Abstract

Globalisation means gains from trade, but not for everyone. As gains from trade come along with factor price convergence, substantial fractions of the working classes in the high-wage countries of the West are likely to belong to the group of losers. In this situation it is tempting for the welfare state to help out, but the difficulties are enormous. On the one hand, the payment of social replacement incomes makes wages sticky, preventing the gains from trade, causing mass unemployment and turning the economies of the West into bazaars with excessive outsourcing and offshoring activities. On the other, the taxes needed for compensation payments to the working classes can hardly be levied from the mobile factors of production, given that globalisation has increased their mobility. This is a double dilemma for the welfare state. The paper discusses the possibilities of mitigating the dilemmas by paying wage subsidies for domestic residents and encouraging private savings so as to give workers a capital income in the future.

JEL Classification

F16; J20; J30

Keywords

Globalisation, Welfare State, Wages