Protecting Jobs in the Age of Globalization: Examining the Relative Salience of Social Welfare and Industrial Subsidies in OECD Countries

Abstract

The relationship between economic openness and welfare policies has become increasingly important to policy makers. While scholars have tended to examine conditions under which budgets for social welfare programs ebb and flow along with countries’ exposure to trade, they have overlooked how governments may compensate domestic labor by subsidizing their employers. To explicitly address the issue of instrument choice, we examine the relative salience of social welfare expenditures to industrial subsidies in a panel of 16 OECD countries from 1980 to 1995. Our results suggest that the relative budgetary salience of social welfare to industrial subsidies is influenced by the interplay between governmental partisan gravity and changes in imports. Unlike Right governments, Left governments tend to favor indirect compensation via industrial subsidies in the wake of negative, zero or moderate increases in imports. Faced with sharp increases in imports, Left governments switch their preferences to compensating workers via more direct and visible policies, namely social welfare. Polanyi’s war-time masterpiece, The Great Transformation (Polanyi 1944), inspired scholars to focus on the interplay between international market forces and domestic ‘‘countermovements,’’ among which welfare policies to compensate those disadvantaged by globalization are most prominent. Ruggie (1982) attributed domestic support in industrialized countries for the postwar expansion in international trade to the institutionalization of social welfare policies that compensated actors hurt by imports. Lately, scholars have debated whether such ‘‘embedded liberalism’’ will survive globalization. Indeed, the study of the compensation hypothesis (Cameron 1978; Katzenstein 1985) has become an important item in the convergence‐divergence debate, and an established literature examines conditions under which various types of globalization, mediated by domestic politics, affect social welfare