Points about globalization and the welfare state

In the media discussion, contemporary and expected future problems for welfare-state arrangements in developed countries are often blamed on the internationalization (globalization) process. In fact, however, the most serious problems for the welfare state are related to domestic economic and social trends in the developed countries themselves. Indeed,

the two most important challenges for welfare-state arrangements in developed countries are (i) the gradual rise, without apparent limit, of the relative costs of providing human services such as child care, education, health care and old-age care; and (ii) the implicit tax wedges in social-insurance arrangements and the related tendencies to moral hazard in the connection with these arrangements. Sooner or later it will, therefore, be necessary to partly shift to other sources than taxes to finance human services – basically insurance arrangements and/or direct service fees in cash. Otherwise it will be impossible to expand the production and consumption of such services in line with people’s need and preferences.

In the media discussion, the demographic development is, of course, regarded as another major threat to the welfare state, in particular, the pension system. However, it is quite superficial to regard increased longevity as a “problem”. It is rather the pension system itself that is the problem, since it has not been adjusted sufficiently to the increased longevity and the improved health of elderly. A higher effective retirement age is the obvious answer to the financial problems for the pension systems, to the extent these problems are created by increased longevity. Moreover, the rising costs for the national economy of health care and old-age care for the elderly have to be dealt with in the same way as the rising costs for human services to other population groups, i. e. by insurance arrangements and service fees.

Immigration of individuals in working age could also help to some (limited) extent – an example when globalization (in this case of the labor market) might be of some help for the welfare state. However, for such policies actually to increase the proportion between the working population and the retirees, it would be necessary to overhaul the systems of wage formation and jobs-security legislation so that immigrants could actually get jobs. Today, the organization of wage formation, and the labor market in general, is often quite inconsistent with large-scale immigration of labor.

What, then, are the challenges of globalization for the welfare state – in addition to the difficulties to integrate immigrants in the national labor market?

First, it is usually assumed that globalization will be accompanied by faster rates of structural change in developed countries, in particular in labor-intensive sectors. However, empirical studies suggest that structural change in developed countries, and related structural unemployment, is a consequence mainly of domestic conditions including policies in the developed countries themselves. Moreover, the situation seems to differ across developed countries. Countries geographically and culturally close to previous “Eastern Europe” may be harder hit than other countries. But again, this may to a large extent be a result of domestic distortions, such as the unrealistically high real wages in former Eastern Germany. Again, rigidities in the domestic labor market (such as the insider-outsider divide), including domestic wage formation, is the problem, rather than the globalization process per se.

But suppose that structural unemployment actually tends to increase in the future. Regardless of the causes, this would probably strengthen the case for providing hiring subsidies, such “hiring vouchers”, for workers who have lost their jobs. However, it is hardly operational (or ethically reasonable) to limit such vouchers to individuals who are asserted to have lost their jobs because of globalization rather than because of some other reason outside the individual employee’s control.

The increased international mobility of various tax-bases is a second challenge of the ongoing globalization process for welfare-state. In particular, the high mobility of financial capital makes it difficult for national governments to redistribute income from the highest income percentiles, for which capital income is important, to lower percentiles. Indeed, these difficulties are illustrated by recent tendencies among countries to reduce capital income tax rates – and even to abolish wealth taxes in some countries. By contrast, so far, there is not much evidence of serious problems for developed countries in the connection with increased international mobility of highly educated individuals. However, in the long run this mobility is likely to put some limits on the possibility for individual countries to use highly progressive income taxes as a tool of redistributing labor income. In developing countries, international mobility of highly educated individual has, of course, for a long time created serious problems of “brain drain”.

The globalization process may have other consequences as well for the welfare state. For instance, the increased mobility of individuals across countries increases the usefulness of international portability of welfare-state entitlements – pensions as well as the availability of affordable health care. In a European context, EU is already involved in the creation of such portability within the European continent. One way of bringing about such portability would certainly be to rely more than earlier on personal accounts in the national entitlement systems.

Note: The points in this paper have been developed in more detail in papers found on my home page: iies.su.se Thereafter: faculty, Assar Lindbeck, Recent work.