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Deviation. Source: Statistics Canada. 2001. Historical Labour Force Statistics 2000. Ottawa: Statistics Canada. ... remained flat until 1993, but continued to grow for the rest of the decade. ...... tawa: Government of Canada. Jain, H. C. and S.

Similar Challenges, Different Solutions: Reforming Labour Market Policies in Germany and Canada during the 1990s

Similar Challenges, Different Solutions

51

THOMAS R. KLASSEN York University Toronto, Ontario

STEFFEN SCHNEIDER University of Augsburg Augsburg, Germany

Le Canada et l’Allemagne ont connu des défis économiques et des chocs politiques considérables au cours des années 90. Un taux de chômage élevé et des disparités sur le marché régional du travail ont fait douter de l’efficacité des politiques concernant le marché du travail, dans les deux pays. Cependant, en dépit de la similarité des défis existants, les deux fédérations ont suivi des voies différentes sur le plan des réformes. Les programmes d’assurancechômage n’ont été que très légèrement modifiés dans les deux nations. Toutefois, pour ce qui est des politiques en vigueur concernant le marché du travail, le Canada a poursuivi une décentralisation asymétrique donnant davantage de pouvoir aux provinces, tandis que l’Allemagne renforçait ses mécanismes corporatistes. Pour expliquer les différentes voies empruntées en matière de réformes, il est nécessaire de prendre en considération un éventail de variables, y compris le contraste entre le fédéralisme allemand — fédéralisme à l’intérieur d’un même état, et le fédéralisme canadien — fédéralisme entre états. Canada and Germany experienced considerable economic challenges and political shocks during the 1990s. High unemployment and regional labour market disparities raised concerns about the adequacy of labour market policies in both countries. Yet despite similar challenges, the two federations pursued different reform paths. Unemployment insurance programs were only marginally changed in each nation. With regard to active labour market policies, however, Canada pursued an asymmetrical decentralization granting more power to the provinces, while Germany reinforced its corporatist mechanisms. Explaining the different reform paths requires consideration of a range of variables including the contrast between Germany’s intrastate and Canada’s interstate federalism.

INTRODUCTION

F

or both Canada and Germany the 1990s consisted of serious economic challenges and momentous political shocks. The two countries faced

increasing competitive pressures and severe constraints on public spending as they moved toward closer economic integration with their continental neighbours. While Canada barely avoided a referendum victory by the Quebec sovereignist forces in

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52 Thomas R. Klassen and Steffen Schneider 1995, Germany had to cope with the effects of its reunification in 1990. Against this backdrop, extended periods of high national unemployment and strong regional labour market disparities raised doubts about the adequacy of traditional labour market policies (LMPs) in both federations, and various reform initiatives throughout the decade sought to address their shortcomings. Yet despite these similar challenges, Canada and Germany have not chosen the same reform path. Here, we analyze the reform trajectories of the two countries in light of a growing literature that explores the sources of continuity and ongoing national diversity of LMPs in an era of economic restructuring and welfare retrenchment. We proceed in four steps. In the next two sections of the paper, we provide some background on employment structures and unemployment trends in Canada and Germany during the 1990s, and on their respective labour market regimes as they entered the decade. In the following two sections, we first describe the reform trajectories of the two countries and then examine the factors that help to understand their largely divergent experiences.

LABOUR MARKET TRENDS IN THE 1990S Canada Unemployment rates in Canada were low during the 1970s, averaging 7 percent, but reached an average of 9.5 percent in the 1980s and 9.4 percent in the 1990s. The recession of the early 1990s caused the standardized national unemployment rate, as illustrated in Chart 1, to exceed 10 percent from 1991 to 1994; however, unemployment decreased in the final years of the decade, falling to a historically low level of 6.8 percent by 2000. As demonstrated in Chart 2 and Table 1, regional disparities were considerable and steadily increased throughout the 1990s. The Atlantic provinces and Quebec experienced the highest unemployment levels. Their average unemployment rate for the decade was 13.8 percent compared to 7.7 percent for the rest of Canada. The average unemployment rate of Newfoundland was 2.8 times that of Saskatchewan, and Quebec’s rate exceeded Ontario’s by nearly three percentage points during the 1990s. The standard deviations climaxed in 1994 and 1997, but

CHART 1 National Unemployment Rates, Canada and Germany, 1991–2000

% standardized unemployment

12 10 8

Germany Canada

6 4 2 1999

1997

1995

1993

1991

0

Source: Organisation for Economic Co-operation and Development. 2001. Labour Force Statistics. Paris: OECD.

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Similar Challenges, Different Solutions

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CHART 2 Variation Coefficients for Unemployment Levels, German Länder and Canadian Provinces, 1991–2000

00 20

99 19

98 19

97 19

96 19

95 19

94 19

93 19

92

Germany Canada

19

19

91

0.5 0.4 0.3 0.2 0.1 0

Sources: Tables 1 and 2.

TABLE 1 Unemployment Rates (%) by Province, 1991–2000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Average

Newfoundland

18.0

20.2

20.4

20.2

18.1

19.3

18.6

18.0

16.9

16.7

18.64

Prince Edward Island

16.7

18.1

17.6

17.2

15.0

14.7

15.4

13.8

14.4

12.0

15.49

Nova Scotia

12.1

13.2

14.3

13.5

12.1

12.3

12.1

10.5

9.6

9.1

11.88

New Brunswick

12.2

13.0

12.5

12.4

11.2

11.6

12.7

12.2

10.2

10.0

11.80

Quebec

12.1

12.7

13.3

12.3

11.4

11.9

11.4

10.3

9.3

8.4

11.31

British Columbia

10.1

10.2

9.7

9.0

8.4

8.7

8.4

8.8

8.3

7.2

8.88

Ontario

9.5

10.7

10.9

9.6

8.7

9.0

8.4

7.2

6.3

5.7

8.60

Manitoba

8.6

9.2

9.3

8.6

7.2

7.2

6.5

5.5

5.6

4.9

7.26

Alberta

8.1

9.4

9.6

8.7

7.8

6.9

5.8

5.6

5.7

5.0

7.26

Saskatchewan

7.4

7.9

8.2

6.8

6.6

6.6

5.9

5.7

6.1

5.2

6.64

Standard Deviation

3.55

3.97

3.94

4.23

3.69

4.01

4.29

4.09

3.82

3.77

Source: Statistics Canada. 2001. Historical Labour Force Statistics 2000. Ottawa: Statistics Canada.

