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The Welfare State and the Forces of Globalization

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  • Hans-Werner Sinn

Abstract

The emergence of the Asian tiger countries and the participation of the ex-communist countries in world trade has reduced the equilibrium price of labor in western Europe and elsewhere. However, the actual price of labor hardly reacts, because the welfare state’s minimum replacement incomes are fixed. The rigidity of wages causes pathological overreactions of the European economy in terms of excessive capital exports, excessive immigration and excessive structural change towards the capital intensive export sectors. The overreactions cause unemployment, sluggish growth, a current account surplus and a high export volume, but may prevent gains from trade. To enable a more efficient economic reaction that would not jeopardize social goals but bring about more employment, growth and gains from trade, it is recommended to move the European welfare state from a system that primarily pays wage replacement incomes to one that pays wage subsidies.

Suggested Citation

  • Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," CESifo Working Paper Series 1925, CESifo.
    • Handle: RePEc:ces:ceswps:_1925
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    References listed on IDEAS

    as
    1. Hans-Werner Sinn, 2005. "Bazaar Economy GermanyWorld Champion Exporter or Laggard?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 58(06), pages 03-42, March.
    2. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2006. "Redesigning the Welfare State," Books, Edward Elgar Publishing, number 12596.
    3. Hans-Werner Sinn, 2005. "Migration and Social Replacement Incomes: How to Protect Low-Income Workers in the Industrialized Countries Against the Forces of Globalization and Market Integration," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 375-393, August.
    4. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May.
    5. repec:ces:ifosdt:v::y:2002:i::p:03-52 is not listed on IDEAS
    6. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2002. "Active Welfare - A path to higher employment and growth," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 55(09), pages 03-52, May.
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    Citations

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    Cited by:

    1. Koskela, Erkki & Poutvaara, Panu, 2009. "Is There Scope for Gains from Revenue-Neutral Labor Tax Reforms with Flexible Outsourcing?," IZA Discussion Papers 3984, Institute of Labor Economics (IZA).
    2. Koskela, Erkki, 2010. "Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing," IZA Discussion Papers 5313, Institute of Labor Economics (IZA).
    3. Koskela, Erkki & Stenbacka, Rune, 2009. "Equilibrium unemployment with outsourcing under labour market imperfections," Labour Economics, Elsevier, vol. 16(3), pages 284-290, June.
    4. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2010. "Current account balances and structural adjustment in the euro area," International Economics and Economic Policy, Springer, vol. 7(1), pages 83-127, May.
    5. Keuschnigg, Christian & Ribi, Evelyn, 2009. "Outsourcing, unemployment and welfare policy," Journal of International Economics, Elsevier, vol. 78(1), pages 168-176, June.
    6. Dieter Schmidtchen & Christian Koboldt & Jenny Monheim & Birgit Will & Georg Haas, "undated". "The Internalisation of External Costs in Transport: From the Polluter Pays to the Cheapest Cost Avoider Principle," German Working Papers in Law and Economics 2008-1-1214, Berkeley Electronic Press.
    7. Ansgar Belke & Holger Zemanek & Gunther Schnabl, 2010. "Current Account Balances and Structural Adjustment in the Euro Area," Ruhr Economic Papers 0176, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    8. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2009. "Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness," Discussion Papers of DIW Berlin 895, DIW Berlin, German Institute for Economic Research.
    9. Erkki Koskela & Panu Poutvaara, 2008. "Flexible Outsourcing and the Impacts of Labour Taxation in European Welfare States," CESifo Working Paper Series 2440, CESifo.
    10. repec:zbw:rwirep:0176 is not listed on IDEAS
    11. Erkki Koskela, 2009. "Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing," CESifo Working Paper Series 2852, CESifo.
    12. Erkki Koskela & Ronnie Schöb, 2010. "Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 682-695, September.
    13. Erkki Koskela & Panu Poutvaara, 2008. "Outsourcing and Labor Taxation in Dual Labor Markets," CESifo Working Paper Series 2333, CESifo.
    14. Erkki Koskela & Jan König, 2008. "Flexible Outsourcing, Profit Sharing and Equilibrium Unemployment," CESifo Working Paper Series 2382, CESifo.
    15. Farkas, Beáta, 2011. "A közép-kelet-európai piacgazdaságok fejlődési lehetőségei az Európai Unióban [The development opportunities for the Central-East European market economies within the European Union]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 412-429.
    16. Koskela, Erkki, 2008. "The Effects of Labour Tax Progression under Nash Wage Bargaining and Flexible Outsourcing," IZA Discussion Papers 3501, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    globalization; unemployment; welfare state;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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