Is workmen’s compensation a social welfare phenomenon?

Dr Albert Mushai and Professor Robert W Vivian argue that workmen’s compensation probably has little to do with social welfare

Workmen’s compensation is usually classified as being part of social welfare – and is treated as being part of the “welfare state”, so to speak. It is always discussed in economic literature on this basis; forming part of social welfare systems. It is usually classified as such automatically, with very little thought being given to the specific question: Is workmen’s compensation socialist in nature? We want to argue this is probably incorrect. It has little to do with social welfare.

Resorting to definitions doesn’t help to answer the question. Socialism, welfare state, capital, capitalism and so on, are notoriously difficult to define and, when defined, the definitions are usually not of much assistance. For instance, socialism is defined as a society where the means of production are owned and controlled by the state. It is difficult to see how this can be applied to workmen’s compensation!

An easy definition of socialism is that it’s the world of the “free lunch”. So, if we talk of free education, or free higher education, or free medical treatment, no doubt most would consider these ideas to belong to the field of social welfare.

Where individuals pay for their own education, it would not be regarded as part of a social welfare state. So, one can ask, we suppose, who pays for the goods? This can help as an indication of whether something is part of social welfare. If the state pays, it points to the welfare state. Another idea would be the degree of state involvement. If the state is involved in one way or another, then it again points to the welfare state.

It does not help much to look at texts that deal with workmen’s compensation as part of the welfare state – most do not discuss the issue. Workmen’s compensation simply appears in some books that deal with social welfare. Workmen’s compensation then finds itself included in that category.

As is well-known, workmen’s compensation in its current form originated in Bismarck’s Germany as part of a package under his so-called social insurance laws. The laws applied to the areas of workmen’s compensation, medical care and old-age pensions.

Many writers treat this as the beginning of the German welfare state. It is also correct that Bismarck introduced these to counter the arguments of socialists that capitalism was uncaring. When workers became old, the socialists argued, they were discarded and replaced with younger workers. In reality, old-age pensions were not a socialist intervention, but a practical solution to the legitimate question of old age.

The same can be said of workmen’s compensation. The socialists’ argument was that, under capitalism, injured workers were simply discarded and new workers employed.  Again, it could be argued that workmen’s compensation was merely a solution to a problem being highlighted by socialists, who could see problems, but not solutions.

Medical funding is more interesting, since medical costs were not significant at the time as medical science had not developed to its modern extent and public hospitals were common.  Life expectancy was also very low.

In the world of Bismarck, the cost of these services was not going to be paid for by the state. He utilised the concept of insurance – everyone contributed towards their own costs via an insurance levy. There was no “free lunch”.

The contribution of the state was to legally force employers and employees to join the schemes and pay the insurance premiums. This became the norm via social security payroll taxes. Therefore, one can see the words “social security” and “taxes”, indicating the nature of these schemes as social security and the levies not as premiums, but as taxes. Further, in the Bismarck model, taxes were paid over to a state body that administered the funds.

Although employers may pay contributions to the workmen’s compensation fund, this does not mean employees do not pay the tax. The tax is merely being paid by employers on behalf of employees.

Thus, employers pay SARS the PAYE contribution of employees. The fact an employer writes out the cheque does not mean the employer is, in fact, bearing the cost. Almost certainly, when working out the employee’s cost to company, the cost of workmen’s compensation will be included as part of the contract.

One way of making workmen’s compensation part of social welfare would be for the costs to be paid out of general revenues – out of taxes, but since the days of Bismarck this has been difficult to achieve.

In the early 1900s, when the British parliament passed what has become known as the Peoples’ Budget, it was not possible and parliament did not agree to pay the costs from general tax revenues. To many, this was the point in time when the United Kingdom (UK) introduced the welfare state. The original plan was to pass these costs onto the tax fund, but this did not happen and a separate social security tax was imposed.

When the UK, and later the United States (US), first introduced workmen’s compensation, it was clear it was not part of the social welfare system. One may even say this was strange – workmen’s compensation legislation merely imposed an obligation on the employer to pay the compensation benefits. No provision was made for the government to fund these obligations.

One could, we suppose, call this private socialism. Instead of the state providing the “free lunch”, it merely passed a law imposing this on the employer. Employers faced with this risk sought insurance cover and the private workmen’s compensation insurance market developed with the blessing of the state. It can thus be argued that originally in the UK, workmen’s compensation was very much a private matter, other than the legal obligation to pay compensation.

We argued in our previous article that, through the concept of externalisation, the economic concept of internalising external costs that workmen’s compensation achieved is conceptually sound. So, the UK and probably the US concept of workmen’s compensation cannot easily fall within the framework of socialism, or social welfare, despite the fact that that is where it is usually placed.

In South Africa, it is even more difficult to categorise workmen’s compensation as part of socialism and the welfare state. By far the most important private industry during the late 1800s was the mining industry. The Rand Mutual introduced workmen’s compensation long before it became a legal requirement. In the South African case, it can be argued that workmen’s compensation clearly was not part of the social welfare system.

The history of the system in this country clearly contradicts the notion that it was part of the welfare system, because it was a private-sector initiative. Therefore, the mere fact that the state assumes oversight over something does not make that activity part of the welfare system. It is more helpful to determine where the costs ultimately lie before making a determination on whether or not something forms part of the welfare system.

Published by

Albert Mushai

Legally Speaking is a regular column by Albert Mushai from the school of Economics and Business Sciences, University of the Witwatersrand. Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining the University of the Witwatersrand as a lecturer in insurance. 
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