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Political Economy in International
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Article Arts & Gelissen

• Arts, W. and Gelissen, J. (2002) Three Worlds of Welfare Capitalism or More? A
State-of-the-Art Report. Journal of European Social Policy 12(2): 137-158.
Esping-Andersen: 3 ideal types of the welfare state: conservative (continental), liberal (Anglo-
American) and social democratic (Scandinavian).
To determine the characteristics of the 3 subclasses two indicators or dimensions can be used: the
degree of decommodification (the degree to which a social service is rendered as a matter of right,
the degree to which a person can maintain a livelihood without reliance on the market) and the kind
of social stratification and solidarities (which social stratification system is promoted by social policy
and does the welfare state build narrow or broad solidarities?).
Scandinavian, social-democratic welfare states show: high decommodification and strong

universalism.
Liberal Anglo-Saxon countries: low decommodification and strong individualistic self-reliance.
Continental European countries: corporatist and etatist, and modestly decommodifying.
Three criticisms on Esping-Andersen’s classification:
The misspecification of the Mediterranean welfare states: Esping-Andersen does not cover these
countries in his work. Seems to include them in the continental/corporatist category.  attracts
criticism. Some argue to treat the Southern European countries as a separate cluster. ‘Southern
model of social policy’ or Latin Rim-countries. They thus add a fourth model to E-A’s 3 models.
Labelling the Antipodean (Australia & N-Z) welfare states as belonging to the liberal welfare state
regime. These two countries have a more inclusive social protection than the standard liberal form,
the world’s most comprehensive systems of means-tested income support benefits. Thus these
countries also represent a separate model.
The neglect of the gender-dimension in social policy. Subjecting the mainstream welfare state
typologies to an analysis of the differential places of men and women within welfare states would
produce valuable insights. Not only the state and the market provide welfare, but also families.
E-A miss this point.
The authors come up with a table of 5 clusters (built up through 7 typologies of various authors).
The Liberal model (USA as prototype)

The Conservative model (Germany as prototype)
The Social Democratic model (Sweden as prototype)
The Latin Rim / Southern model (Spain/Portugal/Italy as prototypes)
The Radical model (Australia & NZ as prototypes)
The Netherlands is a hybrid case which fits into all three models according to different authors.
Criticism has emerged on the empirical robustness of the 3 way classification of E-A. Based on
findings built on the dimensions of degrees of decommodification and modes of stratification several
researchers conclude that the 3 worlds model of E-A fails to capture reality.

Authors suggest to add a fourth and a fifth model to capture reality better. For example a hybrid
European cluster and a Radical cluster.
E-A answer to the question why the three different welfare state regime types emerged: Different
welfare regimes are shaped by different class coalitions within a context of inherited institutions. This
answer is embedded in a power-resources mobilization paradigm. The tentative answer to the
question of why regime shifts are scarce is that a national state cannot easily escape its historical
inheritance.
Article Green-Pedersen
• Green-Pedersen, C. (2004) The Dependent Variable Problem within the Study of Welfare State Retrenchment:
Defining the Problem and Looking for Solutions. Journal of Comparative Policy Analysis 6(1): 3-14.
The Dependent Variable Problem with the Study of Welfare State Retrenchment: Defining the
Problem and Looking for Solutions.
The dependent variable problem: what is welfare state retrenchment and how can it be measured?
The argument of this article is that this problem is of theoretical conceptualization rather than a
problem of data. Different theoretical perspectives on retrenchment lead to different
conceptualizations.
This article argues the dependent variable problem to be a problem of theoretical conceptualization
of retrenchment. Thus it is not in the first place a question about the use of quantitative versus
qualitative data. One should distinguish between two questions: 1st : what should be measured in
empirical investigations? Second, how can retrenchment actually be measured?
This article argues as well that one should keep two different conceptualizations of retrenchment
apart, namely retrenchment as an unpopular cutback in people’s entitlements, and retrenchment as
a change in the institutional structure of different welfare states.
First we have to define the welfare state. Some do this by looking at the outcomes (high
employment, low unequality etc.), others define the welfare state using policy definitions. (services
provided). Most mainstream is the policy definition of the welfare state.
But this debate makes comparative research, in particular cross-national comparisons, very difficult.
Different Conceptualizations of Welfare State Retrenchment
Different research questions and theoretical perspectives should lead to different conceptualizations
of retrenchment and also to different measurements of it. When looking at the debate about welfare
state retrenchment, two different theoretical perspective on welfare state retrenchment are
prominent: retrenchment as cutbacks in people’s entitlements and retrenchment as institutional
change.
Retrenchment in cutbacks (cuts in benefits levels for instance)

The theoretical argument behind focusing on such changes is an expectation of negative reactions
from the electorate. A way to research this is to focus on expenditure data. Some problems however:
expenditure data are outcome measures and other factors intervene between political decisions and
actual outcomes such as expenditures. Also, expenditures can rise or decline as a result of higher

unemployment for example. Also: time-lags (a decision for retrenchment is not immediately visible in
expenditures).
Summing up: when defining retrenchment as entitlement cuts both output and outcome measures
exist. Many of the problems with outcome measures disappear when an output measure is used.
Retrenchment as Institutional Change

Aka: reforms that indicate structural shifts in the welfare state. Some scholars emphasize an interest
in retrenchment as qualitative changes, that is, a break with basic institutional principles. The point
however, is that it requires substantial theory of the welfare state to single out the institutional
features which are so central that changes in them can be considered qualitative change or structural
shifts.
Social security expenditure is a very problematic measure of retrenchment defined as institutional
change. Because expenditure data does not measure institutional characteristics. There is no
straightforward operational definition of retrenchment conceptualized as institutional change.
Cutbacks or Institutional Change: Does it make a difference?
The general point is that significant cutback in entitlements is possible without changing institutional
traits and vice versa. Some examples are given where changes (for example privatization of sickness
benefits) are retrenchment from an institutional perspective, but not from an entitlement
perspective, and vice versa.
Institutional changes in an indirect way may lead to cutbacks in entitlements. This provides evidence
for Pierson’s argument that governments often seek retrenchments in indirect and obfuscated ways.
Conclusion
The dependent variable problem is more about theoretical ambiguity than about the pros and cons
of different types of data. Different definitions of the welfare state notion is one theoretical problem,
but more importantly, welfare state retrenchment can be conceptualized in two different ways,
namely as either cuts in entitlements or changes in institutional characteristics. Which
conceptualization of retrenchment to use depends on one’s theoretical perspective.
The question about the most appropriate data can only be answered once one knows exactly what to
measure, and that is a theoretical question. Expenditure data are more appropriate when
retrenchment is conceptualized as cuts in entitlements than when conceptualized as institutional
changes.

Article – Plümper, Troeger & Manow

• Plümper, T., Troeger, V.E. and Manow, P. (2005) Panel data analysis in comparative politics: Linking
method to theory. European Journal of Political Research 44(2): 327-354.
Panel data analysis in comparative politics: Linking method to theory
This article addresses four potential sources of problems in panel data analyses with a lagged
dependent variable and period and unit dummies (the de facto Beck-Katz standard). These are:
absoption of cross-sectional variance by unit dummies, absorption of time-series variance by the
lagged dependent variable and period dummies, mis-specification of the lag structure, and neglect of
parameter slope heterogeneity.
We show that partisan politics and socioeconomic factors such as aging and unemployment as
expected by theorists have a strong impact on the time-series and cross-sectional variance in
government spending.
One method of panel analysis, the de facto Beck-Katz standard, has become the accepted econometric
technique in comparative political economy.
The de facto Beck-Katz standard
A solution to the small-N problem has been the analysis of pooled time series cross-section data
(pooled data).
Pooling offers two advantages:

- the number of observation increases and so do the degrees of freedom
- pooling makes it possible to control for exogenous shocks common to all countries and to reduce the
omitted variable bias
Article Starke
• Starke, P. (2006) The Politics of Welfare State Retrenchment: A Literature Review. Social Policy &
Administration 40(1): 104-120.
This article reviews the literature on the politics of retrenchment, namely on the impact of socio-
economic problem pressure, political parties, political institutions, welfare state structures and ideas.
Most authors agree that socio-economic problems – particularly domestic problems – contribute to
an atmosphere of ‘permanent austerity’ which inspires cutbacks. Moreover, according to most
scholars, the extent of retrenchment possible depends on the specific institutional configuration of a
political system and the path dependence of existing welfare state structures.
Retrenchment remains of particular interest, since it is usually regarderd as inherently unpopular and
hence difficult to pursue.

The New Politics of the Welfare State
Paul Pierson explains the lack of wide-ranging retrenchment or ‘welfare state resilience’ with his
theory of the new politics of the welfare state. According to Pierson, theories about the old politics of
expansion, including socio-economic functionalism and class-based power resources theory, fail to
account for development after the end of the Golden Age. New factors, namely specific institutional
configurations, are much more powerful in explaining current trajectories of reform.
Pierson builds his explanation of the welfare state’s resilience on: 1. The welfare state’s enduring
popular support and 2. Its institutional inertia.
Expansions of the welfare state produce its own constituency / interest groups that will mobilize
resistance against retreats. + History matters  path dependence. Change is only incremental and
within the structural frameworks.
Also: politicians are office-seekers + voters are reacting stronger against losses than to gains 
makes retrenchment difficult.
So, Pierson argues, politicians pursue ‘the politics of blame avoidance’. (Compensation, obfuscation
and division).
Literature review (research on the welfare state development/retrenchment after the golden age)
Neo-functionalism
Policy changes have to be seen in the light of socio-economic change and – both external and
internal – problem pressure. Political-institutional factors are intervening variables rather than
driving forces. “globalization leaves only little room for a comprehensive welfare state”.
In this vein, retrenchment appears as the only solution unless the process of economic integration is
reversed.
Conflict theories
Social policy is the result of political struggles about distributive decisions. As result of left-wing
parties and interest groups. Trade unions and interest groups are powerful defenders of the welfare
state institutions.
Institutionalism
Politicial institutions (rules of the game of political conflict) and welfare state institutions (the
existing structures of social provision).
The political system determines how easy it is to achieve retrenchment. Higher number of veto
players makes reform less likely. The higher the concentration of power, the easier it is to pass
reforms but then it is also easier for the people to blame those parties. This makes blame avoidance
difficult. So no conclusive evidence/theory yet.
The institutionalist perspective also stresses policy feedback: the influence of existing welfare state
institutions on future developments. = Path Dependence. Good example is the pension system: it
has either grown into either PAYG or funded schemes. Very hard to reform once it has matured.
The degree of middle-class involvement also matters for the possibility of retrenchment. Large
middle-class loyalties in social-democratic (Scandinavia) or corporatist (Germany) societies make

retrenchment difficult. In contrast: in the USA or UK the welfare state institutions depend on the
numerically weak social stratum (lower class, the poorest people) so retrenchment could be easier.
The role of ideas
The role of ideas for social policy and retrenchment. Ideas can be either concrete policy alternatives
(e.g. personal saving accounts) or the ideological beliefs (socialism, liberalism etc). Agenda-setting,
framing and policy learning are related to beliefs and policy paradigms, or ‘discourse’.
To sum up: factors that are under research that may explain retrenchment are: socio-economic
problem pressure, partisan ideology, interest group structure, the existing welfare state regime,
political institutions and ideas.
Starke distinguishes three levels on which most explanations of retrenchment are situated. Motives
for retrenchment (e.g. partisan ideology), the political means by which cutbacks are introduced (e.g.
strategies of blame avoidance), and the opportunities reform minded actors are able to use (e.g. the
structure of the political system).
Some Persistent Issues
The dependent variable problem. In this case: what is a good indicator for the welfare state? GDP
expenditure on social policies? There is no one best measure of welfare state retrenchment.
The problem with actors’ orientations and motives. Why do politicians introduce retrenchment? One
reason may be ideological. Another can be problem pressure (economic crises) which can be used as
an opportunity for blame avoidance. Crises open up opportunities for reform.
Means of retrenchment: obfuscation, division and compensation, framing, social pacts.
Conclusion
Policies of retrenchment are unpopular and the politics of blame avoidance are a powerful causal
mechanism which helps us understand its political dynamics. A number of veto players limit the
cutback of social policies. Problem pressure (such as crises) is acknowledged as one of the major
forces motivating retrenchment. There is still need for good descriptions and good measurements of
the real extent of retrenchment. (the dependent variable problem!).
Article: Political Partisanship and Welfare State Reform in Advanced

Industrial Societies
• Allan, J.P. and Scruggs, L. (2004) Political Partisanship and Welfare State Reform in Advanced Industrial
Societies. American Journal of Political Science 48(3): 496-512.
Allan & Scruggs
Two claims are evaluated in this article: First, that welfare states have remained quite resilient in the
face of demands for retrenchment; and second, that partisan politics have ceased to play a decisive
role in their evolution. In regards to the first claim, the authors find more evidence of welfare
retrenchment during the last two decades than do recent cross-national studies. Second, we examine
the ‘end of partisanship’ claim by estimating the effects of government partisanship on changes in
income replacement rates in sickness and unemployment programs. The results suggest that, contrary

to claims that partisanship has little impact on welfare state commitments, traditional partisanships
continues to have a considerable effect on welfare state entitlements in the era of retrenchment.
Partisan politics (mostly social-democrats and Christian-democrats) have played a role in the expansion
of welfare states, but this effect is not found since the late 1970’s. Pierson even argues that
partisanship theories are not very applicable to study retrenchment since retrenchment is not simply
the mirror image of welfare state expansion.
Allan & Scruggs find considerable evidence of welfare state retrenchment and argue that the welfare
state is not that resilient, as Pierson and others claim. Contrary to claims that partisanship no longer
matters, Allan & Scruggs find that partisanship exerts a considerable effect on welfare state
entitlements in the era of retrenchment.
Contemporary Welfare States: resilience or retrenchment?
Actual spending levels are not directly relevant to the protection (insofar as the welfare state serves
to insure against misfortune vis-à-vis the market) provided. So, expenditure data alone is not very
appropriate to capture welfare state change. Social spending data is problematic to measure welfare
state generosity, and retrenchment.
Programmatic measures of the welfare state: measuring retrenchment with income replacement
rates.
The authors believe it is necessary to look at elements of welfare state programs that provide us with
an indication of the likely impacts of programs on individual life chances. They find evidence of
retrenchment, starting in the mid 1980’s. Allan & Scruggs use the replacement rates of incomes for
single workers and for married workers after taxes as a measure to assess welfare state generosity.
Their results: there has been a great deal of retrenchment in benefit generosity in most countries.
Second, there has been some convergence in replacement rates across countries. The results show a
pattern of welfare state retrenchment emerging the last several decades. Prior to the 1980’s we see
expansion of generosity, while after that period, there seems to be retrenchment.
Another End of Ideology? Political Partisans and Welfare Retrenchment.
Convergence pressure operate on both the left and the right. On the right, the existence of the welfare
state is said to check retrenchment designs (via vested interests who now benefit from the programs).
On the left, factors (globalization and the idea of growth to limits) explain pressures for retraction or
stasis. So, differences between left and right have narrowed! However, the authors argue that there
are still persistent partisan differences and that there is no evidence of convergence among the major
parties on expansion/retrenchment issues.
Do Partisan Differences Matter?
On two fronts, Alan & Scruggs show that partisanship does still matter for explaining changes in welfare
state entitlements. The partisan nature of government matters for retrenchment. The US and UK
(rightist/neo-liberal governments) for example were successful in retrenchment, as opposed to
Pierson’s claims that Reagan/Thatcher were barely successful in pursuing retrenchment.
Statistical Analysis

