One of the main historical justifications for the welfare state has been the equalization of living standards between similar families with different numbers of workers and dependents. Around the 1970s, this rationale began to disappear from welfare state discourse, and nowadays you rarely hear anyone talk about it.
This is a shame, because the horizontal equality case for the welfare state is extremely strong and also helps to explain why the welfare state should feature universal benefits rather than means-tested benefits.
In the first panel of the graph, we see two identical workers doing equal work and receiving equal pay. A worker lives alone. The other lives with an elderly father, a disabled spouse and two children. Because the latter worker has to extend his salary to five people while the former worker only has to extend his salary to one person, the two identical workers have very unequal livelihoods.
In the second panel, the welfare state intervenes to solve this problem. Part of each worker’s remuneration is redirected to a central welfare state, then this welfare state pays benefits to the elderly parent (old-age pension), disabled spouse (disability benefit) and children (child benefit) . The welfare state thus ensures that both workers now enjoy equal livelihoods.
Some leftists who are skeptical of the welfare state will see the graph above and say that the problem is actually the wealthy capitalist below. If we reversed it, we wouldn’t need a welfare state. But this is not true. Consider the following graph in which the employer at the bottom is no longer a factory run by a wealthy capitalist who profits lavishly, but is instead run by the state or run like a worker cooperative.
Despite the change in ownership, the problem of these two workers with unequal livelihoods remains the same. Even if all the profits of the company are redistributed to the workers, the fact remains that the worker who lives alone has much more income per person than the worker who lives with an elderly father, a disabled spouse and two children. . Only a welfare state that transfers income from workers to nonworkers, and thus applies net transfers from households with few nonworkers to households with many nonworkers, can correct this particular source of inequality.
This does not mean that there is no difference between a private company, a state company and a worker cooperative. There are huge differences between them, including differences that have great effects on the distribution of income in society. But these differences do not solve the problem that the welfare state solves.
Payments to capital and labor do not take into account differences in household composition and therefore can never be reformed in such a way as to generate an egalitarian society. You can reduce wage differences between workers. You can also redistribute income from capital to work. But if you want to ensure that the final distribution of income is sensitive to differences in household composition, there is no substitute for a universal welfare state.