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

The Costs of Risk: Examining the Missing Link between Globalization and Social Spending. Stephanie J. Rickard The Pennsylvania State University Department of Political Science. Motivation. What, if any, relationship exists between globalization and social spending?

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

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  1. The Costs of Risk: Examining the Missing Link between Globalization and Social Spending Stephanie J. Rickard The Pennsylvania State University Department of Political Science

  2. Motivation • What, if any, relationship exists between globalization and social spending? • Efficiency hypothesis posits a negative correlation b/c high levels of social spending reduce competitiveness. • Compensation hypothesis posits a positive correlation b/c social spending offsets the costs of international integration.

  3. Motivation • Empirical evidence is mixed • Negative: Kaufman & Segura-Ubiergo (2001); Burgoon (2001); Garrett and Mitchell (2001) • Positive: Cameron (1978); Hicks and Swank (1992); Huber et al. (1993); Adsera and Boix (2002)

  4. Motivation • One possible explanation for mixed empirical results: country-specific variables mediate the effect of globalization. • Domestic political institutions (Adserà & Boix 2002, Rudra & Haggard 2005) • Economic development (Rudra 2003) • Labor force characteristics

  5. Argument • Increased risk exposure does not spur demand for increased social spending amongst all workers. • Workers facing high adjustment costs, like those with specific skills, are most likely to respond with demands for greater spending.

  6. Model • Workers are rewarded according to their skill set • Paid sg where s = 1 for general skill workers and s > 1 for specific skill workers • R = government transfers • Transfers financed though a flat-rate tax (t) • Taxation creates work disincentives • Tax per capita income is

  7. Model U R = 0 -1g -sg R = w/2 P

  8. Argument • Macro level implication: Expect to see a more strongly positive relationship between globalization and social spending in countries where the median voter has specific skills, or more generally, faces high adjustment costs.

  9. Macro-level evidence Year to year differences in spending on welfare (as a percentage of total government expenditures) around trade liberalization date

  10. Macro-level evidence

  11. Marginal effect of imports on social spending

  12. Central insights • Labor’s ability to adjust to increased market volatility mediates the effect of globalization on social spending. • Suggests a possible solution to the persistent division in the literature between the efficiency and compensation hypothesis.

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