Trade openness and public expenditure on labor market policies
This article investigates the effect of trade openness on public expenditure on labor market policies, both passive and active, using a panel of 20 OECD countries in the period 1980-2003. Trade openness and, more in general, globalization, can increase job insecurity and inequality, and therefore governments’expenditure can increase in order to offer compensation or insurance (compensation hypothesis). On the other hand, the increased competitiveness in the global arena constraints the ability of expanding public expenditure both because of efficiency reasons and tax competition effects (efficiency assumption). This study shows that both channels play a role in shaping public expenditure on passive and active labor market policies and that different aspects of globalization have a different impact.
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