Kathleen Thelen rejects the widespread view that economic liberalisation leads necessarily to higher inequality and explains how incremental reforms have the potential to make capitalism fairer.

Kathleen Thelen's groundbreaking work focuses on the origins and evolution of political-economic institutions, and is highly relevant for anyone seeking to understand the prospects for progressive politics and policy in modern economies. Her previous books include Explaining Institutional Change in 2010 and Beyond Continuity in 2005. Her latest book - Varieties of Liberalization and the New Politics of Social Solidarity - will be published early next year.

Juncture co-editor Will Paxton talked to Professor Thelen about how different countries have adapted differently to pressures towards liberalisation, and why she remains optimistic about the prospects for progressive change.

Will Paxton: Can we start with the argument in your forthcoming book: what are the core points that you would like people to take from it?

Kathleen Thelen: The book is meant to challenge the common assumption that economic liberalisation is always and everywhere an unequivocally bad thing. I argue instead that some forms of liberalisation are compatible with continued relatively high levels of equality, and even more than this, I suggest that some forms of liberalisation may in fact be necessary to sustain social solidarity in the current period. Let me explain why I say this.

There is a big academic debate about the future of egalitarian capitalism. Conventionally, it tends to turn on the question of what is going on in the coordinated market economies like those of continental Europe and Scandinavia. Scholars working in the 'varieties of capitalism' tradition - a strand of thinking that seeks to understand the different categories of political economy in developed nations - and their critics disagree about a lot of things but they tend to converge on the idea that the best way to preserve high levels of social solidarity and to sustain egalitarian capitalism is to vigorously defend the institutions of coordinated capitalism. This means a defence of high degrees of wage coordination, labour market regulation and skills programmes that prioritise specific rather than general skills.

At heart, my latest work is trying to shake up that conventional wisdom. Based on the countries that I have looked at - Denmark, Sweden, Germany, the Netherlands and the US - what I see is that in many cases a defence of traditional institutions of coordinated capitalism turns out to be something of a recipe for increasing inequality. This is happening through what I and many others call 'dualisation', with clear distinctions between insiders and outsiders in the labour market. In contrast, certain forms of liberalisation in the areas I study - industrial relations institutions, education and training, and labour market policy - can be reconciled with high levels of social solidarity in a neoliberal era.

WP: Can you say a little more about the different trajectories of liberalisation, and in particular the 'good' forms which have proved compatible with egalitarian outcomes?

KT: I distinguished three ideal types and trajectories of liberalisation which can be associated with different families of countries and which have different implications for distributional outcomes. Let me take each in turn.

The first one is liberalisation as deregulation, which is associated with liberal market economies such as the US and the UK. Deregulation, as I use the term, involves an active political dismantling of coordinating capacities, often on both sides of the class divide. For me, what is important is that this is associated with a strong move in the direction of what Jacob Hacker and others have talked about in terms of individualisation of risk.

Second is liberalisation as dualisation. This is associated especially with Christian democrat continental political economies like Germany, but also a country like Japan. Dualisation involves maintaining traditional protections for labour market insiders, even as the unregulated periphery grows. In other words, it is different levels of protection against market forces: some spheres continue to be shielded but others, especially outside the manufacturing core, are exposed to the full force of the market. Unlike deregulation, dualisation does not typically proceed through a direct attack on traditional institutions. Instead, it is often fuelled by an intensification of cooperation between labour and capital in core firms and industries - an intensification which is underwritten by an increase in flexibility outside of the core.

And third is what I have labelled liberalisation as embedded flexibalisation. This is associated with social democratic countries like those in Scandinavia and also, albeit in a somewhat different way, the Netherlands. Socially embedded flexibalisation involves the introduction of new forms of flexibility but under the umbrella of a continued strong and encompassing collective framework. So in these cases we observe liberalisation in the sense of a departure from some of the features of coordinated capitalism: high wage coordination, strong employment guarantees, specific as opposed to general skills. But rather than the sheer deregulation in the Anglo-Saxon sense, these moves are embedded from the get-go in policies that are designed to support the most vulnerable groups. Above all, this takes the form of various 'social investment' policies, for example, public support for ongoing training - widely available to all kinds of people and at all stages in life - that can allow them to upgrade their skills in ways that can support their employment, not just in any job but in a good job. Instead of an individualisation of risk, these kinds of policies - publically funded and underwritten by the state - involve a collectivisation of the risks that accompany liberalisation.