This section examines the determinants of changes in replacement rates for unemployment benefits
and sickness insurance in 18 OECD countries. The goal is to assess the importance of partisanship as
an explanation of changes in benefits over this period. Allan & Scruggs expect that left parties will be
positively associated with growing replacement rates, particularly during periods of welfare expansion.
Conversely, parties of the right will be associated with welfare retrenchment, particularly in periods of
retrenchment. They also expect more integrated/corporatist democracies to be more resistant to
welfare state retrenchment.
They do a Pooled OLS Regression.
Results
Conclusion: Politics as Usual?
Allan & Scruggs believe that the entitlements approach to welfare state generosity, and the
replacement rate data in this article, provide a much greater purchase over questions concerning the
welfare state’s alleged resilience in recent years, and the role that partisanship plays in shaping welfare
entitlements.
Our analysis provide reasons not to abandon established theories of the welfare state (contrary to
Pierson’s argument).
The partisanship argument (power resources) also appears to work ‘in reverse’ (to explain
retrenchment) despite claims to the contrary by Pierson in his New Politics article.
Government by the Left leads to more expansion, government by the right/neo-liberal tends to result
in greater retrenchment.
Allan & Scruggs find no strong evidence that institutional arrangements constitute barriers to change.
So concentration of power or more class-consensual institutions do not constrain or enable welfare
expansion or retrenchment.
Finally, the authors hope that by shifting the focus from expenditure measures to data that better
reflect the consequences of welfare state policies, their research may contribute to correcting this
lacuna in current welfare state research.
Article : Barriers to entry: insider/outsider politics and the political determinants of job
security regulations.
• Emmenegger, P. (2009) Barriers to entry: insider/outsider politics and the political determinants of jobs security
regulations. Journal of European Social Policy 19(2): 131-146.
Patrick Emmenegger
Job security, here understood as restrictions on hiring and firing, figure prominently in the policy
recommendations of international organization. However, in contrast to the prominence of job
security regulations in the current reform discourse, hardly any attention is paid to their determinants.
In this article, the insider/outsider theory of employment and unemployment is examined. Advocates
of this approach argue that job security regulations mainly benefit the labour market insiders. So,
insiders will fight all reforms that aim to dismantle these regulations. Insiders are supported by social
democratic parties, which only represent the interests of the insiders. Emmenegger argues that this
argument is wrong. Labour market outsiders can be expected to be equally supportive of job security
regulations and Social Democratic parties as labour market insiders.

Job security is seen to be of minor importance for an individual’s position in the labour market. Due to
the distributional effects of job security regulations. These regulations benefit labour market insiders,
but hurt the outsiders. Emmenegger argues (against Rueda) that the insider/outsider theory of
employment is of no use in explaining differences in preferences for job security regulations.
Emmenegger uses three reasons for this:
- Rueda’s insider/outsider suffers from too demanding rationality assumptions, the theory relies on a
homo economicus as opposed to a ‘political man’.
- The theory misconceptualizes electoral politics and the role of policy packages offered by parties in
election campaigns.
-Most importantly: Rueda’s theory disregards the numerous reasons why labour market outsiders
could be just as supportive of job security regulations as labour market insiders.
Insider/Outsider politics and job security regulations
Insiders focus on their own employment and demand wage increases that are beyond the interests of
outsiders, keeping unemployment above the natural rate. Firms can hire unemployed (outsiders) to
replace current employees (insiders) but the costs of replacing employees (labour turnover costs)
frustrate this. The most important sources of turnover costs are job security regulations.
High labour turnover costs thus work as an entry barrier to outsiders who want to work for less than
insider wages. Insiders benefit from high labour turnover costs, and thus low labour turnover.
So, insiders versus outsiders have opposing preferences with regard to job security regulations.
Insiders vote for social democratic parties and social democratic parties will represent the interests of
their core constituency (insiders) and promote increases in the levels of job security.
Emmenegger focuses on three main points: he disagrees with the assumptions concerning rationality
that Rueda makes; the alternatives to Social Democracy; and possible reasons for similar preferences
among insiders and outsiders.
While the benefits of job security regulations is rather obvious for labour market insiders, there are
also good reasons for labour market outsiders to value job security regulations highly.
Emmenegger argues that job security regulation is not an interesting topic for voters during elections
and voters have to choose between the greater policy packages offered by political parties. Voters
value more the parties’ general stance towards social programs or the welfare state as a whole.
Emmenegger argues that both insiders and outsiders are equally supportive of job security regulation.
He also says that the boundaries between insiders/outsiders are blurry, the classification is too static.
Emmenegger also argues that household relationships determine voting preferences, many outsiders
depend on male insiders within their household, and tend to have the same policy preferences as their
husbands/fathers.
To sum up: Upscales (well educated, successful workers) and self-employed people obviously prefer
less job security regulations than labour market insiders, which is argued in the insider/outsider theory
of employment. However, it is less clear why this should be the case for labour market outsiders. They
face several incentives to support job security regulations, such as household relationships, power
resources considerations or the prospect of an insider job in the future.
Empirical evidence & Conclusion
Labour market insiders tend to be rather supportive while ‘upscale’ respondents are quite critical of
job security regulations. The following pattern can be observed: Insiders and unemployed people are
very supportive of job security regulations. The remaining labor market outsiders (temporarily and

part-time employed) and non-employed people are more critical while ‘upscales’ and self-employed
are hostile towards job security regulations.
Why is there a difference between unemployed people and the remaining outsiders?
Temporarily employed people do no benefit as much from job security regulations as those with
permanent contracts. The present value of job security regulation is rather low for them.
The unemployed who are looking for a full-time, permanent job see this differently.
Also, some part-time employed chose this voluntarily and may be perfectly happy with their status as
outsider. As a consequence they may not care too much about job security. (e.g. if the household
relationships allow this, the spouse earns enough).
Unemployed respondents (archetype outsiders) are very supportive of job security regulations.
Emmenegger now turns to voting preferences. Insiders are more supportive of Leftist parties than
upscale, self-employed or non-employed respondents. And, in contrast to Rueda’s insider/outsider
model, labour market outsiders, especially unemployed people, are equally or even more supportive
of Left parties! Labour market status thus does not have a strong affect on party preferences!
To sum up: the empirical evidence for the insider/outsider theory of employment and unemployment
is again weak. Insiders do not more often support Left parties than outsiders. Unemployed people are
the most in favor of Left parties. There is no cleavage between insiders and outsiders.
Article – The New Politics of the Welfare State

• Pierson, P. (1996) The New Politics of the Welfare State. World Politics 48(2): 143-179.
Paul Pierson
For long welfare states expanded and expanded but since the 70’s the discussion about expansion
has been more and more replaced by retrenchment, austerity, etc. Welfare state retrenchment
remains largely uncharted terrain in theory. Pierson argues there is a need for new approaches to
studying welfare state retrenchment. Welfare state expansion happened with enactment of popular
polices in undeveloped interest-group environments. By contrast, retrenchment requires elected
officials to pursue unpopular policies that must withstand resistance from voters and interest groups.
So the analysis of welfare expansion is different than retrenchment and requires different variables.
Pierson emphasizes the critical constraints on reform resulting from the role of supportive interest
groups and voters. The growth of the welfare state itself transforms the politics of social policy. The
welfare stte is the most resilient component of political economies.

I. Why the politics of retrenchment is different
Pierson claims that retrenchment is distinctive from expansion and doesn’t follow the same rules.
There are two reasons for this: First, the political goals of policymakers are different; second, there
have been dramatic change in the political context.
1. The politics of retrenchment is treacherous, because it imposes losses on concentrated

groups of voters in return for diffuse and uncertain gains. Welfare state expansion enables
credit-claiming for expansionist politicians, however, welfare state retrenchment is an
exercise in blame avoidance because the costs are concentrated, while the benefits are not.
People have a negativity bias: they will take more chances/risks to prevent any worsening of
their current position. The result: a simple redistributive transfer of resources from program
beneficiaries to taxpayers, engineered to cuts in social programs, is generally a losing
proposition.
2. Today almost half of the electorate receives transfer or work income from the welfare state,
thus it has changed the political landscape. This has led to strong interest groups and
popular attachment to social policies, which present strong obstacles to reform.
In short, the shift in goals and context creates new politics. Retrenchment advocates will try to play
off one group of beneficiaries against another and develop reforms that compensate politically
crucial groups for lost benefits. Blame avoidance and obfuscation are tactics they use.
II. The Limits of Existing Theories
The policy outcomes of expansions of the welfare state cannot be derived directly from economic
trends. The logics of economic development and industrialism, expansive claims of economic
determinism, pay insufficient attention to the politics of policy change.
The Left power resource and institutionalist arguments do pay attention to the politics of policy
change. These approaches explain welfare state expansion by arguing that distribution of political
power accounted for the expansion of social policies. Strong labor unions and leftist parties
contributed to the growth of social programs. Looking at retrenchment, these same forces play a role
in preventing cutbacks. Also, strong interest groups have formed around recipients of social
programs (pensioners, the disabled, healthcare consumers). The possibility of punishing politicians at
the polls means that policy makers are influenced in their decisions.
The New Institutionalism approach also studies welfare state expansion and retrenchment.
Institutions establish the rules of the game for political struggles. Institutionalists make two claims:
- strong states (in terms of administrative capacities and cohesion) are likely to produce strong
welfare states.
- the second argument concerns policy legacies, or feedback - the consequences of previously
introduced welfare state programs. Preexisting policy structures affect new policies (path
dependencies)
Pierson argues these arguments are not very strong to analyse retrenchment. Also, the argument
that strong government cohesion (few veto points, highly centralized) facilitates retrenchment is
weak, because strong concentrated power is also highly visible and thus accountable to voters (no
room for blame avoidance!!).
From Theories of Expansion to Theories of Retrenchment
Theories that explain welfare state expansion cannot be simply used to explain retrenchment
according to Pierson. The role of organized labor, for example, has diminished substantially.

Retrenchment Politics in 4 countries (US, Germany, Sweden, UK).
Pierson’s research in these four countries proves the following claims:

- There is little evidence for broad propositions about the centrality of strong states or left power
resources to retrenchment outcomes.
- The unpopularity of retrenchment makes major cutbacks unlikely except under conditions of
budgetary crisis
- Governments seek to negotiate consensus packages rather than to impose reforms unilaterally,
which decreases the potential for radical reform
- Far from creating a self-reinforcing dynamic, cutbacks tend to replenish support for the welfare
state
What stands out in the four cases is that the welfare state is very stable. Reforms are never radical,
retrenchment is always pursued cautiously with an all-party consensus if possible. There are
powerful political forces that stabilize welfare states and channel change in the direction of
incremental modifications of existing policies. The first major protection for social programs stems
from the conservative characteristics of democratic political institutions. Major changes require
acceptance of numerous actors. Where power is shared among different institutions, radical reform
is difficult.
A second and crucial source of the welfare state’s political strength comes from the high electoral
costs generally associated with retrenchment activities. Recipients of welfare are concentrated and
well organized. (leads to forms of path dependence, policy lock in, resilience of policy).
Retrenchment does happen in particular cases:

- when there is significant electoral slack (when governments believe that they are in a strong
enough position to absorb the electoral consequences of unpopular decisions). The UK’s Thatcher
government managed to pursue retrenchment as a result of this.
- Moments of budgetary crisis open opportunities for cutbacks. (framed as “necessary to save the
welfare state!!”)
- When there are chances to lower the visibility of reforms. (For example, federalism opened up
possibilities for Reagan to shift the blame for cutbacks).
Also, the prospects for changing institutions determine the possibity for reforms. For example, the
increasing influence of the EU may alter the terrain for struggles over the welfare state. Reforms can
be presented as legally required or economically necessary to create a single market. This liberates
national policy makers from the blame for cutbacks. (“Brussels ordered us to do this”).

Article - Social Democracy and Active Labour-Market Policies: Insiders, Outsiders and the
Politics of Employment Promotion.
• Rueda, D. (2006) Social Democracy and Active Labour Market Policies: Insiders, Outsiders and the Politics of
Employment Protection. British Journal of Political Science 36(3): 385-406.
David Rueda
This article explore the politics behind the promotion of active labour policies. It is argued here that
social democratic governments are often not interested in employment promotion measures; labour
is divided into those with secure employment (insiders) an those without (outsiders); it is conteded
that social democratic governments have strong incentives to pursue labour market policies that
benefit insiders but not outsiders. There are factors that influence the effects of insider-outsider
differences on social democracy. These claims are tested in three ways. First, the interplay of
government partisanship and employment protection is explored in the British case. Secondly, the
individual preferences assumed in the model are tested with Eurobarometer data. And thirdly, the
effects of social democracy on active labour-market policy are analysed using data from sixteen
industrialized democracies.
In an open economy and under internationalization with highly mobile capital, the ability of social
democrats to promote social policies that differ much from conservative ones is constrained. ALMPs
however are instruments to be used by partisan governments to promote employment and equality.
This article’s main points are that labour is divided into those with secure employment (insiders) and
those without (outsiders) and that the electoral goals of social democratic parties are sometimes
best served by pursuing labour-market polices that benefit insiders while ignoring the interests of
outsiders.
Insider-outsider politics of employment promotion
The model presented in this article implies that party behavior is influenced by both vote-seeking and
policy-seeking motivations. The model considers parties to have distinct interests as well as
economic goals fundamentally related to those of their core constituencies.
Rueda’s analysis is based on two propositions: that labour is divided into insiders and outsiders, and
that these interests can be fundamentally different. Rueda emphasizes the significance of insider-
outsider politics as a determinant of social democratic policy. Social democratis consider insiders
their core constituency, and outsiders are less electorally relevant.
ALMP’s are a dilemma for social democrats. ALMPs benefit outsiders, and may harm insiders (the
policies’ effect on taxes and labour-market competition). An increase in ALMPs hurts insiders (higher
tax burden). Also, the introduction of lower paid outsiders into employment through ALMP’s may
harm insiders’ wages, and provide lower wage competition. Thus, Rueda argues, social democratic
government will not be associated with higher levels of ALMP’s.
Since right wing parties represent upscale groups and are not interested in ALMPs either, the
disaggregation of labour into insiders and outsiders implies the absence of any partisan differences
when looking at ALMP’s.
Factors mitigating the effects of insider-outsider differences

