Openness and the welfare state: risk and income effects in protection without protectionism

Abstract

Have recent trends in globalization changed the positive link between trade openness and social insurance? The consensus view – that voters want better social insurance against income loss the more open the economy – is seemingly contested by the rise of new right-wing parties and the China shock. We present a theoretical framework of risk and income effects of globalization that captures the conventional view, but also shows when it will be modified: When the income effect is negative, the political support for social insurance can decline in spite of the risk effect. We construct an empirical measure of welfare state support across European regions and leverage the rapid integration of China into the world economy to show that higher import competition reduces the support for social insurance. Consistent with our framework, we use variations in employment losses between regions to decompose the overall effect of the shock into a (weak) positive risk effect and a (strong) negative income effect.