All three of these paths involve liberalisation in the sense that they are market conforming, but the key point is that liberalisation can take different forms. Which trajectory of liberalisation a country is on has a lot of implications for the distributive outcomes that a lot of us are interested in.

WP: Your work emphasises the power of the state to shape a country's trajectory. What is it that governments can do to move towards more egalitarian forms of liberalisation?

KT: Private sector voluntarism is not enough. There are policy areas where the state simply has to intervene and underwrite, especially in regard to the kinds of social investments in education and training that the private sector simply won't support.

Recent trends in Germany show the limits of voluntarism. The apprenticeship system is widely considered the crown jewel of the German model. It has generated extremely high-quality training and is part of the formula for Germany's success in export markets, which continues unabated. You cannot find another system to which all of the relevant actors - from labour to capital, from Social Democrats to Christian Democrats - are so deeply committed. But the fact that it is premised on voluntarism is creating significant problems.

In the face of changes to technology and markets there has been tremendous cooperation, between different political parties and between unions and employers, to adapt the apprenticeship system to these new challenges. As a result, the quality of German training, already really high, has been raised even further. But the problem is that the upgrading has increased the cost to firms, which has led to smaller firms dropping out. Participation by small firms was one of the things that made the German system as inclusive as it was: it has provided opportunities for children from all educational tracks to get training and to segue into pretty stable, pretty high-wage employment, especially in manufacturing. Without small firms this inclusiveness is undermined. You get a rationing of training, which then leads to firms cherrypicking the best students, with those from lower-class and immigrant backgrounds losing out.

This is one example of how a simple defence of traditional institutions can lead to dualism and increases in inequality, contrary to what many people often think is happening. It is also an example of where the absence of the state power - to provide some counter-steering - has been detrimental.

WP: The Dutch experience is interesting as it, for a period at least, contrasted sharply with that of Germany - how did the Dutch state achieve a more egalitarian turn?

KT: The reason I was interested in the Dutch case is that a set of policies did, for a time, seem to represent a departure from the classic Christian democratic model. One thing that caught my eye was that in the 1980s and '90s especially there was a massive entry of women into the labour market on flexible but relatively favourable terms - something achieved through the upgrading of part-time work. Whereas in Germany the expansion of part-time work has mostly been in 'mini' jobs - which by definition means low wages, hours and benefits - in the Netherlands, part-time work comes with benefits and social protection backed up by legislation. There was a really spectacular transformation in the course of a very short period of time - in 20 years the Netherlands went from having one of the lowest labour-market participation rates for women to a very high level.

The Dutch government achieved this by using state capacity to expand and improve vocational education and training. It has always been strong in regard to initial vocational education, but significantly expanded opportunities for further training for adults, achieving this by using state power to extend the terms of collective bargaining negotiated in certain sectors to cover other areas of the economy as well.

But, what the state provides, the state can take away. The cut-backs that have subsequently been undertaken under the centre-right government in the Netherlands cut straight into some of these advances. It is like riding a bike: you cannot stop pedalling. The Dutch case shows both what is possible but also how fragile some of these advances can be. One of the things that I hope comes out of my book is that even though I wish I had found a silver bullet or model that encompassed all of the good and none of the bad, in the end I didn't.

WP: Does the Dutch experience - the fragility of its advances - suggest that fiscal pressures make a sustainable move towards embedded liberalisation and more egalitarian outcomes less likely?

KT: There is no question about that, at least in regard to social investment policies. There is no question that these kinds of policies are costly, but they do pay off - you have to hang in there. The problem is that the pay-offs only materialise in the medium to long run, and so holding a coalition together around these policies is not the easiest thing in the world.

WP: Your work focuses a lot on the shifting potential progressive coalitions in modern democracies - what are the main social changes as you see them and what does this mean for some of the institutions and policies traditionally associated with achieving more egalitarian outcomes?

KT: One of the reasons that I challenge the idea that traditional institutions associated with coordinated capitalism are what we need to defend in order to achieve more egalitarian outcomes is that they are no longer based on a wide coalition of support. There has been an assumption that employers are generally not going to abandon traditional institutions - training for specific skills with strong employment protections and so on - because they derive real benefits from them. But this ignores all sorts of evidence that employers outside the manufacturing core have not defended these institutions and in fact they are really vigorously trying to change them. In addition, there has often been an assumption that these traditional institutions meet the interests of all workers. Again, this ignores the evidence that a lot of these traditional institutions do not serve the interests of some of the core constituencies that have grown out of the transition to a service economy.