Two factors align the interests of the insiders with the outsiders: a decrease in the level of
employment protection and an increase in the instability of the unemployment rate.
Some hypotheses emerge from this:
- Decreasing levels of employment protection should be associated with increasing levels of

ALMP’s
- The interaction between decreasing levels of employment protection and stronger social
democratic governments should be associated with increasing levels of ALMP.
- As unemployment becomes unstable, social democratic governments increase ALMP’s to
satisfy insiders. Stable unemployment is not a concern to insiders.
Also, social democratic governments are more likely to produce pro-insider polies when they are
subjected to pro-insider pressure from unions (who always side with insiders).
Employment protection and employment promotion in Britain
Only few ALMP’s. High labor union participation in the creation of policies. Thatcher fought against
this and reduced employment protection considerably. ALMP’s were not introduced because
employers did not want them, labor unions had incentives to not pay too much attention to them,
and both Conservative and Labour governments both did not favour them.
The British case demonstrates how higher levels of insider protection correlated with a general lack
of interest on the part of the Labour party toways employment protection. The decrease in insider
protection promoted by the Conservative governments of Thatcher and Major, however, facilitated
the emergence of Blair’s Third Way (defined as a Labour strategy with employment promotion as a
pre-eminent goal).
The British case also proves the institutional connection between the unions and labour parties.
ALMP’s were easier to ignore when the influence of the unions over the Labour party was strong, so
the Labour party was less interested in outsiders.
The effects of government partisanship on policy
The results from statistical analysis:
Cabinet partisanship is not at all significant as an influence on the levels of ALMPs. Whether a
government is social democratic or conservative makes no difference to the levels of ALMPs
promoted.
Additionally: the evidence confirms that a decrease in the employment protection of insiders will be
reflected in an increase in ALMP levels.
Further evidence was found for the following 3 hypotheses: the unemployment level does not affect
ALMPs; unemployment growth is positively associated with ALMPs; and the interaction between
unemployment growth and social democratic government is positively associated with ALMPs. So the
rise in vulnerability of insiders makes social democratic governments more likely to promote ALMPs.
Conclusion
As the insider-outsider model predicted, the increase in the vulnerability of insiders to

unemployment under Thatcher’s conservative government facilitated the adoption of employment
promotion as one of the main goals of Blair’s Labour party.

Article: Globalization and Welfare Compensation: Disentangling the ties that bind
• Burgoon, B. (2001) Globalization and Welfare Compensation: Disentangling the Ties that Bind. International
Organization 55(3): 509-551.
Brian Burgoon
Burgoon argues that political struggles connecting openness to welfare vary across different kinds of
openness and different policies of welfare states. He disagrees with Rodrik. Burgoon claims that
different elements of openness may have varying effects on welfare policy. He argues that import
competition from developing countries will tend to spark more concentrated demands for welfare
compensation, and similar opposition to such compensation. Low-wage openness inspires more
welfare expansion than general openness.
Burgoon’s second argument focuses on how and to what effect globalization sparks demands for
compensation and responses from producers/investors that vary across policies of the welfare state.
He argues that groups put at risk will demand more public spending generally but focus most on
active and passive labor market policies. On the other side, investors and exposed producers will
respond to greater openness by opposing most expansions, and strongly opposing passive labor
market policies.
This results in four possible patterns:
Welfare programs subject to strong compensation demands and investor support  openness
inspires expansion of welfare.
Welfare programs diffusely connected to compensation demands and high investor concern 
openness leads to retrenchment.
Welfare programs subject to strong compensation demands and high investor hostility  openness
leads to combative politics and the outcome depends mostly on the Left parties.
Welfare elements remote from compensation demands and investor fears  openness spurs few
struggles and hardly any changes.
Globalization and Welfare in Contemporary Debate

Globalization and Welfare in Tension
The debate among scholars generated several perspectives.
One perspective worries that globalization and welfare compensation, once mutually reinforcing, are
now in tension as economic interdependence has deepened and public economies have matured. 3
claims are part of this perspective: 1st. greater openness gives certain groups in society economic
insecurity  demands for expansion of welfare programs. 2nd. Globalization puts constraints on the
provision of welfare because assets and capital mobility is higher (exit opportunities for businesses)
 higher tax burdens are discouraged. 3rd. Social insecurity and inability to respond might push
vulnerable societies to call for isolationism and extremism.
To sum up: greater openness might unleash forces that constrain as well as inspire welfare
compensation.
Globalization and Welfare still in harmony

The second perspective emphasizes harmony between globalization and welfare, at least under some
political and institutional conditions. Left-labor power provides such conditions. Empirical evidence:
trade and capital openness correlate positively with spending among countries scoring high on Left-
labor power, but negatively among countries with low Left-labor power.

Globalization and Welfare unrelated

This third perspective on openness and welfare challenges both optimists and pessimists, urging that
globalization does not much affect welfare one way or the other. Some evidence suggests that
globalization poses less risks or volatility in OECD countries, and that any correlation between
openness and welfare, whether positive or negative, may be spurious.
Others arguer that political and institutional conditions mediate any strong connection between
openness and welfare, like Paul Pierson and his New politics of welfare article. So it is all more about
the domestic political and institutional settings that affect welfare expansion, less so openness.
In sum: much debate whether openness spurs, constrains, or has little to do with welfare
compensation. Yet all sides underemphasize the political underpinnings of that connection, and over
-aggregate conceptions of both welfare and openness. Burgoon suspects that the connections
between welfare and openness will vary across elements of welfare and openness.
The Argument
Burgoon disentangles the complex connections between openness and welfare by focusing on two
ways that the politics can vary across elements of openness and welfare. He distinguishes between
general trade openness and low-wage trade, and among government programs that are more or less
directly and immediately aid vulnerable groups and that are more or less costly to exposed producers
and investors.
Exposure to low wage versus developed-country competition

If a developed country competes with a developing country this sparks stronger demands in
industrialized countries for welfare expansion to compensate for the risks of such openness. Intra-
industry trade among developed countries generates less conflict and thus less demand for welfare
expansion.
Burgoon then looks at the effect of ‘low wage’ versus ‘high wage’ trade. Greater openness to low-
wage competition will incite sharpers demands for welfare compensation than high-wage
competition. So his hypothesis is that low-wage openness will be relatively less constraining and
more spurring welfare expansion, compared with general trade openness.
Different faces of economic openness have different implications for welfare politics!
Different elements of welfare provision

Openness can have different consequences for the various elements of welfare provision.
Vulnerable groups and the demand for welfare compensation

The closer the connection of a program to the direct needs of working people made vulnerable by
openness, the more concentrated the demands from those people and their political champions for
welfare expansion. Less-skilled workers favor more welfare expansion to compensate for increased
risks of openness.
Investors, competitive producers, and responses to welfare compensation

Greater openness should elicit among investors, exposed producers and their government
champions resistance to or acceptance of welfare that also varies across elements of such welfare.
Increased exit opportunities will be exploited to resist welfare expansions. Investors and producers
will likely resist compensation when this expands programs constituting the greatest burden on
overall taxation : this implies stronger resistance to pension and healthcare compensation than to
active labor-market policies.
Different elements of welfare can be expected to have different implications for total factor
productivity. (Financial) markets favor welfare efforts that improver economic adjustment, R&D,

infrastructure and human capital.

So to sum up: investors and producers are least hostile towards expansions of education, job training
and relocation programs and more hostile towards social programs that do not improve productivity
such as family benefits, healthcare and retirement programs. They are in particular hostile towards
passive labor policies that do no improve productivity, impose labor market distortions and
concentrate a tax burden on employers!
Combining vulnerable-group demands and investor responses

Burgoon summarizes 4 outcomes of the conflicts between these groups:
HYPOTHESIS 2: GREATER OPENNESS SHOULD INSPIRE ONE-SIDED POLITICS OVER PROGRAMS FOR JOB TRAINING AND
RELOCATION; VULNERABLE GROUPS SHOULD DEMAND, AND INVESTORS, PRODUCERS, AND GOVERNMENT
REPRESENTATIVES SHOULD ACCOMMODATE, EXPANSION OF SUCH PROGRAMS.
HYPOTHESIS 3: GREATER OPENNESS SHOULD INSPIRE LITTLE POLITICAL STRUGGLE OVER PROGRAMS FOR GOVERNMENT
INFRASTRUCTURE, DEFENSE, OR CAPITAL INVESTMENTS; OPENNESS SHOULD ELICIT FEW DEMANDS FOR SUCH PROGRAMS
FROM VULNERABLE GROUPS; AND INVESTORS, PRODUCERS, AND GOVERNMENT REPRESENTATIVES SHOULD ACCEPT THE
STATUS QUO.
HYPOTHESIS 4: GREATER OPENNESS SHOULD ELICIT MORE CONFLICTUAL POLITICS WITH UNCERTAIN IMPLICATIONS FOR
PASSIVE LABOR-MARKET PROGRAMS AND REGULATIONS; INTERNATIONALLY VULNERABLE GROUPS SHOULD MAKE
STRONG DEMANDS FOR COMPENSATION, AND INVESTORS AND OTHERS SHOULD STRONGLY OPPOSE SUCH
COMPENSATION.
HYPOTHESIS 5: GREATER OPENNESS SHOULD ELICIT ONE-SIDED POLITICS, LEADING TO SOME RETRENCHMENT OF FAMILY,
RETIREMENT, AND DISABILITY BENEFITS; VULNERABLE GROUPS SHOULD MAKE MODEST DEMANDS FOR COMPENSATION,
AND INVESTORS AND THEIR CHAMPIONS SHOULD MAKE RELATIVELY STRONG DEMANDS FOR ROLLBACKS.
To sum up, I expect the politics connecting openness and welfare to differ across different elements of welfare
and openness. Compared to trade openness generally, higher proportions of low-wage competition should elicit
stronger political demands for welfare expansion, less or similar opposition from the winners, and more
expansive (or less restraining) consequences for welfare. All moves to greater economic openness should elicit
varying distributional consequences, and hence different politics and outcomes across different elements of
welfare. Most generally, moves to greater openness should spark (1) one-sided politics that expand job training
and relocation policies; (2) non politics that leave defense, infrastructure, and capital spending largely
unchanged; (3) conflictual politics with indeterminate outcomes for passive labor-market policies; and (4) one-
sided politics that retrench retirement-focused and family-focused welfare.

The Evidence: A First Cut
Cross-sectional time series data, covers 18 countries over 34 years, so 612 observations. A regression
analysis.
Independent variables: openness
- trade openness (imports plus exports as percentage of GDP)
- low-wage imports as % of total imports
- FDI exposure
- Portfolio outflows
Dependent variables: welfare efforts

- total government spending
- government consumption
- social security transfers
Burgoon also uses control variables, like per capita GDP, growth, dependency ratio, Left cabinet
portfolio, deindustrialization
Results:
The results support the argument that the proportion of low-wage imports should inspire more
welfare expansion or less contraction than general trade openness.
Conclusion: Extending the approach
Most studies of the welfare-globalization nexus focus on aggregate conceptions of openness and,
especially, of welfare effort; Burgoon expects that a more disaggregated approach will reveal varying
politics underlying that nexus. Burgoon reasoned that a larger proportion of low-wage imports should
spur stronger demands for welfare compensation. So low wage openness yields more expansion than
general trade openness.
Openness ought to elicit varying compensation demands from vulnerable groups and responses from
investors/producers, these combine to create four distinct patters of politics surrounding different
elements of welfare. Different elements of openness and welfare may be in tension for some kinds of
openness and some segments of welfare, in harmony for others, and wholly independent for still
others.
Statistical evidence proves that low-wage imports have a more significant positive impact on welfare
compensation than general openness, which has a more negative effect. Also found in the evidence :
low-wage, FDI and portfolio openness have a generally positive effect on training and relocation
spending, and either a less positive or, a negative effect on total social spending and retirement, and
to a lesser extent healthcare and family benefits.

• Genschel, P., A. Kemmerling and E. Seils (2011) Accelerating Downhill: How the EU Shapes Corporate
Tax Competition in the Single Market. Journal of Common Market Studies 49(3): 585-606.
Article - Accelarting downhill: how the EU shapes corporate tax competition

in the single market
Genschel, Kemmerling, Seils
Tax competition in the EU is shaped by four partly opposed institutional mechanisms. While market
integration and enlargement increase competitive pressure, the tax co-ordination of the Council of
Ministers and the tax jurisprudence of the European Court of Justice could potentially reduce it. The
net effect is to accelerate tax competition. This article proves that tax competition is tronger in the the
EU than in the rest of the world. Tax co-ordination and tax jurisprudence have failed to prevent a race
to the bottom.
Does the EU make a difference?
International tax competition is influenced by its institutional setting/context.

Tax competition in the EU is shaped by four institutional mechanisms.
1. Market integration and 2. enlargement  increase competitive pressures.
3. Tax co-ordination and 4. ECJ’s tax jurisprudence  decrease competitive pressures.
Enlargement effect: the heterogeneity of the EU member states is increased involved in intra-EU tax
competition.
Integration effect: barriers are reduced and the EU facilitates international tax arbitrage among
Member States’ tax systems.
Co-ordination effect: structure for intergovernmental bargaining and enforcement
Judicialization effect: the Court may decrease or increase tax competition.
The authors claim that the net effect of these partly opposed mechanisms is to accelerate tax
competition. Tax competition in the EU is stronger than in the rest of the world. Market integration
and enlargement have been main drivers of intra-EU tax competition.  race to the bottom.
II. The Institutional Embeddedness of Tax Competition
Corporate tax competition takes two major forms:

- general tax competition: affects the whole corporate tax base: governments lower taxes for the
corporate sector as a whole to attract foreign investments and profits.
- targeted tax competition: limited to selected elements of the corporate tax base: governments offer
preferential treatment (preferential tax regimes, PTRs) to very mobile and sensitive parts of the tax
base but maintain high tax rates for the rest.
Resembles a prisoner’s dilemma-type race to the bottom.
Small states prefer competition in tax rates, a loss in domestic tax revenues is smaller (relatively) to
the increase in foreign tax inflows from other countries. Large countries, however, benefit less because
only a comparatively small inflow of foreign base will be attracted.
Country size is less important in targeted tax competition because the spillover effect into domestic
tax policy is less pronounced. PTRs mitigate the policy dilemma of large states between external

competiveness and domestic revenue. Targeted tax competition is still collectively harmful, and thus
resembles a prisoner’s dilemma, but the dilemma is more symmetric. All states, large and small, suffer
from the competition and would be better off without it.
Market integration increases tax competition by decreasing transaction costs of tax arbitrage.
Enlargement increases tax competition by increasing the number and heterogeneity of competing
states. The larger number of states reduces the relative size of each state, thus amplifies the incentive
to cut taxes.
Intergovernmental tax co-ordination mitigates competition by harmonizing tax rates. The EU

institutions increase the likelihood of tax co-ordination, thus reduces competition.
ECJ tax jurisprudence has an ambiguous effect on tax competition. Its effect is indeterminate.
III. How strong is tax competition in the EU?
Two indicators are used for the strength of tax competition in the EU. Statutory tax rates and
preferential regimes.
2 findings: statutory tax rates have fallen faster in the EU than in the rest of the world since the 1990’s.
Also: evidence that the incidence of preferential tax regimes is high in the EU.
IV. How Integration and Enlargement have boosted tax competition in the Single Market.
Empirical studies find that there is a robust correlation between country size and the level of corporate
tax rates: small states have lower corporate tax rates than large states.
The authors distinguish between two intersecting competitive effects in the EU: within-group
competition among the EU-15 states (integration effect) and between-group competition between EU-
15 and Accession-12 states (enlargement effect). Accession-12 states = enlargement of mostly Eastern
European countries.
The authors perform 2 cross-sectional regressions each for 1997 and 2006. The results confirm:
corporate tax rates are positively and significantly related to country size.
Enlargement effect is confirmed: in 1997 the Accession-12 states cannot be statistically distinguished
from the rest of the world. 10 years later they are: far below what would be expected from their
country sizes.
In sum: market integration and eastern enlafgement fuelled tax competition since the 1990’s and
caused corporate tax rates to fall more quicky in the EU than in the rest of the world.
V. Limited Success in EU Corporate Tax co-ordination
Success of EU tax co-ordination has been limited. The EU’s measures to curb tax competition in the
1990s focused on targeted tax competition, less on general tax rates.
Observers attribute the lack of progress of corporate tax coordination to the persistence of the
unanimity rule in tax matters.
Not completely true. Genschel argues: it is not the unanimity requirement which makes
intergovernmental tax co-ordination difficult, but the inherent difficulties of tax co-ordination that
explain its continued subjection to the unanimity rule.