CANADIAN PUBLIC POLICY – A NALYSE DE POLITIQUES,

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54 Thomas R. Klassen and Steffen Schneider were still higher at the end than at the start of the decade. The variation coefficients (standard deviations/averages of provincial unemployment rates) remained flat until 1993, but continued to grow for the rest of the decade. In 2000, the average unemployment rate was 11.2 percent in the Atlantic

provinces and Quebec, and a mere 5.6 percent in the rest of the country. As illustrated in Table 3, participation rates for the total labour force, women and workers aged 55 to 64 are higher in Canada than in other OECD coun-

TABLE 2 Unemployment Rates (%) by Land, 1991–2000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Average

Sachsen-Anhalt*

10.3

15.3

17.2

17.6

16.5

18.8

21.7

21.7

21.7

21.4

18.22

MecklenburgVorpommern*

12.5

16.8

17.5

17.0

16.1

18.0

20.3

20.5

19.4

19.0

17.71

Brandenburg*

10.3

14.8

15.3

15.3

14.2

16.2

18.9

18.8

18.7

18.4

16.09

Thüringen*

10.2

15.4

16.3

16.5

15.0

16.7

19.1

18.3

16.5

16.5

16.05

9.1

13.6

14.9

15.7

14.4

15.9

18.4

18.8

18.6

18.5

15.79

Berlin

10.6

12.4

12.8

13.2

13.6

15.2

17.3

17.9

17.7

17.6

14.83

Bremen

10.7

10.7

12.4

13.7

14.0

15.6

16.8

16.6

15.8

14.2

14.05

Saarland

8.6

9.0

11.2

12.1

11.7

12.4

13.6

12.6

11.9

10.8

11.39

Niedersachsen

8.1

8.1

9.7

10.7

10.9

12.1

12.9

12.3

11.5

10.3

10.66

Hamburg

8.7

7.9

8.6

9.8

10.7

11.7

13.0

12.7

11.7

10.0

10.48

NordrheinWestfalen

7.9

8.0

9.6

10.7

10.6

11.4

12.2

11.7

11.2

10.1

10.34

SchleswigHolstein

7.3

7.2

8.3

9.0

9.1

10.0

11.2

11.2

10.6

9.5

9.34

RheinlandPfalz

5.4

5.7

7.5

8.4

8.5

9.4

10.3

9.7

9.1

8.1

8.21

Hessen

5.1

5.5

7.0

8.2

8.4

9.3

10.4

10.0

9.4

8.1

8.14

Bayern

4.4

4.9

6.4

7.1

7.0

7.9

8.7

8.1

7.4

6.3

6.82

BadenWürttemberg

3.7

4.4

6.3

7.5

7.4

8.0

8.7

8.0

7.3

6.0

6.73

Standard Deviation

2.55

4.18

3.95

3.60

3.13

3.60

4.30

4.56

4.63

5.06

Sachsen*

Note: * = Eastern Länder. Source: Bundesanstalt für Arbeit. 2001. Arbeitsmarkt in Zahlen. Aktuelle Daten – Jahreszahlen 2000 und Zeitreihen (www.arbeitsamt.de/hst/services/statistik/200012/iiia4/multi/multijz-heftd.pdf).

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Similar Challenges, Different Solutions tries including Germany, a trend that continued in the 1990s. At the same time, youth unemployment is significantly higher than in Germany, although not very different from the OECD average. In fact, the percentage share of youth unemployment even rose during the second half of the decade, while the overall unemployment rate was falling. Long-term unemployment, on the other hand, is much lower in Canada than in Germany and other OECD countries, a trend that remained unchanged during the 1990s.

Germany West Germany experienced a gradual transition from virtual full employment to mass unemployment (and average unemployment rates of 2.3 percent and 6.3 percent) in the two decades preceding reunification, a trend that continued throughout the 1990s. As shown in Chart 1, the national unemployment rate stood at 5.6 percent in 1991, but kept growing there-

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after despite a short-lived, post-reunification boom in the western part of the country. The rate peaked at almost 10 percent in 1997 and averaged 8.2 percent during the 1990s. A modest economic upturn at the close of the decade reduced unemployment from a record 4.8 million workers in early 1998 to about 3.7 million and a rate of 8.1 percent in 2000. As demonstrated in Chart 2 and Table 2, high unemployment levels combined with pronounced regional disparities as the labour-intensive and outdated industrial sector of the former East Germany underwent painful adjustment to capitalist structures. The average unemployment rate in the five new Länder (federal states) for the decade was 16.8 percent compared to only 9.6 percent in the western Länder (excluding the City of Berlin). This gap, which overshadowed considerable north-south disparities, even widened during the 1990s. Both

TABLE 3 Structural Aspects of Employment and Unemployment, Canada and Germany, 1991–2000

Year Total Labour Force

Participation Rates (%) Women

Ages 55–64

Youth Unempl. (% total)*

CDN

FRG

CDN

FRG

CDN

FRG

CDN

FRG

1991

77.2

73.9

68.5

60.6

48.5

38.8

28.6

1992

76.4

73.1

67.9

60.8

48.3

39.4

27.7

1993

76.1

72.7

67.8

60.9

47.9

40.2

1994

76.0

72.9

67.7

60.9

48.2

40.6

1995

75.8

72.8

67.8

61.1

47.3

1996

75.6

72.9

67.9

61.4

47.2

1997

75.9

73.4

68.3

61.9

1998

76.3

73.6

69.1

62.5

1999

76.9

73.9

69.8

2000

77.4

74.7

70.5

Long-term Unempl. (% total)**

Service Empl. (% civ. empl.)