For example, many years ago G?sta Esping-Andersen identified salaried workers as one of the crucial sections of support for social democracy. Salaried workers, who form a huge and growing constituency, have not proved to be particularly invested in traditional institutional arrangements. In Scandinavia, they embraced some forms of wage liberalisation, for example.

But thinking beyond salaried workers, it is not hard to think of other constituencies whose interests have not necessarily been all that well served by some of the arrangements that seemed so appropriate in the era of manufacturing. We have a lot of research that shows that women are disadvantaged in countries that feature traditional firm-based apprenticeships and strong initial vocational education and training; they tend to do a lot better in school-based training that emphasises general skills and which also gives them more flexibility to adjust to work-life balance issues. And for low-skill workers, who are nowadays most exposed to changing production patterns and technological changes, arrangements that are organised around the assumption of a stable career trajectory and training systems that involve heavy upfront investments do not necessarily serve them well either.

The point is simply that a lot of the new risks faced by these groups are not well covered by arrangements that were designed for the world of the 1950s and '60s - an era of manufacturing dominance. Arguably, these groups - salaried workers, women and the low-skilled - are much better served by more flexible arrangements and training systems that allow them to acquire skills flexibly and over their life-course.

WP: So what can a progressive coalition of voters look like today?

KT: The form of liberalisation I have described as embedded liberalisation, by better responding to these new risks, can actually help to shore up a progressive coalition encompassing different kinds of groups.

When technology is changing so rapidly, workers at all different skill levels can be equally vulnerable to skill obsolescence. Likewise, workers across a range of skill levels and industries face all sorts of risks associated with the need to reconcile work and family in a context in which women no longer stay at home. It is about helping the clerical worker as much as the skilled professional.

We know that salaried groups and professionals and workers at the higher end are not against the welfare state or universalism, they just embrace it in a different form - one that emphasises opportunities for individual development, gender equality and things like that. Once we look at it in that way, we begin to see new kinds of coalitions that can bring together groups that otherwise might be seen as having distinct interests.

WP: Can we turn to some issues that are more directly relevant to the UK. Do you think that the recent economic and fiscal crises create opportunities for progressives in Anglo-Saxon countries?

KT: You would have thought so, but thinking about it from the US perspective, in the short term at least, there is little cause for optimism. One might have thought that the recent economic events would have caused a more fundamental rethinking in the way that the state does or does not intervene in markets. Even with the stars more in political alignment, with Barack Obama in the White House, it has been a disappointment. I know a lot of people have attributed this to Obama himself, but I really do think that in the US it is the political polarisation that has actually prevented any fundamental rethinking of the role of the state in the economy. On balance, I am still optimistic, but I confess it is hard to point to a lot of big advances--though there is healthcare, of course.

WP: So why the optimism?

KT: All of my work is about forms of incremental change that can add up to something potentially transformative. I am not looking for a 'big bang' moment, like the financial crisis happening and people suddenly waking up and asking 'how could we have been so stupid and why weren't we regulating finance better?' Instead, the kinds of changes that I think are possible are the gradual changes that can add up to something big over time. From my point of view we have not had enough time since the economic crisis to see its full impact.

So overall, I'm more optimistic than many other scholars for whom the Anglo-Saxon world is more or less stuck with higher levels of inequality. I think that the overall message of my book does point to possibilities for policy innovations even without the traditional institutions of coordination. It begins to sketch out the possibilities for more egalitarian outcomes even in liberal market economies. Whether it is the Dutch experience of using state power to create opportunities for more flexible working arrangements or the Danish experience of liberalising labour markets but with strong state support for ongoing training to achieve more egalitarian outcomes, the critical point is that there are ways of combining liberalism with egalitarianism.

Of course, it remains the case that some of the features that inhibited Anglo-Saxon countries in the past are still problems in the present. For example, we know for sure that fragmentation and weakness on the labour side is pretty devastating for social solidarity. Nonetheless, you can get these 'baby steps' that can be undertaken or underwritten by the state - countries are not structurally determined to follow a particular path. It is a matter of political will. There are options for change that are gradual and incremental but that over time can add up to something big.

This interview appears in issue 20(3) of Juncture, IPPR's quarterly journal for rethinking the centre-left.