There is now a not so very strong code of conduct to curb competitive tax in the EU, but, in fact, insofar
as the code is effective in curbing targeted tax competition, it may indirectly fuel general tax
competition and thus further aggravate distributive conflicts over tax harmonization.
VI. The Corporate Tax Jurisprudence of the European Court of Justice
ECJ case law merely reinforced tax competition.

Most cases that are handled by the ECJ are undertaken by taxpayers who are willing to incur the costs
of litigation because they expect to lower their tax burden if successful. So most of the cases concern
national tax laws that are costly to taxpayers in restricting their freedom of movement, but essential
to tax authorities for shoring up their domestic tax base. (like exit taxes). Hence, the prevalence of the
preliminary rulings prodecure (most cases are referred to the ECJ by national courts, the ECJ provides
it with a judgement  national court decides the case then) implies an inherent tax reduction bias in
the cases brought. Adding to that: member states lose >80% of their cases.
Also, the ECJ is extremely reluctant to accept justifications for restrictive national provisions (like: this
tax policy is protecting the public interest).
2 reasons: the court refuses to accept revenue requirements as an imperative requirement of public
interest. If a corporation exploits the lower tax level of another member state, then that is not an abuse
to be stopped but a legitimate right to be protected. = ECJ’s thinking.
Second, the ECJ ignores the distinction between harmful targeted competition and less objectionable
general tax competition introduced by the code of conduct. The ECJ entitles tax payers to make full
use of both types of advantages (lower general tax rates and special tax regimes).
In sum: the ECJ accords higher priority to the protection of taxpayer’s treaty-based rights of mobility
than to member states’ public policy requirements.
VII. The Future of European Tax Competition
Short conclusion, no new points made. Difficult to predict developments. Article stems from 2008,
everything has changed today. Enlargements are not to be expected anytime soon. Co-ordination
effect is difficult to predict as well. The judicialization effect is also hard to gauge.
Article – Why do open economies have bigger governments?

• Rodrik, D. (1998) Why Do Open Economies Have Bigger Governments? Journal of Political
Economy 106(5): 997-1032.
Dani Rodrik
There is a positive correlation between an economy’s exposure to international trade and the size of
its government. One explanation is that government spending plays a risk-reducing role in economies

exposed to a significant amount of external risk. The relationship between openness and government
size is strongest when terms-of-trade risk is highest.
Introduction
There is a positive and robust partial correlation between openness, as measured by the share of
trade in GDP, and the scope of government, as measured by the share of government expenditure in
GDP. The explanation: socieities seem to demand an expanded government role as the price for
accepting larger doses of external risk. In other words, government spending appears to provide
social insurance in economies subject to external shocks.
Central evidence for this comes from regressions in which openness is interacted with two measures
of external risk, volatility of the terms of trade and the product concentration of exports. Another
author (Cameron) argued the same: public spending is a risk-reducing instrument on which there is
greater reliance in more open economies.
II. The evidence

Lots of positive associations found in the regression analyses. See article for graphs and tables.
III. Probing Deeper: some hypotheses and checks of robustness

- not so relevant
IV. A Possible Explanation: social insurance against external risk

The relationship between openness and government spending is not spurious, it is robust. It is not
generated by omitted variables. But why?
If a household’s income is based on private tradables, private non-tradables and the government
sector, assume that some of the riskiness in the household’s income due to external shocks can be
mitigated by having a larger government sector.
A test of the central hypothesis can be carried out by checking whether the relationship between
openness and government consumption is stronger in economies that are exposed to greater
amounts of external risk. Rodrik uses two measures as proxies for exposure to external risk.
- terms-of-trade risk (a measure of the volatility of the streams of income associated with
fluctuations in the external terms of trade would be the only relevant measure of such risk).
- An index of the product concentration of exports (countries that export only a few
commodities are presumably more exposed to external risk than countries with a diversified set of
exports, in a way that need not necessarily show in fluctuations in the terms of trade ).
In practice both measures are strongly correlated.

In regressions, Rodrik tests both variables and discovers that when the terms-of-trade and export
concentration measures of risk are included simultaneously in the regression, it is terms-of-trade risk
that does all the work! Despite the high correlation between the two!
Rodrik concludes that openness matters to the scope of government because of the role played by
external risk. Governments consume a larger share of domestic output in economies subject to
greater amounts of external risk. Once external risk is controlled for, openness does not seem to
exert an independent effect on government consumption. Put differently, openness appears to work
purely through its consequence of exposing the economy to greater amounts of external risk.
In advanced countries with social welfare programs in place, primarily spending on social security
and welfare is correlated with the exposure to external risk, as Rodrik finds. In developing countries
the increased government spending is on public employment, in-kind transfers and public works.

Rodrik’s results also indicate that external risk is positively associated with income volatility for all
three measures of income.
Concluding comments
Governments have expanded fastest in the most open economies. The reasons have to do with social
insurance. Openness exerts the strongest influence on government consumption in economies that
are subject to the greatest amount of external risk. Governments mitigate the exposure to risk by
increasing the share of domestic output they consume.
Article – The New Political Economy of Taxation in advanced capitalist democracies

• Swank, D. and S. Steinmo (2002) The New Political Economy of Taxation in Advanced Capitalist
Democracies. American Journal of Political Science46(3): 642-655.
Swank & Steinmo
The authors argue that internationalization, domestic economic change, and budgetary pressures
each prompt significant changes in tax policy; yet, together, they create a system of constraints on
altering the level and distribution of tax burdens. They find that capital mobility and trade are
associated with cuts in statutory corporate tax rates but not with reductioins in effective average tax
rates on capital income. Moreover, they find that capital mobility is negatively associated with the
tax components of labor costs. Domestically, structural unemployment leads to reductions in labor
and capital taxes while public sector debt and social needs raise taxes.
Globalization theory suggest a race to the bottom in taxation (as a result of exit opportunities for
mobile assets that give way to tax competition between countries). Steinmo and Swank, however,
find a remarkable stability in the levels and distribution of tax burdens.
They show that rises in capital mobility and trade have systematically preceded cuts in statutory tax
rates. However, three factors – internationalization, domestic economic change, and budgetary
forces – simultaneously constrain changes in tax burdens, and, together, help explain the complexity
of tax policy outcomes.
Taxation in developed capitalist democracies

During the 80s and 90s the OECD countries in this test experienced dramatic changes of the content
of tax policies, but the actual tax burdens on capital, labor, and consumption remained remarkably
stable. How so?
International capital mobility and taxation: globalization theory

The interaction of governments and transnationally mobile capital becomes a prisoner’s dilemma: in
the face of difficulties in achieving international policy cooperation, governments each face
incentives to compete for investment by reducing tax burdens to a “lowest common denominator”.
In sum, globalization theory predicts that as capital mobility increases, effective tax rates on capital

income, corporate profits and high earners will decline. To compensate for this, there will be more
taxation of relatively immobile factors, or when factor mobility is high too, then there will be declines
in taxes across most revenue categories.
The evidence: empirical findings do not support the globalization hypothesis.
Internationalization and taxation: an alternative theoretical view

Swank & Steinmo expect internationalization and a secular decline in domestic economic
performance to be associated with the shift in the content of tax policy. A solution to the dilemma of
tax competition and rising needs of public expenditure is to cut simultaneously the statutory tax
rates and reduce or eliminate tax expenditures.
Policy makers face a set of constraints on altering actual tax burdens. Internationalization creates
pressure to low taxes on capital income, however, shifting the tax burden to labor is difficult.
The authors hypothesize that internationalization exerts downward pressures on both capital and
labor taxes. Public sector debts and demands for public spending increase tax burdens. The
conflicting pressures created by contemporary international and domestic forces leave little room to
alter relative or absolute tax burdens.
Evaluating conventional and alternative theories

information on the statistical methods and regression equation
Empirical findings
The authors have tested the effects of international, domestic economic, and budgetary forces on
statutory corporate tax rates and on the effective average tax rates on capital, labor, and
consumption.
- liberalization of capital controls and trade openness are negatively associated with statutory
corporate tax rates, and the substantive magnitude of the effect of capital mobility is large. Political
economic forces (internationalization, liberalization, neoliberal views) contributed to statutory
corporate rate cuts.
- Past levels of tax rates and Christian Democratic governments are significantly related to corporate
tax rates.
- Effects of domestic economic changes are absent! But rises in unemployment are associated with
reductions in capital tax burdens.
- No support for the notion that liberalization of capital controls systematically led to reductions in
the effective tax rate on capital.
Altogether, the findings support the view that while internationalization contributed to the shift in
the content of tax policy, it has not resulted in reductions in actual tax burdens on capital.
The impacts of domestic economic and budgetary pressures on labor taxation are nearly identical to
those for capital taxation  pressures to reduce tax burdens on labor income.
Expansions of public debt create upward pressures on labor taxes.
To sum up: Internationalization has not resulted in a shift of the tax burden to labor and
consumption as conventional globalization theory predicts. To the contrary, evidence suggests that
international capital mobility has sensitized policy makers to potential economic costs of high labor
taxes.
Conclusions: The New Political Economy of Taxation

In the past, countries lowered tax rates and eliminated tax credits/allowances. The content of tax
policy changed dramatically, the levels and burdens did not.

Reforms followed rises in international capital mobility and trade openness; increases in capital
mobility are also associated with reductions in the tax components of labor costs. Unemployment
leads to employment-oriented cuts in tax rates (both labor and capital). Public sector debt actually
gives upward pressure to raise taxes.
Overall, the ‘new political economy of taxation’ may be characterized as an environment where
policy makers confront 3 constraints: internationalization, domestic economic stress, and budgetary
imperatives.
Article – Causes of Welfare State Expansion: Deindustrialization or Globalization?
• Iversen, T. and Cusack, T.R. (2000) The Causes of Welfare State Expansion: Deindustrialization or
Globalization? World Politics 52(3): 313-349.
Iversen & Cusack.
Increasing openness of national economies  growing economic insecurity.  demands for larger
welfare spending. However, rising globalization is now seen as an obstacle to governments’ ability to
meet these demands and even a cause of cutbacks. A revisionist perspective suggests that the
challenges promoted by by globalization when met by strong left-labor power within domestic
political system combine to produce a compensation strategy that entails a large and vibrant welfare
state.
Iversen & Cusack argue against both perspectives, they say that most of the risks being generated in
modern industrialized societies are the product of technologically induced structural transformations
inside national labor markets. Increasing productivity, changing consumption patterns, and saturated
demand for products from the traditional sectors of the economy are the main forces of change.
These structural sources of risk fuel demands for state compensation and risk sharing.
Big transformations in employment structures: industry and agriculture declined, service sector grew
rapidly. Many workers unable to switch  unemployment / early retirement.
Governments responded to these structural changes in 3 ways:

- promoting employment in private services sector (deregulation) and various forms of public
insurance to compensate workers for risks of having to find new jobs in services
- maintain extensive regulation of private services as well as relatively compressed wage structure
while simultaneously expanding employment in public services
- heavy regulation of labor and product markets has hampered a major expansion of private sector
service employment, at the same time not allowing the public sector to grow.  major
unemployment  social programs geared towards secure exit out of labor market and into early
retirement.
The three responses resemble Esping-Andersen’s model of respectively liberal, social democratic and
Christian democratic welfare states.

Main focus of this paper: to convince the reader that growth in both transfers and government
consumption – the two main components of welfare-state spending – can largely be explained as a
function of the severity of internally driven employment losses in the traditional sectors, not by
forces in the global economy.
Discounting globalization
Argument of globalization  welfare state expansion – rests on two causal mechanisms

- trade and capital market integration is said to expose domestic economies to greater volatility
which implies higher risks for workers
- Greater labor market risks are hypothesized to generate political demands for expansionary
spending policies that will cushion and compensate people for such risks
Iversen & Cusack argue that whether openness is related to risk depends on the extent to which
international market volatility is greater than domestic market volatility. At least one of two
conditions must hold: (1) price volatility in international markets is greater than in domestic markets,
and (2) trade concentrates more than diversifies risk.
Iversen & Cusack do not believe that globalization has been much of a factor in the post war
expansion of the welfare state. Traditional explanations that emphasize the role of the industrial
working class run up against the inescapable fact that spending has skyrocketed in many countries
precisely during a time when the industrial working class has been in steep decline.
So, to understand the force behind expansion, we need to look beyond standard class-power
explanations.
Deindustrialization and the labor-market risk structure

Like Garrett and Rodrik the authors believe that exposure to risk in the labor market is a determinant
of peoples’ preferences for state protection and public risk sharing, and Iversen & Cusack argue that
the main sources of risk are to be found in the interaction of sector-specific skills and domestic
economic processes.
The correspondence between the scope of employer sponsored insurance and the transferability of
skills (can a worker use his skills in a different sector?) tells us a great deal about the sources of
demand for welfare state expansion.
Iversen & Cusack also argue that employers do not necessarily oppose expansion demands.
Employers encourage the state to provide insurances for workers who need to acquire new skills to
transist to new industries.
They also note how little attention is paid to deindustrialization as a driving force behind welfare
expansion. When the authors talk about deindustrialization, the talk about secular, long-term and
structurally driven processes of labor shedding in both agriculture and industry beginning in the early
1960s. Deindustrialization is a crucial source of welfare state expansion!
While deindustrialization everywhere propels the growth of welfare state spending, whether in the
form of government transfers or consumption, we expect the distributive aspects of the rising service
economy and the private-public sector mix of employment to vary according to political parameters.
Findings
All effects of deindustrialization are statistically significant. It seems justified to conclude that the
effects of the domestic economic variables carry far greater weight than globalization in shaping
government spending.
The political variables turn out to affect civilian government consumption in the predicted direction.