CDN

FRG

CDN

FRG

15.3

9.0

31.6

72.3

55.0

14.8

13.4

33.5

73.1

56.7

26.8

14.1

16.4

40.3

73.5

57.9

26.7

13.2

17.8

44.3

73.3

59.1

42.4

26.9

12.4

16.7

48.7

73.0

60.2

44.1

26.6

12.2

16.7

47.8

73.1

61.6

48.2

45.2

28.8

11.3

16.1

50.1

73.0

62.3

48.6

45.0

29.3

11.3

13.7

52.6

73.9

62.6

62.6

49.9

44.4

30.2

11.2

11.6

51.7

74.0

62.7

63.2

51.2

44.7

30.4

11.2

12.2

51.5

74.1

62.7

Note: * = 15–24 years for Canada, –25 years for Germany. ** = Unemployed for more than one year. Sources: OECD. Various Years. Economic Outlook, Employment Outlook, Labour Force Statistics. Paris: OECD.

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56 Thomas R. Klassen and Steffen Schneider standard deviations and variation coefficients, after declining from a peak in 1992, once again grew in the second half of the decade, nearing postreunification levels in 2000. In the same year, the average unemployment rate was 18.8 percent in the eastern and 9.3 percent in the western Länder. As shown in Table 3, a number of structural features differentiate the Canadian and German labour markets. Notably, German service employment and participation rates for the total labour force, women and workers aged 55 to 64 are similar to other European nations, but low in comparison to Canadian and North American standards. The already low percentage share of youth unemployment in Germany declined further in the 1990s, distinguishing the country from its neighbours. The share of long-term unemployment, on the other hand, was high by European and North American standards and rose considerably during the decade.

LABOUR MARKET REGIMES It is now widely accepted that distinct national varieties of capitalism have developed — and continue to survive — in the advanced industrial economies (Esping-Andersen 1996; Hall and Soskice 2000). This notion has, for instance, led to the distinction between coordinated and liberal market economies (Soskice 1999). Typologies of this kind describe multidimensional configurations of institutions and policies that closely interact with welfare regimes and labour market structures (Esping-Andersen 1990; Kolberg 1992). Despite debate about the adequacy and relative merit of competing typologies in general and the categorization of specific countries in particular, it is obvious that Canada and Germany differ along several of the various relevant dimensions.

Canada Like its American neighbour, the Canadian model of capitalism largely corresponds to the liberal market economy ideal-type. Canadian unions, which CANADIAN PUBLIC POLICY – ANALYSE

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represented only 18.7 percent of private sector workers and 69.9 percent of public sector workers in 2000, are generally better organized than business, since the essence of free market competition counters efforts of firms to cooperate. Both unions and employers’ associations are highly decentralized and fragmented, with power yielded either by provincial organizations or (much more commonly) by union locals and individual firms. Although national bodies of labour and business do exist, their power to make or enforce decisions, and to ensure the coordination of locals, is very limited. Interactions between labour and business tend to take place at the provincial level, since the provinces are responsible for the bulk of legislation regarding industrial relations, employment standards, health and workplace safety, workers’ insurance and related areas. The relatively small role of the state by and large corresponds to the liberal model. However, as there are no cooperative and self-governance arrangements of labour and business, and hence no strongly organized counterweight to government action, the state occasionally has considerable latitude with regard to aspects of LMP. There are few attempts by the state, labour or firms to coordinate human capital initiatives. For example, apprenticeship in Canada is underdeveloped and vocational training is generally left to individuals. The fact that provinces have primary constitutional responsibility for aspects of LMP further fragments this policy field and prevents the formation of effective centralized or national private sector bodies (Dupré 1973; Haddow 1995). Passive labour market policies (PLMPs) became a federal responsibility after a constitutional amendment in 1940 and are primarily composed of an Unemployment Insurance (UI) scheme financed by employers and workers. Eligibility and payments to the unemployed vary across regions, type of work, and other factors, such as frequency. Passive measures for those not eligible for UI, in other words for those who have exhausted their benefits or were not previously employed, are a provincial domain, VOL. XXVIII , NO. 1 2002

Similar Challenges, Different Solutions although some federal funds are transferred to the provinces for this purpose. Active labour market policies (ALMPs) have historically involved both the federal and provincial governments, particularly because under the constitution, provinces have responsibility for social policy and for the state institutions that provide training, such as technical and vocational colleges. Services to improve the ability of individuals to access the labour market and obtain jobs range from vocational counselling, basic skills training (literacy, numeracy, and related) and more advanced types of training (including apprenticeship) to wage subsidies and (in a few cases) job creation. These have been funded, if not provided, by both levels of government, with contractions and expansions as unemployment levels and political priorities fluctuated. A common deficiency of many of these programs is that they fail to adequately prepare workers for long-term employment, rather focusing on immediate employability (Premier’s Council 1990; Klassen 2000b).

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legislative framework within which business and labour operate, and to ensure the existence of selfgovernance arrangements that provide various collective goods and contribute to many aspects of policy implementation and administration. For instance, active involvement and a high degree of coordination among firms and employers’ associations sustain the country’s system of vocational training (Culpepper and Finegold 1999; Lehmann 2000).

Thus, in keeping with the basic features of a liberal market economy, LMPs in Canada are relatively underdeveloped, uncoordinated, and regionally fragmented. Although the coverage and generosity of benefits is generally greater than in the United States, programs are less comprehensive than those found in Germany and other European countries. For the most part, Canada has traditionally relied on labour force mobility (both within its own borders and internationally), regionally differentiated labour markets based on a wealth of natural resources, and private initiatives in its LMPs.

PLMPs are a federal responsibility. The earningsrelated UI scheme, which is funded through worker and employer contributions and federal grants, and a second layer of income support, the means-tested and tax-financed unemployment assistance, are administered by the Bundesanstalt für Arbeit (Federal Labour Office, FLO). As a public corporation, the FLO enjoys considerable autonomy, but is ultimately under the supervision of the Bundesministerium für Arbeit und Sozialordnung (Federal Ministry of Labour and Social Affairs). Employers’ associations, unions, and the Länder governments are represented at all levels of the FLO, including the ten regional and 181 local subsidiaries. There is no regional variation with regard to UI eligibility requirements, benefits or the duration of payments. The Länder governments and the municipalities have neither legislative nor administrative responsibility with regard to PLMPs, and their role as providers of ALMPs is marginal. However, municipalities administer and finance social assistance, a means-tested and tax-financed income-support program under federal legislation that is not tied to previous employment status (Clasen 1994; Schmid and Blancke 2001).

