From Social Protection to Social Investment? Revisiting the Welfare-Skill Formation Nexus in the Knowledge Economy.

The transition to the knowledge economy has transformed the nature of work in the advanced capitalist democracies. Workers now face more frequent career interruptions, transitions across industries, and shorter shelf lives of acquired skills. Consequently, the distinction of ideal-type economies prioritising either general or industry- and firm-specific skills are being blurred. At the same time, welfare states have followed varying trajectories of liberalisation. Estevez-Abe et al. (2001) famously theorised how social protection serves to underpin skill formation systems with more generous income protection schemes enabling effective investment in the formation of industry-specific skills while economies relying more on general skills can afford more limited social protection. The challenges and consequences of the transition to the knowledge economy render both systems inadequate, instead requiring a move toward more holistic social investment that complements generous buffers with policies easing labour market flows and expanding human capital stock (Hemerijck et al. 2023). Building on an analysis of legislative change, microdata on social spending, and elite interviews, this paper reassesses and theorises the welfare-skill formation nexus in the knowledge economy in the United States and Germany from a social investment perspective. Conditional on the skill requirements of dominant sectors, including manufacturing, finance, and ICT, the paper outlines two waves of welfare state reform trajectories since the 1990s, the first of which led to an erosion of the complementarities that used to support the welfare-skill formation nexus: The German model of generous income protection made way for a social policy model that predominantly favours a shrinking core of workers with high but increasingly general skills. As the significance of firm- and industry-specific skills declines, German firms seek to profit from this transition by ‘outsourcing’ their skill formation needs to the public sector and in particular to higher education. Having long relied on the division of labour between publicly-provided social protection and largely privately provided training, the state, in turn, lacks experience in delivering on these skill needs. The US, by contrast, doubled down on unfettered liberalisation, which led to a growing scope and sophistication of the immense hidden welfare state of privately provided alternatives to social policy, which is, however, increasingly ill-fitted to cope with the challenges of the transition to the knowledge economy and its skill requirements. A second wave of welfare state reforms in both countries sought to overcome these shortcomings through a more genuine move toward social investment. The paper thus showcases how the economic imperatives stemming from a previous equilibrium propping up a country’s welfare-skill formation nexus first hindered genuine social investment reforms, but ultimately became beneficial constraints providing an impetus for a convergence on – albeit fledgling – social investment.