A typical Left government spends about 2% more than a Right government. Also, the strength of
labor in the industrial relations system also has an upward effect on spending.
Iversen & Cusack have made a causal path analysis:
The effect of deindustrialization runs along two different paths:

- deindustrialization raises the generosity of transfer payments as governments respond to electoral
pressures for insurance against labor-market risks (path a). Higher generosity implies higher
government transfers, so deindustrialization is directly related to spending via generosity.
-the employment effects of deindustrialization are conditioned by labor-market institutions and

partisan politics. Insofar as redundant labor in the traditional sectors are not being picked up by new
employment in private services, (path b) governments are likely to face electoral pressures to create
employment by expanding public provision of services (path c).
The results generated by Iversen & Cusack strongly support the deindustrialization argument. As
deindustrialization increases, both government transfers and government consumption rise, but the
latter effect is particularly strong when wage bargaining is centralized and when governments are
dominated by Left parties. Under Right governments, most of the effect comes through increases in
transfers. The reason is that right governments will not compensate for private sector labor
redundancies through public services production, using instead transfer schemes, such as early
retirement, to facilitate labor market exit. Since centralized wage bargaining reduces the absorptive
capacity of workers who are made redundant in the traditional sectors, the effect on transfers is
particularly strong when bargaining is centralized.
The sources of deindustrialization
Deindustrialization is largely driven by domestic factors other than spending itself.

Two debates:
- the competition from the Third World countries?
- domestic sources (changed preference patterns, high productivity growth, new productive
capacities) ?
Also, governments caused deindustrialization??: the costs posed by taxation and the generosity of
the welfare state, and the Baumol disease had a tremendous effect on industrial employment. 
efficiency losses from distortionary taxation.
Iversen & Cusack test these assumptions.

The results support their arguments. Deindustrialization is almost exclusively driven by domestic
factors other than the welfare state. So not globalization or trade openness!
Technological progress, demand conditions, and shifting consumption patterns cause employment in
industry and agriculture to decline.
No evidence found for the assumptions above. Deindustrialization is driven primarily by deep
economic processes that are unrelated to either openness or spending.
The authors conclude that their arguments and results for spending are robust to the charges that
deindustrialization is a mediating variable and that its association with spending is a result of
reversed causality.
Conclusion
Domestic forces caused shifts in the employment structure (manufacturing  services). Risks for
(low-skilled) workers create pressure on governments to expand social security. There is tremendous
variation in the extent of deindustrialization, and our empirical results demonstrate that this factor
can account for a very significant proportion of the variance in welfare state spending.
The analysis suggests that any major transformation in the employment structure, whether from
agriculture to industry or from industry to services, produces insecurities in the labor market that
propel demands for state intervention. Government respond to this by welfare expansion.
Partisanship plays an impotant role in the redistributive aspects of the welfare state.
Article – Globalization, labour power and partisan politics revisited.
Yong Kwon & Pontusson

• Yong Kwon, H. and J. Pontusson (2010) Globalization, labour power and partisan politics revisited. Socio-
Economic Review 8(2): 251-281.
This article explores temporal variation in partisan effects on social spending growth in OECD
countries over the period 1971-2002. The authors argue that partisan effects are jointly conditioned
by globalization and the mobilizational capacity of organized labour.
3 empirical findings:

- partisan effects increased from the mid-1970s to the late 1980s and then disappeared in the 1990s.
- partisan effects rose with globalization in the 1970s and early 80s, a period characterized by rising
labour strength (union density/membersip) in many OECD countries, but this is not true for the post-
1990 period, characterized by declining labour strength.
- globalization was associated with declining partisan effects in countries that experienced union
decline in the 1980s and 1990s, but it was associated with rising partisan effects in countries in which
unions remained strong.
Partisan conflict over the public provision of social welfare is jointly conditioned by globalization and
the strength of organized labour. As Rodrik argued: globalization constrains the ability of
governments to expand public spending, but also generates demand for more social protection,
especially among unskilled workers.
The authors claim: rising globalization in the context of labour mobilization explains the rise of
partisan effects from the mid-1970s onwards and that continued globalization in the context of
labour decline explains the fall of partisan effects in the 1990s.
The authors are most interested in how and why partisan effects have changed over time.
Dependent variable is aggregate social spending.
1. Theoretical framework
The power resources approach treats trade unions and Left parties as representatives of working
class interests. The traditional partisanship argument is about Left parties fighting for the expansion
of welfare programs for their constituency (low skilled workers, dependent on employment,
vulnerable). The share of seats held by Left parties is a good predictor of government consumption
and the size of the public sector.
The decline-of-partisanship thesis

The salience of partisanship has declined
- the OECD-wide deceleration of economic growth has given rise to a condition of ‘permanent
austerity’ which constrains the ability of Left parties to expand the welfare state further.
- Support for existing social programmes ensures that parties committed to cut back social programs
are not electorally successful. (Pierson’s ‘new politics of the welfare state’ –thesis)
This has led to some convergence of both Left and Right parties.
Globalization and labour strength

The authors disagree with Rodrik’s thesis that globalization increases economic insecurity and
thereby generates increased societal demand for compensatory social policies. Garrett argues that
globalization spurs partisan conflict because it affects core constituencies of Left and Right parties
differently. Garrett also argues that the stronger labour unions are, the more Left governments
respond to globalization-induced demand for social protection.
The thesis is that globalization and union organization jointly condition partisan effects. (low skilled
workers, vulnerable to risks arising out of globaliazation  unite in labour unions, so strong labor
unions  they demand from Left parties to expand welfare).
2. Analytical set-up
The dependent variable: annual change in total social spending as % of GDP.

The explanatory variables: government partisanship, globalization, labour strength (union density).

The control variables: growth of GDP, public debt as % of GDP, dependency ratio, unemployment
rate, de-industrialization
3. Empirical results
3.1 The evolution of partisan effects

Globalization was strongly associated with less social spending growth in the 1970s as well as the
1990s. Union density is associated with less social spending growth!
We did not observe any statistically significant effects of government partisanship in the first five
windows (1971 through 1984). For (1976-1981 through 1981-1990) we observe partisan effects that
are statistically significant. For most windows however, there are no significant partisan effects and
no apparent trend.
The challenge is to provide a coherent analytical framework for explaining both the rise and the
decline of partisan effects. Herein lies the promise of the thesis that globalization and labour strength
jointly condition the partisan politics of social spending. The results are consistent with the argument
that Left parties will respond to the (skill-biased) insecurity generated by globalization by engaging in
compensatory social spending when unions are strong, while the constraints imposed by
globalization will generate partisan convergence when unions are weak.
Conditional effects of government partisanship

The authors’ core argument implies a 3 way interaction between government partisanship,
globalization and union density.
Consistent with their argument, Kwon & Pontusson show that partisan effects increased with
globalization in the period 1971-1985 and – in contrast – globalization does not appear to have had
any effect on the partisan politics of social spending in the period 1990-2002.
The results conform closely to the predictions their core argument. For the countries where labour’s
organizational strength held up, partisan effects rose with globalization in the 1980s and 1990s. For
countries characterized by labour decline, partisan effects fell with globalization.
4. Conclusion
The timing of the decline of partisan effects does not conform to the expectations of those who
argue that slow growth and large welfare-state clienteles (Pierson) have brought about a decline of
partisan effects. The thesis that globalization generates pressures on Left parties to expand the
welfare state when unions are strong and pressures in the opposite direction when unions are weak
provides a coherent framework for explaining the rise as well as the decline of partisan effects.
Globalization was associated with rising partisan effects in countries where the strength of organized
labour held up in the 1980s and 1990s, but it was associated with falling partisan effects in countries
that experienced extensive union decline.

Article: Globalization and the welfare state: testing the foundations of the compensation
hypothesis
• Walter, S. (2010) Globalization and the Welfare State: Testing the Microfoundations of the Compensation
Hypothesis. International Studies Quarterly54(2): 403-426.
Walter
This article provides evidence for the compensation hypothesis. Meaning that globalization losers are
more likely to express feelings of economic insecurity. Such feelings increase preferences for welfare
state expansion, which in turn increases the likelihood of voting for a social democratic party. Also,
globalization losers and winners differ significantly with regard to their social policy preferences and
their propensity to vote for left parties.
Introduction
Proponents of the compensation hypothesis argue that globalization leads to welfare state
expansion, as governments strive to compensate potential globalization losers for the risks
associated with increased international competition and volatility.
This article presents a test of the compensation hypothesis’ micro-foundations. It is innovative on

two counts: First, it uses a number of different and more nuanced indicators measuring individuals’
positions as beneficiaries or losers of increasing global competition, that take into account that high-
skilled individuals may be affected by globalization differently than low-skilled workers. Second,
rather than focusing on a particular part of the causal chain, it tests the entire individual-level causal
mechanism implied by the compensation hypothesis.
This case is empirically tested in Switzerland. The findings support the causal logic of the
compensation argument. Strong evidence for the direct links, implying that globalization exposure
increases individual job insecurity, job insecurity enhances preferences for welfare state expansion,
and such preferences are positively related to partisan preferences for the Left.
Linking Globalization and the welfare state at the micro level. The Causal Mechanism of the
Compensation Hypothesis.

As shown above, the compensation hypothesis has several micro-level empirical implications, which
link globalization and welfare state expansion both directly and indirectly. Focusing on the demand
side of the argument, Walter argues that three causal links represent the mechanism between
globalization and demands for welfare state expansion: a link between individual exposure to
globalization and insecurity (LINK 1), a second link between insecurity and demands for
compensation (LINK 2), and a final link between compensation demands and individuals’ partisan
preference (LINK 3). The direct links suggest that globalization losers should not only feel more
insecure, but also demand more social protection as compensation for the increased risks they face,
and vote for parties that champion social insurance and redistribution. The opposite holds for
globalization winners.
Conceptualization, Operationalization, and Method
Walter identifies winners and losers of globalization: high-skilled workers are beneficiaries of
globalization, whereas low-skilled workers lose out. Low-skilled workers in sectors or occupations
that can be easily moved abroad should be most negatively affected by globalization. The distinction
between winner/loser also depends on the degree of exposure of the sector/occupation and his/her
skill level. Industries are exposed to globalization in various ways. Walter uses three measures to
assess the potential of globalization’s impact on individuals’ jobs : industry-specific exposure to
international trade and FDI, as well as occupation-specific offshoring potential.
For example, the higher the ratio of exports and imports per industry output, the more exposed
Swiss workers are to international trade competition.
Walter uses an interaction term: exposure to globalization X skills. She interacts an individual’s
sectoral exposure to globalization (measured as sectoral trade openness, FDI exposure, and
offshoreability) with the respondent’s skill level (0 -6 | 0=no degree, 6= university degree).
Dependent variable: economic insecurity, Welfare state preference, and Vote Choice.
Control Variables: income, gender, age, labor union membership, etc
Empirical Analysis
The results support the argument put forward by the compensation literature that globalization
losers feel systematically more insecure, demand systematically more state involvement, and are
systematically more likely to vote for the left than globalization winners.
A low-skilled individual exposed to globalization is between three and six times more likely to worry
about job security than an equally exposed, but well educated individual.
The first link is supported: globalization losers experience more economic insecurity than both
globalization winners and individuals working in more sheltered industries or occupations.
The second link is also supported: individuals who feel economically insecure should prefer an
expansion of the welfare state. The third link – individuals with a preference for welfare state
expansion will vote for parties that advocate such an expansion (social democrats) – is supported
too. The results also suggest that a direct relationship between individuals’ vulnerability to economic
internationalization and their vote choice exists.
Conclusion
This article has researched the compensation hypothesis on an individual level in Switzerland. It has
established three causal links underlying the compensation hypothesis and found empirical evidence

for them. Swiss globalization losers more likely express feelings of economic insecurity, in turn, this
increases the likelihood that a person will express preferences for more welfare state expansion, and
Swiss individuals with this preference are more likely to vote for the social democrats.
The effects of globalization exposure are dependent on the individual’s’ skill level.
The pressure on policy makers to expand the welfare state as a result of globalization is indeed real.
Article – Government Spending and Public Support for Trade in the OECD: An empirical test of the
Embedded Liberalism Thesis.
Hays, Ehrlich & Peinhardt.

• Hays, J.C. , S.D. Ehrlich and C. Peinhardt (2005) Government Spending and Public Support for Trade in
the OECD: An Empirical Test of the Embedded Liberalism Thesis. International Organization 59(2): 473-
494.
According to the Embedded Liberalism Thesis, governments committed to free trade provide
insurance and other transfers to compensate those who lose economically from expanded trade. To
maintain public support for trade liberalization. The authors test the assumption behind the
embedded liberalism thesis that government programs designed to protect individuals harmed by
imports reduce opposition to free trade. The authors find empirical evidence for the embedded
liberalism thesis (ELT).
Committing to free trade also means that politicians need to manage public support for economic
openness.  Expansion of welfare programs for citizens exposed to risks of the international
economy in return for their public support for openness. This is called the bargain of embedded
liberalism.
Authors have three criticisms on former research:

- research on this topic rarely distinguishes between imports and exports. Most studies use imports +
exports as % of GDP (trade openness) as independent variable.
- most research fails to consider the varying degrees of labor market exposure to international trade
- no one has tested the microfoundations of the ELT.

The authors that to make a convincing case for the free trade-welfare state linkage, it is necessary to
examine data at a lower level of aggregation.  micro level test.
The results show that individuals employed in import competing industries are the strongest
opponents of trade, but unemployment insurance and active labor market polices can moderate
their opposition. The authors argue that (1) politicians respond to surges in imports and not
necessarily to expanding trade if it is balanced, and (2) the extent to which politicians respond to
rising imports will be a function of how many workers are employed in tradable industries.
Trade and Government Spending in the developed democracies
Some important authors:

- Rodrik: short-term causal relationship between trade and government spending. Government
policies, by neutralizing the negative effects of trade, can deliver protrade majorities.
- Garrett & Mitchell: challenge the ELT!!! Relationship between trade and welfare state effort is long-
term and historically contingent. Trade dependence facilitated unionization, which, in turn, created
strong social democratic parties that expand the welfare state when in power.
- Ruggie: ELT: American welfare state expanded after WW2 because government chose to liberalize
trade, and realized they had to compensate market losers directly for the dislocations liberalization
generated.
- Iversen & Cusack: strong challenge against ELT!!. Post-WW2 growth of the welfare state is a
product of deindustrialization not globalization. Workers who move from industry and agriculture to
sercices must cross significant skill boundaries which is difficult and uncertain.  creates demands
for government spending. They show that relation between trade and spending is statistically or
substantively insignificant after controlling for deindustrialization.
The authors of this article raise 2 criticisms on research.