Germany The German brand of capitalism has strong features of the coordinated market economy ideal-type. Union coverage is considerably higher in Germany than in Canada. Most unions and firms are represented by centralized associations that engage in collective bargaining at the sectoral and firm levels. The role of the German state is primarily to set a

Most ALMPs are funded through contributions to the UI scheme and operated by the FLO. The initial legislation for a broad range of measures, enacted in the 1960s, mandated that these were legal rights to be used to ensure full employment in Germany. Programs include job counselling and workforce integration, employment maintenance and job creation, vocational training, and qualification

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58 Thomas R. Klassen and Steffen Schneider instruments. ALMPs are complemented by tight dismissal regulations and employment standards that are uniform across the nation (Janoski 1990). In summary, LMPs in Germany are key elements of a coordinated market economy that provides significant opportunities for corporatist bargaining. German capitalism combines extensive coverage and generous benefits with high and stable wages, but a low degree of labour market flexibility and labour force mobility.

REFORM TRAJECTORIES As part of their efforts to fight unemployment, reduce fiscal strain and improve competitiveness, the governments of most advanced industrial economies closely scrutinized traditional LMPs throughout the 1990s. In the wake of an ideological shift toward neoconservatism, many centre-right governments — and often left-wing governments as well — embarked on an agenda of welfare retrenchment and labour market deregulation, as advocated by the OECD (1994a, 1994b). The shift from PLMPs to ALMPs was a key goal of most reform initiatives. Yet, as evidence from Canada and Germany demonstrates, there has been little, if any, convergence of reform trajectories and outcomes.

Canada After gaining power in 1984, the Conservative Mulroney government concentrated on two major objectives: it hoped to strengthen national integration through constitutional reform and to foster neoconservative-inspired economic and social policy change through trade liberalization. The 1990s began with an escalation of constitutional debates that resulted in the collapse of the Meech Lake Accord in 1990 and the demise of the Charlottetown Accord in 1992. The recession of the early 1990s, together with the implementation of the 1988 Canada-US Free Trade Agreement and the 1993 North American Free Trade Agreement (NAFTA), triggered significant economic restrucCANADIAN PUBLIC POLICY – ANALYSE

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turing in the industrial heartland of the nation. Partly as a consequence of these developments, the early 1990s also marked a period of unprecedented and increasing fiscal pressures. In a surprising turnaround, the Liberal Chrétien government, which succeeded the Conservatives in 1993, endorsed NAFTA and spent most of its political capital on the reduction and elimination of deficits, which declined as government expenditures decreased and the economy recovered during the remainder of the decade. In 1992, the deficit stood at 9.2 percent of the gross domestic product (GDP), but the surplus reached in 1997 even swelled to 3.4 percent of GDP by 2000 (OECD 2001a, Annex Table 30). In the first half of the 1990s, the UI program was incrementally altered to counter concerns that it was undermining work incentives by being too generous and too passive in helping the unemployed to find new jobs, and more importantly, to reduce costs. Eligibility requirements were tightened, the duration of payments was reduced, and benefits were lowered. For instance, in 1993 and 1994, the benefit rate was lowered from 60 to 57 and 55 percent, and the average entitlement period was shortened. Notwithstanding these changes, the UI program, which in 1993 provided 3.4 million Canadians with $18.3 billion in benefits, continued to be viewed as too generous and costly (HRDC 1994). Consequently, pressures continued to be placed on the newly elected Chrétien government to further reform UI. The Liberal government’s social security review targeted UI expenditures with initiatives that sought to reduce the reliance of workers on UI, thereby achieving significant reductions in expenditures. Particularly severe adjustments were made to eligibility criteria affecting frequent users of UI (now renamed Employment Insurance — EI) who tended to be concentrated in seasonal occupations such as fishing in the Atlantic region. Specifically, 26 weeks of work (910 hours) were required for eligibility rather than the previous 20 weeks, the number of weeks of entitlement was reduced from 50 to 45, and payment levels were decreased. The various VOL. XXVIII , NO. 1 2002

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reforms to the insurance program proved very effective, at least in reducing costs, with the percentage of GDP spent on all LMPs decreasing sharply from 2.6 percent in 1993 to only 1.5 percent in 1998 (OECD 2001b, Table 1.5). In constant dollars, $9,350 of benefits was spent per unemployed worker in 1990, but only $5,907 by 1997 (Haddow 2000).

1991 and 1995, an average of 236,000 immigrants was accepted into Canada each year. In contrast, far fewer immigrants were accepted in years when unemployment rates were low. For instance, between 1986 and 1990, the annual average was only 164,000 and during the economic expansion from 1996 to 2000, the average was 207,000 (Veugelers 2000; Veugelers and Klassen 1994).

Since provinces have constitutional jurisdiction for most aspects of employment standards, industrial relations and so forth, the decade witnessed considerable variation and shifts in labour market regulation. For instance, during the first half of the decade, under the New Democratic Party government, labour laws in Ontario were generally union friendly and provided relatively strong protection for workers, including high minimum wages (Jain and Muthuchidambaram 1995). However, this changed in 1995 with the election of a Conservative government, which moved quickly to deregulate a range of areas, such as the maximum number of hours of work. Overall, the national trend was toward labour market deregulation as provinces sought to compete with each other and jurisdictions in the United States for private sector investment.

At the start of the decade, especially in light of the implementation of the Canada-US Free Trade Agreement, ALMPs in Canada were being criticized as inadequate because they did not tackle the causes of long-term unemployment and failed to sufficiently involve the labour market partners (Advisory Council on Adjustment 1989). In response, many state and some private sector decisionmakers sought to emulate the German corporatist model with regard to training the unemployed (CLMPC 1990; Premier’s Council 1990). The federal government and most provinces established business-labour training and adjustment boards beginning in 1990, charged with providing advice to decisionmakers on labour training and adjustment programs. In Ontario and Quebec, these boards were also granted significant powers to design and operate training programs (Haddow 1998; Klassen 2000a). However, by the mid-1990s, it had become apparent that the boards were unable to forge corporatist consensus and by the end of the decade, nearly all had been dismantled (Sharpe and Haddow 1997).

