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Zareh Asatryan, Sebastian Braun, Holger Görg, Freidrich Heinemann, Hassan Molana and Catia Montagna, Compensating the losers of globalisation, WWWforEurope Policy Brief No. 4, August 2014

Zareh Asatryan, Sebastian Braun, Wolfgang Lechthaler, Mariya Mileva and Catia Montagna, Compensating the losers of free trade, WWWforEurope Working Paper No. 63, June 2014

Compensating the losers of globalisation

In WWWforEurope Policy Brief No. 4 Zareh Asatryan, Sebastian Braun, Hoger Görg, Friedrich Heinemann, Hassan Molana and Catia Montagna present their insights on who are potential losers of globalisation and whether and how they could be compensated.

In the last decades inequality in the developed countries has increased significantly. This is not only due to globalisation (computerisation is another important factor), but globalisation and trade liberalisation can be identified as having a profound effect on labour market outcomes: Although there are positive aggregate effects for economies as a whole, there are industries that face strong import competition and therefore suffer. International trade and off-shoring not only lead to job losses but dampen wages as well, thereby increasing inequality. The effects of this are more pronounced for low-wage, low-skilled workers.

Opening up economies to trade will lead to a more efficient international division of labour and should therefore increase welfare and output in the long run. But it also means that workers are required to move between firms, sectors, occupations, and regions. These adjustment processes take time and generate costs. As the overall welfare effects are supposed to be positive it is feasible to compensate losers.

But wouldn’t compensation set wrong incentives and distort the market? To go even further: Is not the welfare state per se an inefficient hindrance to competition and liberalised markets? The Policy Brief proves this view to be wrong. Not only did globalisation not lead to a race to the bottom (welfare states are still strong and sometimes even growing), but welfare states themselves are an important factor in competitiveness. Especially in countries with economies of scale (large firms and strong vertical linkages in the economy) welfare states enhance competitiveness. On firm level it can be shown that social expenditure can be attractive to foreign direct investment from abroad and keeps firms in the home country.

So, although in theory it is feasible and reasonable to compensate losers, there are few actual compensation schemes in action. The reason is that it is not a trivial task to identify losers of globalisation and to set the right incentives for effective adjustments. Therefore many developed countries have instead chosen to increase their active labour market policies, which means that they do not target solely specifically trade-displaced workers but try to support import-competing industries in general.

The best way to make globalisation more inclusive is to prevent workers from becoming losers in the first place, by investing heavily in human capital, education and qualification. But if there are losses then nevertheless it is important to subsidize employment and not unemployment. According to the Policy Brief wage subsidies are preferable to unemployment subsidies and it might be advisable to target older workers. But there is no one-size-fits-all solution: The effect of policies depends on the time horizon considered and on national idiosyncrasies in the economic environment.

The positive welfare effects of globalisation should not be countered by protectionist policies. This is not always easy because the losers of globalisation are already voters while the potential winners are yet unknown. Very often the winners do not perceive themselves as winners (e.g. consumers usually do not realise how globalisation affects low prices of consumption goods), especially if populism and tabloids polemicise against globalisation. Policy makers should try to counter these biases by drawing on other countries’ experiences and by broad and accessible information on all fairness issues concerned.


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