They argue we need to distirnguish between imports and exports: imports and exports should have
opposite effects on government spending.
Also, the impact of trade flows on government spending depends on the underlying structure of the
economy, in particular how many workers are employed in threatened sectors  represent voters
 politicians feel pressure to compensate
Unemployment benefits and individual attitudes toward trade

The authors wonder: if governments provide compensation in the form of unemployment insurance
or active labor market policies, will it effectively build support for free trade among those who are
likely to oppose it otherwise? The relationship between government spending and support for trade
is essential to the ELT.
Results of tests:
- individuals employed in high import industries are more likely to support tariffs to protect the
economy than individuals who are employed in either high export or nontradable industries.
Individuals with higher levels of education (skills) and income (capital) are less likely to support
protectionism. Finally, the higher an individual’s net replacement rate the less likely they are to
support protectionism. This confirms the ELT’s argument: government policies that remedy the
negative effects of trade increase support for economic openness.
Overall, results are very supportive of the ELT.
Imports and Government Spending in Postindustrial Economies
Politicians who want to maintain support for trade will have to respond to surges in imports. This is

particularly true if there are a large number of individuals employed in tradable sectors of the
economy. However, as individuals move out of tradable industries it becomes less important for
politicians to respond to increased imports. Thus, the micro results suggest that the movement of
workers from tradable to non-tradable industries will increase support for trade. Therefore,
globalization and deindustrialization should have interdependent effects on government spending. In
postindustrial economies, the effect of imports in spending should be smaller in magnitude.
Results
The authors prove that the effect of imports on a country’s level of government spending depends
on how exposed the domestic labor market is to trade.
The authors also run an experiment. The short-term effect of increasing a country’s imports is larger
for industrial than postindustrial economies.
The macro-results demonstrate the significance of our individual-level findings for the trade/welfare
state debate. The relationship between trade and government spending is robust when imports and
exports are distinguished and the interactive effects of trade and deindustrialization are recognized.
Conclusion
Ruggie’s ELT involves a political compromise in which leaders commit their countries to freer trade
while managing the dislocations that follow. The empirical tests demonstrate that this compromise is
a politically feasible one. Citizens’ attitudes toward trade are malleable and well informed by their
self-interest according to the predictions of trade theory. Workers who compete against imports
tend to oppose free trade, but their opposition can be reduced with policies designed to protect
them like UI and ALMPs.
Immigration, integration and support for redistribution in Europe.
Burgoon
• Burgoon, B. (2014) Immigration, Integration, and Support for Redistribution in Europe. World Politics 66(3):
365-405.
Immigration poses individual or collective economic risks tha might increase support for
redistribution, but can also generate fiscal pressure or undermine social solidarity to diminish
support. These offsetting conditions obscure net effects of immigration for welfare states. This paper
explores whether immigration;s effects are mediated by the economic and social integration of
immigrants – their unemployment levels, reliance on the welfare state, and social attitudes. Such
integration may alter how immigration reduces solidarity and poses fiscal and macro-economic
pressures, but not so much how immigration spurs economic risks. Where migrants are more
integrated by such measures, immigration should have less negative implications for native support
for government redistribution and welfare state than where migrants are less integrated.
The finding of this article is that economic integration, more than socio-cultural integration, softens
immigration’s tendency to undermine support for redistributive policy.
Hypotheses:

- Higher immigration should more negatively affect support for government redistribution to
the extent that immigrants are more unemployed than natives, more dependent than
natives on social benefits, or do not share the native native population’s socio-cultural
values.
The analysis by Burgoon reveals that exposure to higher foreign-born percentages tends to diminish
support for redistribution and social protection, but that this effect is substantively and statistically
significant more negative when migrtants have higher unemployment rates and dependency on
benefits. In contrast, the gap between foreign born and natives in socio-cultural values has a more
modest and less consistent negative effect on the relationship between immigration and
redistribution. Conclusion: economic, more than socio-cultural, integration may be important to
dampening immigration’s negative effects on welfare states in Europe.
All research evidence proves that immigrants have higher dependencies on social welfare and lower
contributions to government revenues than natives. Hence, immigration can lower support for
redistribution out of concern for the higher net fiscal costs of immigration. Also socially/culturally,
immigration may lower social solidarity and willingness to support redistribution.
Also, immigration might heighten collective or individual insecurities to boost rather than burden the
political sustainability of redistribution.
Most empirical evidence finds that immigration and support for, or actual, social-policy protection or
redistribution to be modestly negative.
How integration mediates the redistributive politics of immigration

Burgoon uses aspects for determining economic and socio-cultural integration patterns relevant to
the three channels discussed above that plausibly link immigration to support for social policy and
redistribution: the economic insecurities, fiscal pressures, and solidarity/altruism.
Burgoon looks at three gaps between natives and immigrants: unemployment rates, dependency on
social benefits, and socio-cultural assimilation (attitudes on gender, religion, political values, social
standards). Burgoon then develops three hypotheses for each gap how it mediates immigration’s net
effects on support for government redistribution.
In sum, the arguments culminate in three hypotheses that larger gaps between immigrants and
natives in unemployment (H1), in social benefit dependency (H2), and/or in social values (H3) ought
to make the effects of immigration on support for redistribution more negative.
3. Survey evidence in Europe
Dependent variables: public support for government redistribution and welfare protection.
Independent variables: foreign born % population (principal explanatory variable), the three gaps are
also independent variables.
4. Results and discussion
See conclusion
5. Conclusion
This analysis suggests that economic non-integration (captured by gap in unemployment and gap in
social-benefit dependency), more than socio-cultural measures of non-integration (gap in socio-
cultural values), exacerbates negative effects that immigration has on support for redistribution and
welfare. Burgoon clarifies mechanisms for such effects: economic non-integration, again more than

cultural non-integration, exacerbates how immigration can spark concerns about the fiscal viability of
welfare states, while doing little to alter how immigration affects altruism or individual economic
risks.
This study tells that national level measures of immigration can have important implications for social
policy and politics, but in ways that are mediated by integration. Greater economic integration of
immigrants into the labor markets can reduce negative effects. Economic integration, hence, more
than cultural convergence, can help cushion the social-policy implications of immigration in Europe
and elsewhere.
Article – International migration and the welfare state revisited
Gaston & Rajaguru

• Gaston, N. and G. Rajaguru (2013) International migration and the welfare state revisited. European
Journal of Political Economy 29: 90-101.
The focus of this paper is whether a large intake of immigrants reduces welfare state effort. It is
often argued that increases in immigration lead to public pressure for lower levels of publicly-funded
social expenditures. Gaston & Rajaguru find little evidence in favor of this hypothesis. While
immigration does have a relatively modest effect on the welfare state, if anything there is some
support for the view that a greater influx of immigrants has lead policy-makers to increase welfare
state spending.
Introduction
As Rodrik argues, increased economic insecurity results in a call for increased government support by
affected groups of workers. Increased openness  higher risks for workers  demands for
compensation.
Two conflicting views:
- globalization leads to difficulties for governments to raise taxes and leads to a race to the bottom
 negative consequences for the welfare state
- globalization creates losers  they demand more compensation  expansion of the welfare state
The literature identifies two broad effects of immigration on the size of the welfare state:
- The exposure or insurance effect: an increased likelihood of unemployment, may be

associated with a greater influx of immigrants, leads to higher welfare state expenditures.
- The redistribution or tax effect: workers with a higher probability of being employed prefer
lower taxes in response to an increase in immigration.
The second effect dominates.
The findings can be summarized as follows:

First, when the dataset is extended to cover a longer time-horizon and broader set of countries,
the former effect becomes more important.
2. The welfare economics of migration

Some studies find that gains from liberalization of migration are great. As with the welfare analysis of
international trade, turning a potential welfare gain into an actual welfare gain requires
redistribution.
3. The political economy of migration
It is common to find that individual preferences on immigration policy are determined by

endowment.
Another channel via which immigration affects native economic interests is the welfare state/fiscal
redistribution channel.
4. The relationship between welfare state spending and immigration
The presence of a redistributive welfare state can change both the welfare optimum and individual
political economic calculation. The basic question addressed by this body of research is clear: does
admitting immigrants (especially unskilled immigrants) lead to a reduction in welfare state effort?
Literature distinguishes two broad effects of immigration on the size of the welfare state:
-the exposure or insurance effect : workers and voters exposed to unemployment risks prefer higher
welfare state expenditures (and taxation), to the extent that the likelihood of unemployment
associated with higher immigration increases there is a greater demand for welfare.
- the redistribution or tax effect: workers with a higher probability of working always prefer lower
taxes and less welfare in response to an increase in immigration.
Hence, all native workers would vote for reductions in government benefits if immigrants are a fiscal
liability. Overall, whether more open immigration places downward pressures on welfare state
spending very much depends on who it is that immigrates.
5. The Evidence
Dependent variable: government social welfare expenditures

Independent variables: unemployment as % of total labor force, GDP growth, government debt,
dependency ratio, union membership, globalization. Etc.
Increases in immigration result in higher social spending. Immigration engender both an exposure
effect and a redistribution effect on social expenditures. The exposure effect dominates.
6. Concluding comments
Existing evidence showed that immigrants receive net transfers from natives via the welfare system.
Public social expenditures perform two key roles: an exposure effect and a redistributive effect which
work in opposite directions.
The findings support the view that immigration has had a relatively modest effect on welfare state
spending. Some support for the exposure or compensation effect is provided. But, strongly depends
on the group of countries considered!!
Notwithstanding, while labour market effects and redistributive effects associated with increasing
immigration surely matter, there is evidence that compositional amenities or social interaction
effects may be even more important. A broader understanding is required of the politics of the
welfare state and cultural adjustments to change.
There appears to be a strong link between poor macroeconomic circumstances, hardening attitudes
towards immigrants, less generous social policies and more restrictive immigration policies.

Domestic factors remain the most important determinants of public social expenditure, such as
government indebtedness, economic growth and the rate of unemployment. So not so much
increased migration of workers.
Article – Does EU enlargement start a race to the bottom? Strategic interaction among EU member
states in social policy
Jon Kvist
• Kvist, J. (2004) Does EU Enlargement Start a Race to the Bottom? Strategic Interaction among EU Member States
in Social Policy. Journal of European Social Policy 14(3): 301-318.
This article examines whether Eastern enlargement has led the EU 15 member states to enter
strategic interactions implying a race to the bottom. The question is whether concerns about welfare
migration have led to downward pressure on the EU 15 member states in the form of more
restrictive access to their labour markets and adjustments of their social policy benefits. Kvist finds
little empirical evidence to support the assumption that welfare states with generous benefits and
accessible labour markets will become magnets for welfare migration. Nevertheless the 15 member
states did engage in strategic interactions as if such migration would occur, restricting free
movement of workers from the eastern countries.
Introduction
Are welfare states sustainable in a world where Community rules have partly dissolved territorial
borders in social policy and when EU enlargement expands the potential numbers of social policy
claimants? The dominant view within comparative welfare state research is that exogenous
pressures stemming from EU collaboration are far less important than endogenous pressures such as
ageing populations.
Enlargement/Europeanization studies have not addressed two issues:
- they neglect the interactions between member states
- they neglected the impact of enlargement on policy in the older member states
In brief, Kvist finds that welfare migration fears are largely unfounded but that the EU 15 have acted
as if migration takes place.
European integration and social policy

There has been a dual development in European social policy. Positive integration is characterized by
widening and use of non-binding forms of governance where the prohibition of discrimination can
hardly be seen as changing the blueprint of the welfare state. In contrast, negative integration is
continuously deepened through case law. ECJ rulings that aim to secure the social protection of EU
citizens and a European labour market by adopting a broad definition of work and of who qualifies
for social protection and other benefits, and by making more benefits exportable, have, intensified
pressures on national social policy. At least EU regulations lie at the heart of anxieties voiced in the
EU 15 member states on the potential adverse impact of enlargement on national social policy.
Social tourism, social dumping and social raids
With the enlargement, fears grew that new EU citizens would migrate to the older member states to
profit from welfare. Mobility concerns in regards to the enlargement can be summed up under 3
headings:

- social tourism (people migrate to free ride on welfare)

- social dumping (2 forms: 1. Business as a product factor leaves the country in reaction to increased
competition from abroad, and to avoid this wages are lowered or working conditions worsened. 2.
Labour or business as a product factor entering the country, so-called ‘arms and legs companies’ that
de jure are companies established to promote a service but de facto are one-person companies
offering labour under wage and working conditions below standards).
-social raids (surprise attacks on national social security by a small or large group of people from
abroad, for example: getting work to get entry into the welfare system, sometimes with the aim to
export benefits to family back home). Resembles social tourism.
Welfare magnets or myths?

Some experts expected mass migration from east to west after the eastern enlargement. The
accession did not increase migration substantially in some countries, but did so for Germany and
Austria. Irrespective of the scope and nature of migration, the issue remains whether European
integration and enlargement lead to policy changes in existing welfare states.
Politicians may react to enlargement (in anticipation of it) as if welfare migration will take place, even
when the evidence suggests negligible effects.
Postponing the inevitable: restricting the free movement of workers

The regulation of free movement will apply in all countries seven years after the enlargement,
because of exemptions and clauses member states can use to delay this. For the eastern
enlargement most EU 15 member states adopted restrictive policies on the free movement of
workers, restricting their access to the labour market. These may only apply for 7 years at maximum,
so on 1 May 2011 all these restrictions ended.
Race to the bottom? National adjustments of social policies

Following EU rules, having work is an entry ticket to benefits. States may not discriminate between
nationals and non-nationals.
Countries, like the Netherlands, made eligibility and entitlements dependent on years of residence or
contributions just before they joined the EU. Other EU states also increased eligibility criteria to
prevent non-nationals to profit from universal welfare benefits. A clear development is observed that
shows that older EU member states increased requirements and restrictions to prevent migrants
from profiting from welfare provisions intended for national residents.
It shows that schemes with no link between contributions and rights are often perceived as exposed
to mobility, and that such perceptions may spill over into policy changes which potentially affect
national residents as well.
What is also interesting is that countries follow up on each other’s policy decisions to restrict access
to benefits. No member state wants to be the only country left without stricter criteria and thus
possibly become a magnet for social tourism/dumping.
However, the adjustments are marginal in nature. The levels of benefits are not reduced in order not
to be magnets for welfare migration, and there is no evidence in support of a race to the bottom.
Conclusions
There is no empirical support for the race to the bottom assumption, and no support for the thesis
that generous accessible EU member states serve as magnets for welfare migrants. However, there is
evidence that EU 15 states engaged in strategic interactions! Restrictions, increased requirements,
etc.