Absent from the national LMP agenda during the 1990s were significant attempts to regulate the labour supply, notwithstanding that initiatives along those lines could have been incorporated into the overhaul of passive measures in 1995–96. In fact, the federal Program for Older Worker Adjustment, which provided a bridge between permanent labour market displacement and retirement, was eliminated in 1996 as a cost-cutting measure. The regulation of the labour supply has been left to employers (through company-sponsored early retirement packages), unions, and other private sector actors. Immigration policy, which might have been used as a means of regulating the labour supply, had the opposite effect in that immigration rates were extraordinarily high during the early 1990s even as unemployment levels exceeded 10 percent. Between

As part of the 1995 reform of LMPs, the aim of federal ALMPs was shifted to focus on two objectives: the number of EI clients re-employed and savings generated to the EI account, calculated as the difference between the maximum entitlement of a worker and the actual payout of such benefits (HRDC 2001). This meant that active programs were solely mandated to move clients into employment as quickly as possible, rather than to make clients as employable as possible in the long term. At the same time, as a direct result of the Quebec referendum in which 49.4 percent voted “yes,” the

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60 Thomas R. Klassen and Steffen Schneider federal government offered to transfer responsibility for ALMPs to the provinces, including both funding and federal staff (HRDC 1996; Bakvis 1996). Since then all provinces, with the exception of Ontario, have signed labour market development agreements that have decentralized ALMPs (Bakvis and Aucoin 2000; Klassen 2000b). In total, more than 1,500 federal staff have been permanently transferred to the provinces, and about $900 million flows to the provinces each year for training. Consequently, the federal role in the design and delivery of training and related programs has been largely abolished, albeit in some of the smaller provinces, it remains larger since federal program delivery staff (and funds) have not been transferred to the provinces, but instead work more closely with provincial officials. As a result, there is now an asymmetrical decentralization of active measures (HRDC 2000; Klassen 1999, 2000b).

Germany In West Germany, the 1982 electoral victory of the centre-right parties, led by the Christian Democratic Union, was initially expected to usher in a neoconservative-inspired era of welfare retrenchment and labour market deregulation. However, the steps taken by the Kohl government in 1985 to weaken the strike capacity of unions and to increase labour market flexibility and labour force mobility were relatively cautious. Moreover, the political context completely changed in 1990 with reunification. The Kohl government had promised the quick economic recovery of the former East Germany and the fast expansion of the West German welfare regime to the entire nation (Ganssmann 1993). The sheer magnitude of the labour market problems facing the five new Länder and Berlin dictated swift and decisive action. Yet the soaring unemployment levels of the 1990s caused rising expenditures and sinking revenues, and hence threatened the financial viability of the entire welfare regime. The deficit peaked several years after Canada’s, but at a level much lower than Canada’s, reaching 3.4 percent of GDP in 1996. At the same time, the fiscal and monetary stability criteria of the CANADIAN PUBLIC POLICY – ANALYSE

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1992 Maastricht Treaty and the fear that growing expenditures and non-wage labour costs would provoke further employment contraction represented strong countervailing pressures in favour of continuing the austerity and retrenchment measures of the 1980s. It was only in 2000 that a surplus was achieved (OECD 2001a, Annex Table 30). Moreover, there was serious doubt about the capacity of uniform national LMPs, as established before 1990, to solve the problems of the Eastern Länder without further eroding the relative competitiveness of their industrial sector. Yet sweeping reform in the direction of a flexible labour market regime would have jeopardized the foundations of the coordinated market economy in the western part of the country (Carlin and Soskice 1997). Widespread concern about high unemployment and Chancellor Kohl’s perceived incapacity to curb it dominated the September 1998 electoral campaign and played a major role in the defeat of his government. Conversely, the new left Social DemocraticGreen administration has unequivocally linked its fate to reducing unemployment. Not unlike the Liberals in Canada, though, the Schröder government decided soon after its victory to focus on deficit reduction and a policy of fiscal prudence. In this context of conflicting pressures, and despite the fact that traditional LMPs were conspicuously overburdened, the bulk of reforms actually implemented during the 1990s by both government coalitions were ad hoc emergency and containment measures driven by the situation in the new Länder and fiscal strain. Accordingly, the organizational and legal basis of LMPs was not substantially altered (Heinelt and Weck 1998; Manow and Seils 2000; Schneider 2002). Throughout the decade, some of the flaws of this institutional framework were exposed by a widening gap between shrinking UI revenues and growing demand for services. Total expenditures and those allocated to PLMPs increased substantially in the first three years after reunification. The FLO, which shouldered between 75 and 90 percent of national LMP VOL. XXVIII , NO. 1 2002

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spending, ran deficits and received federal grants throughout the 1990s.

employment were enacted, and the works council system was strengthened.

The government, in 1991, reacted by increasing UI contribution rates from 4 percent to the current 6.5 percent. Furthermore, in 1994 and 1996–97, it tightened eligibility criteria and lowered the benefits of the two main income-support programs — UI and unemployment assistance — from 68 and 58 percent of the last net income to 60 and 53 percent (67 and 57 percent for persons with children). Furthermore, rules as to what constitutes “suitable job offers” became stricter. The economic upturn of the late 1990s, along with these measures, helped to stabilize and even reverse the quick rise of LMP expenditures. Notwithstanding these changes, eligibility criteria and benefits remained quite generous by international standards, and retrenchment was hardly driven by strong ideological motivations. However, combined with the growing incidence of long-term unemployment, the cuts nevertheless resulted in a growing share of workers relying on social and unemployment assistance rather than UI benefits. As was the case in Canada, spending on these two income-support programs increased at a rate far exceeding that of UI expenditures. Hence there was a shift from entitlements to means-tested and tax-financed programs.

During the 1980s, the Kohl government had focused on delaying entry of workers into the labour force and reducing the labour supply in its battle against unemployment. For instance, it implemented repatriation incentives for foreign workers and a tight anti-immigration policy, expanded vocational training programs, failed to correct biases against female employment in the German tax code and, most importantly, promoted early retirement. These measures were continued in the 1990s despite conspicuous flaws like the fact that early retirement further reduced UI revenues and hence merely shifted the costs of unemployment from the FLO to the pension system. The new government has so far not radically questioned or altered these measures. However, its green-card program, implemented in 2000 and designed to address the labour shortage of growth industries by offering non-renewable, fiveyear visas to a maximum of 20,000 highly qualified specialists, represented a remarkable, if cautious, break away from the previous policy of reducing the labour supply.

