Globalisation, Institutions and the Welfare State

Focussing on the global changes since 1989, the objective of GIWeS is to produce first class research on how trade, technology and the welfare state interact; on the challenges to national welfare states in an integrated European labour market, and on the political support for reform. The project is unique in several dimensions: It is comparative, focussing on Austria, Germany, Norway, and the UK, countries that differ in their industry base, skill structure, and welfare institutions. It is relevant, addressing the current crisis, migration and the support for welfare spending. It is dynamic, drawing on unique longitudinal information that allows us to explore long term impacts of global shocks down to the individual firm and the individual worker. It is innovative, linking – for the first time – administrative longitudinal data covering entire populations across countries allowing us to follow individuals across national borders, investigating their choices in work environments and welfare institutions. It is wide-ranging, capturing how globalization makes competition more dynamic, speeding up innovation, and the process of creative destruction, and how wide-ranging changes may give rise to a new political and economic equilibrium. It is institutional, asking whether the European welfare state survives the transformation, and what will happen to its different incarnations such as the Scandinavian, the German and the British model. It is spot on all five themes of the call, organized around international research groups in London, Linz and Oslo, with additional partners. It is enlightening, adding unique and novel insight into the interplay of the Welfare State and economic prosperity in Europe.

Project Summary

Globalization and increasing migration challenge the European welfare states. Two institutional equilibria can emerge. One with modest inequality: a high level of globalization generates wage coordination that leads to wage equality, and, hence, to a high welfare generosity that sustains the high level of socially accepted globalization. Another with high inequality: a low level of socially accepted globalization goes together with decentralized wage setting with a low level of coordination that in the next round is associated with high wage inequality and hence, low welfare generosity that sustains the low acceptance of globalization.

Contrary to dominant views, the equilibrium with low inequality has the highest level of socially accepted globalization. Our project also identifies distinct counter-veiling forces that maintain low inequality in spite of threatening challenges. For instance, Battisti, Dustmann, and Schonberg (2017) show that workers who hold jobs that disappear due to technological and organizational change (T&O) do better than many expect. Although T&O reduce firm demand for routine-task based jobs, T&O play an important role in curtailing its potentially harmful effects by offering affected workers re-training opportunities to more abstract jobs.

Similarly, unionization is in decline, but not always for the reasons people think. Anton, Boheim, and Winter-Ebmer (2018) show the effects of international migration on native workers’ technological and organizational change. Higher immigration of foreign workers lower union density of natives in firms with more foreign workers. Yet, the decline of unions is not driven by natives leaving unions, but by the different composition of turnover, depending on the share of foreigners in the firm.
One decisive link in the institutional equilibrium is how low wage inequality is associated with the generosity of the welfare state. Barth, Finseraas, and Moene (2018) provide a theory of micro motives and an empirical test of the relationship between voters’ demand for public transfers and their income. They find that the demands for social insurance and for redistributive taxation differ: While the support for social insurance goes up with more pre-tax equality, the support for pure redistribution declines.

The mechanisms of the institutional equilibrium of the welfare state can also change by an unintended use of the arrangement: Bratsberg, Raaum, and R0ed (2018) show how firms attract foreign workers who are willing to work for low pay, as long as they as a compensation receive rights to welfare benefits. Welfare states with high welfare generosity become more attractive for low paid workers, implying that high wage inequality is more associated with high inequality in wages, an aspect observed after the 2004 and 2007 eastwards expansions of the EU.

The results of the four papers mentioned above shape important parts of the entire institutional equilibrium. Together they indicate that the institutional equilibrium with high globalization and modest inequality seem to prevail in many countries, but in a way where it exhibits a higher level of wage inequality and a somewhat lower level of welfare generosity together with less unionization and possibly also less waqe coordination.