Does Labor Market Dualization Translate into Welfare State Dualization? the Case of Germany

In this paper, I examine one country in particular—Germany—which is considered to be a prime example of a Bismarckian, social-insurance based, welfare state. I propose answers to three fundamental questions: 1) whether there are more labor market outsiders in Germany today than there were twenty years ago; 2) whether these labor market outsiders are indeed worse off today than two decades ago; and 3) whether the welfare state increases or lessens this dualism. To answer these questions, I employ data from the Luxembourg Income Study (LIS) and analyze the income—both pre- and post-welfare state involvement (i.e. pre- and post-taxes and transfers)—of those determined to be labor market outsiders and insiders. My analyses utilize five waves of the LIS data for Germany: 1984, 1989, 1994, 2000, and 2004. The welfare state is shown to have an ameliorative effect on the income gap between insiders and outsiders at the household level. Taxes and transfers reduce the difference in incomes between these two groups in Germany over time, providing preliminary evidence that welfare state reforms and state re- structuring between 1984-2004, while trimming benefits and payout periods, did not result in an overall loss of welfare (measured in monetary terms) for those considered to be at a disadvantage in the labor market.