Despite its self-proclaimed neoconservative orientation, the Kohl government was much more hesitant in pursuing the goal of labour market deregulation (Büchtemann 1991). After 1990, it continued its modest and largely unsuccessful efforts to encourage more flexible working times and retail-closing hours, fixed-term contracts, and casual jobs; it also tried to facilitate dismissals and to cut back sick-pay compensation. Core principles of industrial relations and collective bargaining in Germany were hardly touched, though. Schröder, moreover, quickly rescinded some of these measures and introduced new elements of labour market regulation: most notably full sick-pay compensation was restored, social insurance contributions for persons with casual jobs and those in some forms of self-

Immediately after reunification, the German state assumed an unfamiliarly interventionist role in the former East Germany. ALMPs were used to an unprecedented extent, and new instruments were added in order to cope with high unemployment in the eastern Länder. Subsidized employment and qualification measures became a set of emergency incomesupport programs used to shed labour and mask the real extent of the problem. Expenditures for ALMPs initially rose and climaxed in 1992, but were scaled back when, in 1994–95, the first special programs for the new Länder were phased out or made available in the western part of the country. By the second half of the decade, ALMPs spending even sank below the 1991 level. Quite astonishingly, however, the Kohl government tried in early 1996 to renew, with employers’ associations and unions, the corporatist arrangements of

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62 Thomas R. Klassen and Steffen Schneider the 1970s as part of its fight against unemployment. The government encouraged cooperation with and between the social partners and defined an enabling role for the state in the so-called Employment Alliance, a series of roundtable talks of government, business, and labour representatives with academic experts. This initiative was linked to the ambitious goal of halving unemployment by 2000, but did not survive growing tensions between its participants nor produce substantive policy output (Bispinck 1997). Nevertheless, a revival of the Employment Alliance was at the core of Schröder’s labour market strategy. Once again, a roundtable served as an arena for reform discussions and bargaining on a range of employment and macroeconomic regulation issues. Several major initiatives have emerged from this arena since 1998. Among these were the above-mentioned green-card program, a highly successful youth-employment and qualification program that involved the Länder, municipalities and social partners, as well as measures that aim to expand and improve vocational training geared toward the information and telecommunications sector (Hassel 2000).

EXPLAINING THE REFORM TRAJECTORIES In this section, we analyze two interrelated questions. First, what explains the overall policy stability in Germany and Canada during the 1990s, when major shifts might have been expected in both countries? Second, what explains differences in the reform trajectories of the two federations, especially with regard to ALMPs? In tackling these questions, we draw on the recent new institutionalist literature, which seeks to identify sources of continuity and ongoing national diversity in the reform experiences of advanced industrial economies (Pierson 2001; Wood 2001). This literature posits three major barriers to policy shifts: (i) the power of the private sector, (ii) electoral constraints faced by governing parties, and (iii) the importance of constitutional CANADIAN PUBLIC POLICY – ANALYSE

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veto points and federalism. We discuss each of these in turn to shed light on developments in Canada and Germany.

The Role of Business and Organized Interests Mass unemployment during the 1990s illustrates the extent to which globalization, continental economic integration, and technological innovation exacerbated competitive pressures on the open and vulnerable economies of Canada and Germany. While regional unemployment disparities were greater in Canada than in Germany, with the exception of two years at the start of the decade, there was a gradual confluence of variation levels in the two nations by the end of the 1990s (Chart 2). In both countries, high unemployment raised the costs of LMPs and contributed to high deficits. Hence governments in Ottawa and Bonn/Berlin struggled with almost equally pronounced economic and fiscal pressures. Furthermore, the neoconservative agenda of welfare retrenchment and labour market deregulation dominated the political discourse in both countries. Lastly, the governments on both sides of the Atlantic operated within the institutional framework of a federal system. Yet, the experiences of Canada and Germany during the 1990s provide ample evidence for a rejection of the hypothesis that pronounced and similar economic and fiscal challenges, combined with severe political shocks, must result in substantial policy change and convergent reform trajectories. Rather, the 1990s were characterized by a fair amount of policy stability in the two federations. The continuity of LMPs was greater — and, given the “seismic shock” (Wood 2001, p. 389) of reunification, even more striking — in Germany than in Canada. Both continuity within and similarities between the two countries were greatest with regard to PLMPs. The development of the Canadian and German UI schemes also illustrates that reforms were more often driven by fiscal and strategic considerations than by ideological motivations. Hence the main funding source of all, or most, incomeVOL. XXVIII , NO. 1 2002

Similar Challenges, Different Solutions support programs for the unemployed (worker and employer contributions) remained intact despite the continuing problem of cyclical revenue and expenditure patterns in UI funding throughout the 1990s: in other words, revenues were lowest when demand for services was greatest. Neither in Canada nor in Germany did governments consider a substantial reform of this flawed mechanism, but opted for (politically less demanding) adjustments to contribution rates, tightened eligibility criteria, and lowered benefit levels instead. Some income-support expenditures were downloaded to regional and local governments, which implied a partial shift from social insurance to means-tested programs in both countries. These measures were more successful in Canada, where the UI/EI account operated with a surplus in the second half of the decade, than in Germany, where the FLO continued to rely on federal grants. A firm-centred explanation of policy stability stresses the privileged role of business in capitalist democracies. According to this perspective, liberal market economies and coordinated market economies diverge in providing employers with incentive structures for different types of LMPs. Employers oppose reforms that are not compatible with these incentive structures unless policy inefficiencies reach a point where business interests are directly threatened. The failure of corporatist labour market development boards in Canada during the 1990s is in line with this explanatory approach. Labour was generally supportive of these corporatist experiments and viewed them as a means of strengthening its clout. Business, on the other hand, was more sceptical and perceived them as a threat to its own ability to influence the formulation of LMPs through lobbying and other mechanisms. The historical animosity of business and labour, along with the unwillingness of state decisionmakers to relinquish power and a general lack of experience in corporatist bargaining, meant that most boards were unable to influence policies. Among employers, support for trade liberalization, welfare retrenchment and labour