Article – European Migration: welfare migration or economic migration?
Warin & Svaton

• Warin, T. and P. Svaton (2008) European Migration: Welfare Migration or Economic Migration? Global
Economy Journal 8(3): 1-30.
This article presents an empirical assessment of bilateral migration flows into the EU-15 countries.
Using an extended gravity model, it identifies economic, welfare state, geospatial and linguistic
variables as the principal determinants of migration flows into the EU-15 countries. The level of social
protection expenditure influences migrants’ choice of destination, as long as its effect is not offset by
a high unemployment rate in the host country.
1. Introduction
This study uses a gravity model as in the most recent studies, but differentiates itself (1) by looking
explicitly at the immigration flows towards the 14 Western Europe members, (2) by considering pairs
of the top 15 origin countries that send migrants to each host country out of the 14 Western Europe
countries, and (3) by estimating the welfare state effects by choosing total social protection
expenditure per capita in purchasing power parity standards instead of using broad measures such as
total government expenditure or tax revenue as % of GDP.
The main goal of this article is to identify push and pull factors of migration into the EU-15 countries.
Warin & Svaton find that economic, welfare state, network, geospatial and linguistic effects all play a
role in explaining migration flows into the EU-15 countries from the rest of the EU-15 countries, the
Central and Eastern European countries (CEE0-10) and the developing countries.
Network effects increase immigration inflow, geographic distance decreases immigration inflow.
Social protection expenditure attracts migrants. The closing income gap decreases inflow.
The positive effect of social protection expenditure in the host country partially offsets the negative
effect of host country unemployment on the inflow. Considering this interaction. Warin & Svaton
discover that the negative effect of unemployment seems to override the positive impact of social
protection on the immigrant inflows.
2. Review of the Existing Literature

2.1 Economic impacts of migration
Highly productive skilled immigrants benefit a host economy, low skilled less adaptable
immigrants pose a burden. = Free riders.
2.2 Composition of the Immigrant Flow
The quality of migrants is conditioned on few economic and political characteristics of the
country of origin. Skill levels and propensity to migrate depend on social-economic
characteristics of the origin country.
2.3 Immigration and the Welfare State
In a progressive redistributional tax system, migrants with low earnings will free ride on the
host country welfare system.This creates resistance among natives  demand lower taxes.
There is empirical evidence that high inflows of unskilled immigrants correlate with a lower
tax rate.

Immigrants benefit a host country if they have unique factors of production, perform
unpopular jobs or if they alleviate a shortage of labor. The correlation between migration
and economic growth depends on human capital levels of immigrants (skills, education).
Empirical evidence confirms that immigrant households are more often recipients of welfare
benefits than natives.
2.4 European Migration

Population ageing generates economic incentives for immigration. Friedberg and Hunt’s
model proposes that the economy will adjust to the inflow of immigrants through wage reductions if
the labor market is flexible, or through higher unemployment if the labor market is dominated by
stiff labor union contracts protecting the insiders.
However, Zimmerman argues that factor inputs of immigrants are likely to be complements to the
domestic stock of labor and immigration had the potential to erode undesirable institutional
constraints and make the labor market more flexible.
Other authors argue that other enlargements of the EU did not increase migration flows drastically.
The impact of immigrants on the employment of natives is insignificant according to some studies,
except perhaps for less educated native workers.
3. Data and Stylized Facts

Dependent variable: the immigration inflows as % of host country population.
Independent variables: social expenditure, unemployment rate host country, geographical distance,
income gap.
4. Empirical Analysis
Warin & Svaton divide the dataset into four sub-samples based on the country of origin: the EU 15,
the CEE-10, the Eastern European countries (non-EU), and the developing countries.
4.1 Total social protection expenditure

The authors anticipate the following relationship to occur:
- confirming the existence of network effects, the stock of the origin country population already
resident in the host country should be positively correlated with immigrant inflows.
- For the welfare state magnets hypothesis to hold, the proxies for welfare expenditure should be
positively correlated with immigrant inflows.
- The host country’s unemployment rate should be negatively correlated with inflows.
- The lower the income gap between the sending and destination country, the lower are the
immigrant inflows.
-The unemployment rate in the country of origin is positively correlated with immigrant inflows into
the host country.
- Larger geographical distance increases costs of migration and reduces inflows.
- The geospatial and cultural dummy variables contiguity, common language and colony will have a
positive effect on inflows.
- The host country old-age dependency ratio raises the immigrant inflows from developing countries
indicating that countries with ageing societies admit more immigrants to expand the labor supply.
4.2 Disaggregated social protection expenditure

Warin & Svation further disaggregate the social protection expenditure into three components:
- social protection expenditure related to old age
- “ related to family
- “ related to the labor market

4.3 Interaction between Host Country Unemployment and Social Protection Expenditure
The inclusion of this interaction term weighs the importance of these factors in the migrants’
location decision. Is it the economic health of the host country or the level of its welfare state
provisions? Or both?
Findings:
- The unemployment rate and the interaction term are significant in all 4 samples by the region of
origin, whereas the social protection expenditure is only significant when we considfer immigrants
from the new EU member states.
If we consider the marginal effect of the unemployment rate, we find that social protection
expenditure diminishes the marginal effect of the rate of unemployment on the migrants’ decision of
destination. Similarly, the marginal effect of social protection expenditure on the migrant’s decision
of destination is reduced if the unemployment rate increases. = offsetting effect.
- An increase in social protection expenditure in the host country per unit of unemployment
has the poptential to attract migrants from the rest of the EU-15, from the new EU members
and from Eastern Europe.
A rise in the unemployment rate per unit of social protection expenditure will make the host
country less attractive for migrants from the rest of the EU-15 and the CEE countries.
The absolute magnitude of the social expenditure over unemployment coefficient is much
lower than the absolute magnitude of the unemployment over social protection coefficient.
Hence, there is an offsetting mechanism between unemployment and social protection in
the host country with respect to attracting migrants, but the negative effect of the
unemployment rate seems to be disproportionally more important than the positive effect of
social protection expenditure.
5. Concluding remarks and Policy Implications
By using social expenditure per capita in purchasing power parity standards instead of using broad
measures such as total government expenditure or revenue as % of GDP, Warin & Svaton hope to
improve estimation of the welfare state effect.
The finding that levels of social protection send signals to immigrants supports the welfare state
magnet hypothesis in the EU context. They found that the economic and the welfare state forces
have joint effects on migration. They infer that that countries with a positive labor market outlook
and with generous welfare will be favorite among immigrants. The labor market outlook
(unemployment) us comparatively more important than welfare provisions, although the positive
signal of a generous welfare state is not trivial.
The authors plead for better coordinated social policy across the EU  harmonization

Article – The Politics of Fiscal Responses to the Crisis of 2008-2009.
Armingeon
• Armingeon, K. (2012) The Politics of Fiscal Responses to the Crisis of 2008-2009. Governance 25(4): 543-
565.
Some countries reacted to the crisis of 2008-9 with a strong demand stimulus, some intended to slash
expenditures and a third group pursued mildly expansionary policies. There strong reasons for
governments to pursue a mildly expansionary policy. When governments want to depart from this
default strategy (with a strong counter-cyclical strategy) they must be able to swiftly make decisions.
Therefore, effective use of counter-cyclical policy will be unlikely in cases where lengthy negotiations
or significant compromises between governing parties with different views are likely. A major
determinant of the expansionary strategy is a unified government, usually in form of a one-party
government. If governments opt for pro-cyclical policy in a major economic crisis, they do so because
they have few other viable options. In this situation they tend to shift blame to international
organizations.
Since the 80s most governments believed in the ‘Washington consensus’, the belief that counter-
cyclical deficit spending (Keynesianism) ceased to work after the liberalization of capital markets.
After the monetary policy options were exhausted, most democracies turned to demand management
as the second step of the anti-crisis measures. Major fiscal packages composed of tax reductions and
increased expenditures in order to stimulate the economy.
Armingeon argues that the default response strategy of governments was to pursue a limited
expansionary budget.
Some countries however, implemented a swift shift to strongly expansionary policy given the crucial
condition that they had a unified government that could react quickly, or they opted for the pro-cyclical
policy. Taking the restrictive pro-cyclical option was motivated by pressure from IO’s, whether driven
by prior agreements with the IMF or the possibility of entering the Euro zone/Eurozone membership.
To minimize political costs of unfavorable polices, governments shift the blame to IO’s (either to
legitimate the lack of major anti-cyclical measures or to blame IO’s for tying the hands of
governments). Armingeon provides evidence for this claim.
The Argument
Reasons for countries not to deviate too much from pre-crisis deficit levels is: the debt burden,
unclear whether increased spending lowers unemployment because counter-cyclical effects of the
spending are conditional on the timely implementation of the stimulus and the extent to which the
expenditures remain in the domestic economy. Given these conditions, the logical fiscal response for
most countries is to increase spending by a marginal amount with the intention of alleviating the
worst of the labor market strains and signaling to the voter that government is actively trying to fight
the crisis. Armingeon assumes this is therefore the default fiscal policy response to the crisis. Because
it carries the least risk in economic and electoral terms!
The other two options (strong deficit spending or pro-cyclical policy) both require a significant shift
from the fiscal status quo. This requires a unified government that can take action swiftly.
Pro-cyclical = government explicitly rejects idea of stimulus program and aims at a restrictive fiscal
policy.

Counter-cyclical = governments commit themselves to substantial deficit spending. Classic Keynesian

response.
Why would a country choose for strong pro-cyclical policy during a severe crisis? Answer: the
strategy will pay off either through substantial gains in other areas that can offset the blame for
increased unemployment, or through the avoidance of substantial punishment. Gains and
punishments can be offered by IO’s!!
Most countries in Armingeon’s study chose the default strategy of a slight fiscal-stimulus. But two
groups chose the other approaches. Why this variation? We would expect strong congruence among
crisis responses as a result of globalization and coordination by IMF, EU, G20 etc.
Explanations
Why variations?
- countries differ with regard to their automatic stabilizers
- the severity of their crisis
- politics
- levels of debt
- size of population
Armingeon’s argument:
Assumption: governments need to be able to make swift and significant fiscal policy changes,
requires governments to act quickly and not engage in long negotiations etc. Hence, we expect one-
party governments to react stronger and more expedititously.  all expansionary policy responses
were by one-party governments.
In almost all other countries that did not pursue a significant anti-cyclical policy, the government was
a coalition composed of two or even more parties!
How can we explain that some governments (Baltics, Bulgaria, Greece etc) opted for pro-cyclical
policies, thereby risking to aggravate further the economic crisis? Simple answer: no choice!
Needed to do this to receive IMF loans. Also, some were membership candidates for the Euro zone
so a counter-cyclical policy could endanger the future Euro membership.
The most important factor in designing their response to the crisis was the governments’ ability to
react swiftly enough to deliver a sufficiently strong stimulus to the economy. Other main factors are
the political constraints that leave governments no choice but to pursue a fiscal policy, which in all
likelihood will contribute to a worsening of the crisis.
Conclusion
Armingeon argues there are strong economic and electoral reasons to pursue a midly expansionary
policy like the 19 countries did. This minimizes growth of debt and funding of other countries’
economies as their stimulus expenditures trickle away to their trading partners. This response also
manages electoral dangers, as their policies allow them to claim to their electorate that they are
actively trying to turn around their economies. Being active within the IMF allows blame shifting (IMF
tied our hands, “we cannot do more”).

If governments opt for pro-cyclical policy in a major economic crisis, they do so because they have
little other choice. Either under IMF conditionality or they have a goal on the horizon: Euro
membership.
This comparative analysis by Armingeon shows that in the global crisis of 2008/2009, a swift and
significant departure from the standard patterns of fiscal policies toward a major demand stimulus
required the presence of governments that are able to make decisions without lengthy negotiation
or compromise.
Article – The politics of fiscal policy during economic downturns, 1981-2010.

Raess & Pontusson
• Raess, D. and J. Pontusson (2015) The politics of fiscal policy during economic downturns, 1981-
2010. European Journal of Political Research 54(1): 1-22.
This article investigates fiscal policy responses to the Great Recession in historical perspective. It
explores general trends in the frequency, size and composition of fiscal stimulus as well as the impact
of government partisanship on fiscal policy outputs during the four international recessions. The
article calls into question the idea of a general retreat from fiscal policy activism since the early
1980s. The propensity of governments to respond to economic downturns by engaging in fiscal
stimulus has increased over time and no secular trend in the size of stimulus measures is observed.
At the same time, OECD governments have relied more on tax cuts to stimulate demand in the two
recessions of the 2000s than they did in the early 1980s or 90s. No significant direct partisan effects
is found in the four recessions! However, the size of the welfare state conditioned the impact of
government partisanship in the two recessions of the 2000s, with left-leaning governments distinctly
more prone to engaging in discretionary fiscal stimulus and/or spending increases in large welfare
states, but not in small welfare states.
Introduction
This article first explores general trends in fiscal policy responses to economic downturns since 1980;
and, second, we explore changes over time in the impact of government partisanship on fiscal policy
outputs. The study addresses three questions:
- the frequency of fiscal stimulus in response to economic downturns (are left wing governments
more likely to undertake fiscal stimulus measures?)
- the size of the fiscal stimulus (any differences between left and right wing governments?)
- the composition of fiscal stimulus (rely more on tax cuts? Differences between left and right?)
The evidence presented calls into question the idea of a general retreat from fiscal policy activism
since the early 1980s. Propensity of governments to engage in fiscal stimulus has actually increased!
Most governments relied more on tax cuts in the early 2000s and in the Great Recession than they
did in the early 1980s and 1990s.
For the recession of the early 2000s Raess & Pontusson found that left governments were more likely
than right governments to engage in fiscal stimulus and to rely on spending increases as the source

of fiscal stimulus in countries with a large welfare state. In the Great Recession, left-leaning and
right-leaning governments in large welfare states diverged with respect to reliance on spending
increases to stimulate the economy, but not with respect to the size of fiscal stimulus.
Existing literature and working hypotheses
It seems that many believe that governments have abandoned the Keynesian policy paradigm, a
retreat from fiscal policy activism.
Left wing parties should be more willing to engage in fiscal stimulus during economic downturns. Left
wing governments will also rely more on spending increases, while right governments will rely more
on tax cuts to stimulate domestic demand during economic downturns.
If it is indeed the case that the political-economic environment has become less permissive of fiscal
policy activism, it is possible that partisan differences over use of fiscal stimuli matter less.
According to Starke et al , generous social welfare provisions not only reduce the need for fiscal
policy activism during recessions, but also reduce partisan conflict over fiscal policy responses to
recessions. Countries with a large welfare state and more automatic stabilizers will have less
partisan conflicts.
However, Raess and Pontusson argue that partisanship matters more in large welfare states than in
small welfare states. They hypothesize that right-leaning governments will be more likely to adopt
expansionary fiscal policies that run counter to the interest of their core constituencies or, in other
words, behave more like left governments. Put the other way around, generous welfare provisions
reduce the electoral pressure on right-leaning governments to engage in fiscal stimulus and
compensatory spending, allowing them to adopt fiscal policy responses that correspond more closely
to the interest of their core constituencies. In already large generous welfare states, right wing
governments are better able to pursue their own policy preferences.
In large welfare states, left wing parties are also better able to pursue their expansionary welfare
state policies because there are more public sector jobs, less private sector jobs so there is less
resistance to expansion of welfare.
Empirics I : General trends
The data presented conveys two main points: the propensity of OECD governments to respond to
international recessions by engaging in fiscal stimulus has increased over time; and taking the extent
of economic downturns into account, we do not observe any secular trend in the size of stimulus
measures. Tax cuts featured more prominently in the two recessions of the 2000s than they did in
the early 1980s or 90s.
The frequency of fiscal stimulus in response to economic downturns increased steadily across the
four recession episodes.
Globalization might produce fiscal policy behavior that appears to be coordinated.
Empirics II: Government partisanship
The measure of government partisanship is the percentage of cabinet portfolio held by left parties. =
independent variable.
Left government were more likely to respond to economic downturns by engaging in fiscal stimulus.
But it differs per recession.

