The Next Welfare State

Hans-Werner Sinn

A market economy is efficient, but it is not just. Because wages are determined by the law of scarcity, some people cannot earn enough money to live a decent life.

In Western Europe, the welfare state helps these people. It guarantees a socio-cultural subsistence minimum by paying replacement incomes in the form of social aid, unemployment benefits, or early retirement benefits. If the market does not provide you with a sufficient income from your labor, the state will provide an income without requiring you to work.

But, as humane as this policy is meant to be, it is largely responsible for the mass unemployment from which Europe suffers. The reason is simple. Replacement incomes are wages for doing nothing. They establish “reservations wages” or minimum wage demands against the private economy that employers are increasingly unwilling or unable to satisfy.