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market deregulation was strong and growing, and NAFTA strengthened the features of a liberal market economy type of capitalism in Canada. The approach is less convincing in accounting for the German case, though. It is true that most employers continued to play by the rules of the coordinated market economy model of capitalism in the 1990s and were often less than enthusiastic about ongoing attempts of the Kohl government to deregulate labour markets and to weaken the unions. Slightly relaxed hiring-and-firing rules and new jobcreation measures that gave a prominent role to firms and chambers of commerce, introduced in 1996–97, were rarely used. The social partners even restored 100 percent sick payments in most collective agreements before the Social Democratic-Green administration rescinded the old government’s prescribed cut to 80 percent. Yet while business may indeed have shown a preference for gradual and consensual reforms only, the continuity of its strategic preferences and incentive structures should not be overstated. Employers’ associations have become increasingly vocal proponents of fiscal restraint, welfare retrenchment, and labour market flexibility, and have started calling for more radical departures from traditional policy stances in order to foster competitiveness. The steep rise of non-wage labour costs is now widely seen as a major problem for German firms exporting to global markets. In the eastern part of the country, more and more firms have opted out of collective agreements. Yet, while even the Social Democratic-Green administration has made some concessions to this more overtly neoconservative discourse, such as tax reforms favouring large corporations, LMPs have remained largely untouched by it. The second explanation of policy stability is based on the role of organized interests within, and the electoral constraints faced by, governing parties. High unemployment levels and the advocacy of welfare retrenchment, reduced employment

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64 Thomas R. Klassen and Steffen Schneider protection or benefit cuts are expected to be difficult for parties with strong organizational and electoral links to unions and their membership. The unemployment issue did indeed play a role in the momentous 1993 Canadian and 1998 German changes of government. In Canada, however, neither the Conservatives nor the Liberals, both ideologically flexible brokerage parties of the centre-right, have formalized links with organized interests, and given the crisis of the New Democratic Party throughout the 1990s, labour could hardly mount a credible electoral threat for either one of them. The Chrétien government’s policy shift on LMPs was facilitated by these factors.

First, while both countries have parliamentary regimes, the Westminster-style combination of a first-past-the-post electoral system with single-party and executive-centred, prime-ministerial government in Canada distinguishes it from Germany. Facing a largely ineffectual, regionally and ideologically divided opposition, the Liberals in particular enjoyed considerable political latitude and hence were able to implement a policy shift in LMPs without risking punishment by the voters. Power is more dispersed in Germany with its proportional representation electoral system, coalition governments and greater discretion for individual, especially minor-party, Cabinet ministers.

In Germany, while organizational links between the Social Democrats and the unions have always been particularly close, the major parties of the centre-right also have strong ties both to the churches and to working-class groups. Indeed, conservative governments in the postwar era implemented core elements of the German welfare regime and LMPs. During the 1980s and 1990s, and despite pressures from its business wing and coalition partner, the Christian Democratic Union has never endorsed the neoconservative agenda to the same extent as AngloSaxon parties like the Canadian Liberals and Conservatives. The social and labour market initiatives of the Schröder administration, on the other hand, illustrate the cleavage between old- and newleft positions within the Social Democratic Party as the new chancellor tries, with varying success, to court business and keep the unions at arm’s length. While the unions have lost some policy battles, they remain influential.

Second, while judicial review has become more important in Canada since 1982, the courts have no significant influence on LMPs. In Germany, by contrast, the Bundesverfassungsgericht (Federal Constitutional Court) blocked various measures of the Kohl government. Third, the German welfare regime continues to delegate considerable power to the social partners and bodies of self-governance like the FLO. While the internal structures of the FLO and its relative autonomy create leeway for adjustments in the administration and implementation of programs without direct state intervention and lengthy reform processes, the social partners, themselves increasingly at odds with each other, have so far rather used their clout to block radical changes of LMPs. In Canada, by contrast, the institutions that might have performed a similar role — the labour force development boards — failed.

Constitutional Veto Points and Federalism A third explanatory factor for policy stability underlines the importance of constitutional veto points, highlighting that the autonomy of governments decreases, and reform obstacles grow, with the number of veto points (Lijphart 1984; Tsebelis 1999). Canada and Germany do indeed differ fundamentally in this respect.

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The above-mentioned variables are inextricably linked with the federal nature of the two countries, which arguably creates the most important veto points in both cases. In much of the literature on types of capitalism and welfare regimes, federalism is an ignored or under-explored variable, and most of the literature on “market-preserving” or “competitive” federalism uses a superficial distinction between unitary and federal regimes. As a result, a premature conclusion may be reached that

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Similar Challenges, Different Solutions decentralization is a quasi-natural reform path of LMPs in federal systems, allowing them to fully capture the efficiency and innovation potentials inherent in their institutional arrangements (OECD 2000; Peterson 1995; Weingast 1995). Canada and Germany, however, in many ways represent opposite ends of a spectrum of federal systems, interstate versus intrastate federalism (Schultze 1992; Watts 1999). Their divergent experiences in the 1990s suggest that federalism matters not just in the crude sense of contrasts between federal and unitary systems. Upon closer examination, the reform trajectories chosen by the two countries are heavily dependent on their specific, historically developed intergovernmental arrangements. Their respective types of federalism were reinforced by the Quebec crisis and NAFTA in the case of Canada, reunification and European integration in the German case. As a result, the federal regimes have diverged even further during the course of the 1990s. A comparatively clear and non-hierarchical division of responsibilities between the federal and provincial levels characterizes many Canadian policy fields. This allows the federal government and the provinces to pursue their own interests and exercise power in discreet fields. Territorially based interests are at best weakly represented in the Senate, and the second chamber hardly represents a serious veto point. The nature of intergovernmental relations is aptly summarized by the term federalprovincial diplomacy. While Ottawa continues to use its spending power for unilateral reform activities, the practice of opting out and negotiated settlements between Ottawa and a varying number of provinces — as in the decentralization of ALMPs — has led to an increasingly asymmetrical federalism. The fragmentation of organized interests along regional lines and the existence of separate national and provincial party systems are also characteristic features of Canadian federalism, as is the heterogeneity of Canadian society. Federalism is primarily a tool for managing, and at times reinforcing, this diversity,

