The Costs of Risk: Examining the Missing Link between Globalization and Social Spending

Abstract

Globalization is often credited with the expansion of the welfare state and increased spending on social insurance programs. However, empirical evidence on the relationship between globalization and social welfare spending is mixed. One possible explanation for these mixed results might be country-specific factors that mediate the effect of globalization on social spending, such as key characteristics of a country's labor market. Countries with fluid, flexible labor markets likely respond to globalization differently than countries with rigid, inflexible markets. At the micro level, workers who find it costly to adjust to market volatility will likely demand compensatory and insurance programs to offset the high costs of adjustment. Given this, the relationship between globalization and social insurance is likely to be more sharply positive among countries with relatively immobile labor. I test this argument using data on social expenditures in both developed and developing countries. The findings indicate that trade exposure increases social spending in countries where workers face high adjustment costs. When workers face low adjustment costs, trade exposure has a strong reductive effect on social spending. This reductive effect declines as adjustment costs increase.