Welfare State: What It Is and How It Works

The first social laws, in Germany

Toward the end of the nineteenth century, German factories imposed long shifts, often twelve or fourteen hours, in conditions that damaged workers’ health. According to the Deutsches Historisches Museum, these conditions fed recurring protests and strikes throughout the nineteenth century. It was in this climate that Chancellor Otto von Bismarck pushed through three laws that, one after another, covered the main risks a worker faced.

In 1883 the Reichstag passed the sickness insurance law, which applied to workers employed for more than a week and earning below a set income threshold. According to the Deutsches Historisches Museum, the law brought 4.7 million industrial workers under compulsory coverage. A year later, in 1884, the accident insurance law took effect: in the event of a workplace accident, a worker received compensation regardless of who was at fault, starting from the fourteenth week, once sickness coverage ran out.

The third law, on invalidity and old-age insurance, arrived in 1889. German sources disagree on the exact day of approval, giving dates in both May and July, but it is certain that the law followed a large strike by miners in the Ruhr coalfield. The resulting pension was modest: according to the Bundeszentrale für politische Bildung, after thirty years of contributions it covered only a fifth or a sixth of previous earnings.

Bismarck was no revolutionary. According to the Deutsches Historisches Museum, the reasoning behind his laws was that workers would feel more bound to the state if it guaranteed them a degree of security: the three laws were a tool for political stability.

The British model and the Beveridge Report

More than fifty years later, in the United Kingdom, an inter-departmental committee on social insurance and allied services, chaired by economist William Beveridge, presented a report to parliament: it was November 1942, in the middle of the war. According to the Modern Records Centre at the University of Warwick, the report proposed a new type of welfare state, with social insurance covering every stage of life and the stated aim of preventing a return of the widespread poverty seen during the prewar economic depression.

The report received broad support and is regarded, according to the same source, as the foundation document for the welfare state built by the Labour government between 1945 and 1951. Unlike the German model, built insurance scheme by insurance scheme and tied to employment, the British approach aimed at more uniform coverage, extended to the population as a whole.

Practical example: a family that loses its job under a Bismarckian-style system receives support proportional to the contributions paid during employment; under the scheme envisioned by the Beveridge Report, the same family would be entitled to a baseline of coverage regardless of its contribution history.

The welfare state’s four functions

According to the International Labour Organization, a social protection system guarantees, as a minimum, access to essential healthcare and income security across a person’s entire life. Four functions follow from this definition, showing up in different proportions in every OECD country: healthcare, support for children and education, income support for people of working age who cannot earn enough on their own (covering sickness, unemployment, maternity and disability), and pensions for old age.

These four functions are closely tied to a country’s economic policy choices: spending on income support tracks the ups and downs of the labor market.

Three models of welfare

In 1990, sociologist Gøsta Esping-Andersen proposed a classification of welfare systems into three groups of countries, distinguished by how the state, the market and the family divide up the task of providing social protection.

The liberal model, according to academic research published by Cambridge Core, rests on means-tested assistance and modest universal transfers, aimed mainly at a lower-income segment of the population. The social democratic model, typical of the Nordic countries, instead grew out of a left-wing political coalition strong enough to push through universalistic social policies. The third model, the conservative-corporatist one, builds social protection around employment and contributions paid over a career: it is the same logic as the Bismarckian insurance schemes described earlier, widespread across several continental European countries.

How much OECD countries spend

According to the OECD, in 1960 public social spending across member countries averaged under 10% of GDP. In 2022, France and Italy led the OECD ranking, with public social spending above 30% of GDP; at the opposite end, Costa Rica, Ireland, Korea, Mexico and Türkiye stayed under 15%. The Covid-19 pandemic left a visible mark on the time series: still according to the OECD, average social spending rose from 20% of GDP in 2019 to 23% in 2020, before an estimated fall to 21% in 2022.

These differences between countries don’t reflect the generosity of benefits alone: they also mirror how each country deals with inequality and poverty, and the broader economic policy choices that, in the decades after the Second World War, often drew on Keynesian ideas about the state’s role in the economy.