The Welfare State and the Forces of Globalization

28 Pages Posted: 27 Feb 2007

See all articles by Hans-Werner Sinn

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

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Date Written: February 2007

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.

Keywords: globalization, unemployment, welfare state

JEL Classification: F11, F21, F22, H53, J64

Suggested Citation

Sinn, Hans-Werner, The Welfare State and the Forces of Globalization (February 2007). CESifo Working Paper Series No. 1925. Available at SSRN: https://ssrn.com/abstract=965418

Hans-Werner Sinn (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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National Bureau of Economic Research (NBER)

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Ludwig Maximilian University of Munich (LMU)

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