Restructuring

Welfare restructuring literature has concentrated on political institutions, electoral systems and cross class coalitions for explaining recent policy reforms. However, even in Bismarckian welfare states, which are dominated by veto positions, proportional representation electoral rules and strong unions and employers, fundamental welfare restructuring has taken place during the last decade. The paper argues that these policy changes can only be understood by taking into account the structure of welfare financing in these countries. Focusing on the reform of unemployment benefits in Germany we analyze the origins of the reform and illustrate the close interaction between labour market and fiscal policy considerations within the government. We argue that the cost-shifting nature of the German political system resulting in high non wage labour costs and a growing financial burden for municipalities was responsible for the emergence of new conflict lines. The paper concludes by reconciling coalition politics and fiscal constraints arguments