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rather than a tool to equalize the living conditions of all citizens. In Canada, then, the adjustments to PLMPs involved few intergovernmental discussions, although there were intergovernmental impacts. Historically, many workers who exhausted their UI benefits became eligible for provincial social assistance. However, in the 1990s, as the UI/EI benefits became less generous, so (independently) did the provincial income support. In other words, as more unemployed workers found themselves ineligible for UI/ EI, they also found themselves more likely than in the past to be ineligible for social assistance. Thus, a weakness of Canadian federalism is that it has not provided intergovernmental mechanisms to ensure the coordination of UI/EI and social assistance (McIntosh and Boychuk 2000). The downloading of income-support expenditures to the provinces was one reason for the expansion in the number of active measures — in some provinces, workfare — associated with provincial PLMPs. Additionally, provinces sought to end the administration of ALMPs as a joint federalprovincial domain and to shift to the more traditional Canadian pattern of a well-defined and non-overlapping division of responsibilities. In doing so, they essentially aimed at establishing the disentangled federalism regime of other policy fields, such as health and education. Canada’s size, geography, and differentiated labour markets also impacted on the nature and development of LMPs. Historically, there has been substantial disparity in unemployment rates between regions (Cousineau and Vaillancourt 2000). The acceptance of these long-standing inequalities between regions is one of the reasons that made possible the decentralization of ALMPs in 1996. From one perspective, decentralization is the logical conclusion of a process that had been underway for decades, with federal active labour market field offices granted increasing autonomy from Ottawa

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66 Thomas R. Klassen and Steffen Schneider headquarters beginning in the late 1980s (Hunter 1993). Furthermore, since reducing unemployment was less a political and social priority in Canada than in Germany, decentralization and its implications have received little public attention. German intrastate federalism, by contrast, is characterized by joint decision-making, interlocking government, and legal harmonization at the national level. While the federal level has a restricted number of exclusive legislative responsibilities, and the residual competence formally lies with the Länder, there is a broad range of concurrent legislative areas and of fields open to national framework legislation. Therefore, federal law has widely preempted state law over the decades. This dynamic is closely linked to a constitutional provision that demands the promotion of equal living standards throughout the country and permits federal action wherever the legal or economic union of the federation is threatened. Various elements of the Grundgesetz (Basic Law), such as a highly redistributive horizontal and vertical equalization mechanism and instruments of fiscal coordination and co-financing, support this constitutional goal (Jeffery 1999; Laufer and Münch 1998). The Länder, on the other hand, play no more than a subordinate role as legislators in their own right, but instead participate in federal legislation and act as influential collective veto players through the Bundesrat; the second chamber of the German parliament, which is composed of Länder premiers and ministers, must approve much of the nation’s legislation. Therefore, it is the prime link between the federal government and the Länder. Joint decisionmaking at the national level is compounded by the centralization of organized interests and the horizontal and vertical integration of the party system. During the 1990s, divergent party majorities in the two chambers of parliament — the Social Democratic Party dominated the Bundesrat between 1991 and 1999 — had brought a de facto grand-coalition government to the country. German federalism also continued to be linked with the previously described CANADIAN PUBLIC POLICY – ANALYSE

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corporatist arrangements and with a high degree of social homogeneity, at least in the western part of the country. Although heterogeneity has increased and more pronounced centre-periphery structures have emerged after reunification, the expectation of equal living standards and service levels throughout the country goes unabated. Moreover, Germany’s conflict-averse political culture does not tolerate strong regional imbalances. It is thus within the logic of German federalism that LMPs, like most other social policy fields, are based on a largely national framework (Münch 1997). Länder initiatives are restricted to the few areas not covered by federal law and the FLO. The provision of most passive and active measures through a national public-law corporation is in line with several other branches of the German welfare regime. The FLO itself operates outside the intergovernmental arena, with its survival ensured by its labour and business stakeholders, while UI entitlements, like other entitlements, enjoy the status of quasi-property rights. Hence the peculiar nature of Germany’s highly centralized and interlocking federalism with its multiple veto points has, in combination with characteristic elements of its political culture, welfare regime, and model of capitalism, worked against, rather than in favour of, substantial reforms like the decentralization of ALMPs or some regionalization of the UI scheme, both of which transpired in Canada. Yet, as in Canada, the limited German reforms did have an intergovernmental effect. A partial downloading of income-support expenditures from the federal level to the municipalities shifted costs from social insurance to means-tested and taxfinanced programs.

CONCLUSION Despite the impact of globalization, economic restructuring, and fiscal pressures, combined with high unemployment and strong regional labour market VOL. XXVIII , NO. 1 2002

Similar Challenges, Different Solutions disparities, the LMPs of Canada and Germany hardly converged during the 1990s. With regard to PLMPs, both countries avoided fundamental changes, while decreasing benefits and downloading expenditures. However, German PLMPs sought to ensure identical coverage throughout the nation and continued to rely on government subsidies. In contrast, UI/EI in Canada maintained and strengthened its element of regional differentiation, and was weaned of its reliance on federal grants. With regard to ALMPs, the reforms in the two countries followed quite different trajectories. In Canada, experiments with corporatist arrangements along the lines of the German model of social partnership were quickly aborted, followed by radical and unprecedented decentralization. The country thus chose a reform path suggested by a growing literature that argues, on the basis of neoconservative or competing (Sabel 1994) theoretical rationales, that there is a positive correlation between decentralization, economic competitiveness, and labour market performance. In Germany, on the other hand, decentralization was not pursued, but national and Länder governments instead opted for a renewal of corporatist arrangements as suggested by research providing evidence for the superior performance of consensus, as opposed to majoritarian, democracies (Cox 1998; Crepaz 1996). In short, while the Canadian reforms entailed substantial changes to the federal distribution of responsibilities and to the institutional framework of ALMPs, there were no equally pronounced changes in the German case. The differences between Canada and Germany — given the similar forces bearing on their economies and welfare regimes during the decade — highlight the need for a closer look at, and better understanding of, specific federal structures and processes as explanatory variables in their own right. In Canada, LMPs reflected a general trend toward asymmetrical federalism, while German LMPs shifted little because of the country’s peculiar,

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allegedly reform-averse type of federalism. Given that the federal structures of both countries are unlikely to be altered to any fundamental degree in the foreseeable future, their LMPs can be expected to continue along divergent trajectories.

NOTE We would like to thank the Social Science and Humanities Research Council of Canada (grant 410-2001-1777) for financial assistance. We would also like to thank Harvey Lazar as well as the referees and editors of the journal for their helpful comments and advice.

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