The overall shift towards greater reliance on tax cuts to stimulate domestic demand appears to have
been spearheaded by non-left governments and initially resisted by left governments.
The evidence does not give any significant direct effect of government partisanship. It does not
appear to be the case that more left-leaning governments consistently pursued more expansionary
fiscal policies or relied more heavily on expenditure increases to stimulate aggregate demand.
Is welfare state size a proxy for labor encompassment? In that case, the positive interaction between
size of the welfare state and government partisanship could be interpreted as confirmation of
Garrrett’s thesis, that encompassing unions willing to engage in wage restraint allow left
governments to stimulate growth through government spending. Testing this idea, Raess and
Pontusson do not find a significant interaction between labor encompassment and partisanship.
The size of the welfare state conditions the behavior of both left and right parties.
These findings contradict the core argument of Starke et al, and raise questions about Rueda’s
implicit claim that labour market dualisation reduces partisan differences over policy responses to
rising unemployment.
Concluding remarks
Raess & Pontusson do not find any evidence of a general retreat from fiscal policy activism over the
time period. Governments use fiscal stimulus less in response to economic downturns. Tax cuts
featured more prominently in the two most recent recessions than they did in earlier recessions. The
partisan effects found are not very robust, but signify a greater willingness of left governments to
increase discretionary spending as the economy begins to recover.
The size of the welfare state conditioned the impact of government partisanship. In large welfare
states – not in small ones – left governments were more prone to engaging in discretionary fiscal
stimulus as well as spending increases than were right governments during the recession of the early
2000s. In large welfare states, left-leaning governments were again more likely than right
governments to rely on spending increases as a means to stimulate demand during the Great
Recession.
Article – The Great Recession and Welfare State Reform: Is Retrenchment Really the Only Game
Left in Town?
Van Kersbergen, Vis & Hemerijck.

• Van Kersbergen, K., B. Vis and A. Hemerijck (2014) The Great Recession and Welfare State Reform: Is
Retrenchment Really the Only Game Left in Town? Social Policy & Administration 48(7): 883-904.
After the Greece crisis all countries pursued austerity. It seemed like retrenchment and cutbacks
were the only games left in town. This article studies the reform measures taken by mature welfare
state regimes (liberal, UK; conservative, Germany; social democratic, Denmark; and hybrid, the
Netherlands) to examine empirically whether austerity has indeed become the only item left on the

menu.
This article reveals that retrenchment features prominently on the agenda everywhere, but nowhere
by itself. While compensation for income loss is rare since 2010, this still happens. More
unexpectedly, reforms in line with a social investment agenda are still being pursued in all four cases.
Introduction
If retrenchment and austerity is really the only game left in town then governments’ responses since
the 2010 euro crisis should be solely of the retrenchment or cost containment type. We should not
find measures aimed at compensation or social investment.
The article assesses to what extent the reforms:

- aim to compensate groups affected negatively by the crisis
- strive for retrenchment of welfare state programmes, or aim to contain their costs; or
- aim for social investment
The analysis reveals that retrenchment is on the agenda everywhere, yet nowhere is it the only item
on the menu. Compensation for income loss still exists. Reforms in line with a social investment
strategy are still being pursued.
Existing Knowledge on the Impact of Crisis on the Welfare State
Radical welfare state reform does not appear to be the common response in the latest crises. The
literature indicates that austerity is the only policy option left. Almost all reforms were
retrenchment. Partisan politics barely played a role.
The authors now assess if and to what extent this austerity claim is valid, by examining all reform
measures since the 2010 crisis.
Approach
Case selection: UK, GER, DNK, NLD. Very similar countries in economic indicators, all centre-right
governments in 2010.
Operationalization:
social investment = measures that capacitate individuals and improve human capital, e.g. expansion
of child care, ALMPs or maternal leave. The idea behind social investment was to increase human
capital and thus increase productivity. In particular to stimulate employment of women.
Compensation = those measures which compensate the (income) losses of individuals.
retrenchment = measures cutting back existing entitlements
Cost containment = reducing public expenditures but does not cut back formal entitlements
The authors present a comparative analysis of the welfare state reforms per policy area. The analysis
shows that in spite of the common pressures on these welfare states, there is substantial variation in
how they deal with the Great Recession. The picture is not one of exclusive austerity, but more
nuanced and surprising. The remarkable finding is that although the room for social investment has
been narrowed, it is still available.
Comparison of Welfare State Reform Measures

This section discusses reforms in the four countries.

Discussion and Conclusion

Not all measures taken are retrenchment measures. Passive compensation has become rare since
2010. Surprisingly, many of the reform measures take are social investment. In the UK seven out of
nine measures qualify as social investment. However, these social investment measures had a
component of retrenchment. The findings show that austerity is not the only game in town.
The second observation is that many measures, if not most, do aim for austerity. In particular in the
Netherlands all measures are retrenchment, sometimes combined with cost containment.
The third observation is that active labor market policies are not being discarded.
Fourtth, most countries embarked upon a thorough pension system reform. Raising the pension age.
Fifth, some of the radical reforms were already in preparation before the crisis, but the crisis has
made citizens more accepting of reforms.
If fiscal austerity remains the hegemonic policy strategy for economic recovery, retrenchment at the
cost of compensation and social investment is increasingly likely to become the only game left in
town. Thus far, at least, our cautionary tale challenges this conjecture.
N.B.
Welfare states face two constraints when in a crisis and trying to reform.
- economic constraints: increasing deficits, debt burden, rising interest rates, conflicts with the IMF,
ECB etc.
- political constraints: electoral domestic pressures
Article – Political Parties and Social Policy Responses to Global Economic Crises:
Constrained Partisanship in Mature Welfare States
Starke, Kaasch, Van Hooren
• Starke, P., A. Klaasch and F. van Hooren (2014) Political Parties and Social Policy Responses to Global
Economic Crises: Constrained Partisanship in Mature Welfare States. Journal of Social Policy 43(2): 225-246.
This article argues that policy responses to global economic crises vary significantly across countries.
What explains the cross-national and within-case variation in responses to crises?
The authors argue that political parties and the party composition of governments can play a key role
in shaping crisis responses. They show that partisan conflict and the impact of parties are
conditioned by existing welfare state configurations.
In less generous welfare states, the party composition of governments plays a decisive role in

shaping the direction of social policy change. In more generous welfare states (more automatic
stabilizers) the direction of policy change is regularly not subject to debate, political conflict in these
welfare states rather concerns the extent to which expansion or retrenchment is necessary.
Therefore, a clear cut partisan impact can often not be shown.
Introduction
This article argues that there is no uniform crisis response – such as austerity – across countries when
it comes to social policy. Why these differences?
The link between party composition of government and social policy crisis management is studied by
comparing 4 small OECD economies. In this article the authors look at decisions on the generosity of
and access to social entitlements. Australia, Belgium, The Netherlands and Sweden. Four crises are
reviewd.
The size of automatic stabilizers is a central aspect of this study. The size of the automatic
stabilization effects affects the recovery from economic shocks. The argument put forward in this
article is that in welfare states with relatively low benefits and therefore small automatic stabilizers,
crisis responses are indeed shaped by partisan politics. Decisions to expand welfare or cutback
benefits are driven by partisan forces.
In larger welfare states (Continental and Northern Europe) the partisan effect on the direction of
change is very limited, since much of the fiscal stabilization is through automatic stabilizers. So the
crisis response is less subject to political debate.
The partisan politics of crisis management
An important challenge to partisan theories comes from the so-called ‘new politics’ literature on
welfare state retrenchment (Pierson, Starke) which focuses on the ways in which reform minded
governments – irrespective of partisan composition – are able to conceal unpopular cutback
measures through ‘blame avoidance’ strategies.
However, most studies (Armingeon, Cusack et at) discover that partisan effects do not play a very
robust role in fiscal stimulus programmes. The evidence on the impact of parties on crisis responses
is mixed, at best.
Economic conditions and the partisan composition of government
The picture of responses to the crises is highly diverse.

The relationship between the depth of the crisis and responses across countries can be called very
weak, at best. Depth of crisis does not tell us anything about the direction of responses.
The conditioning impact of welfare state generosity
How can we explain the differential impact of the partisan composition of governments on the social
policy responses to the crisis in Australia on the one hand, and the European countries on the other?
The crucial conditioning factor for the uneven impact of parties is the generosity of the welfare state.
In highly developed welfare states, large automatic stabilizers do their work.
The pattern of left expansion versus right retrenchment was most pronounced in Australia, and much
less so in Europe. Belgium, Netherlands and Sweden have large automatic stabilizer effects. In
Australia, the question of stimulus has to be put on the political agenda each time the economy is in
trouble. Automatic stabilizers work strongly counter-cyclical. So the content of crisis response is
shaped by the presence or absence of large automatic stabilizers.

Constrained partisanship in generous welfare states
Welfare state generosity has a conditioning impact on the kind of post-crisis debate. In Australia (not
generous) the debate typically revolved around the overall direction of crisis responses (expansion
versus retrenchment). In the other three generous European countries, the debate was more about
how much stimulus or retrenchment is enough?
Potential alternative explanations
Eurozone membership has a reinforcing influence under very specific conditions in Belgium and the
Netherlands and must therefore be added to the explanation. But this is not further examined in this
article.
Possible other factors could be the role of interest groups and corporatism, but this association is not
straight forward.
Conclusion
This study found strong variations in social policy responses to economic crises. The generosity of
welfare states matters for the type of partisan conflict that dominates during moments of crises. In
less generous welfare states, partisan strife to an important extent determines the direction of policy
change, while in more generous welfare states there is a rally around the flag, but only in relation to
the general direction of policy change.
The findings about the conditional impact of parties on crisis-policy making have larger implication
for comparative welfare state research. Parties do matter but in times of crisis, the dynamics of
partisan conflicts are strongly influenced by the role of welfare states as macroeconomic stabilization
mechanisms.
Article - Untangling Trade and Technology: Evidence from Local Labour Markets
Autor, Dorn & Hanson

• Autor, D.H., D. Dorn and G.H. Hanson (2015) Untangling Trade and Technology: Evidence from Local
Labour Markets. The Economic Journal 125(584): 621-646.
This article juxtaposes the effects of trade and technology on employment in US local labour markets
between 1980 and 2007. Labour markets whose initial industry composition exposes them to rising
Chinese export competititon experience significant falls in employment, particularly in manufacturing
and among-college workers. Labour markets susceptible to computerization due to specialization in
routine task-intensive activities instead experience occupational polarization within manufacturing
and non-manufacturing but no net employment decline. Trade impacts rise in the 2000s as imports

accelerate, while the effect of technology appears to shift from automation of production activities in
manufacturing towards computerization of information-processing tasks in non-manufacturing.
Introduction
The aim of this article is to analyze the simultaneous impacts of technology and trade on US
employment levels and job composition, juxtaposing their effects across local labour markets, over
time, between sectors and occupations, and among workers of different education, age and sex
categories. The analysis reveals divergence between the labor market consequences of these two
phenomena – both across industrial, occupational, geographic and demographic groups, and over
time as the trajectory of these forces has evolved.
The analysis produces three new sets of results on the causal effects of advancing automation and
rising low-wage country imports on local-labour market outcomes.
- Technology and trade have distinct effects on labour market aggregates. Whereas import
competition leads to sharp declines in local manufacturing employment and corresponding
growth in local unemployment and non-employment, exposure to routine task specialization
has largely neutral overall employment effects. The authors’ contribution is to place the
overall manufacturing employment consequences from technology and from trade side by
side, which reveals the larger aggregate employment effects of globalization when compared
to routinisation.
- Technology and trade affect employment in broad occupational categories and sectors in
different magnitudes and different directions. The results of this article for aggregate
occupation-sector cells highlight a critical difference between the impacts of technology and
trade shocks. While technology affects the labour market at the occupational level by shifting
occupational composition within sectors, trade competition has a broad sectoral impact an
depresses employment across all occupation groups in manufacturing, with a notable
negative employment effect for higher-skilled managerial, professional, and technical jobs.
- The timing of the sectoral impacts of technology and from trade strongly diverge. With the
growth of imports from China, the effect of trade competition on manufacturing has
increased over time. Conversely, the effect of technological change on employment
composition inside of manufacturing has decelerated.
However, outside of manufacturing the impact of automation accelerates during the three
decades of our sample, suggesting that computerization of information processing in
knowledge-intensive industries continues to intensify.
To sum up: the impacts of technology and trade appear to have little overlap either across space or
across time, which substantially simplifies the task of identifying their independent contributions to
changes in labour market outcomes.
2. Measurement
The authors use an instrumental variables approach, using a gravity-based estimation strategy.
3. Results
The authors examine the local labour market consequences of exposure to routine task specialization
and import competition from China in three stages, beginning with changes in labour market
aggregates (overall employment, unemployment, labour force participation), then considering
differences in employment effects by demographic group (sex, education, age), occupation (abstract,

routine, and manual task-intensive jobs), and sector (manufacturing, non-manufacturing), and finally
evaluating how outcomes at the sector and occupation level vary by decade from the 1980s to 2000s.
The first main empirical result is that technology and trade do not have comparable impacts on
aggregate employment, unemployment and non-participation. Greater trade exposure results in
significant overall losses of employment in local labour markets whereas greater exposure to
routinisation does not.
The results underscore that trade and technology are not a unified, monolithic force acting on the
local labour market. The negative employment impacts of routinisation are concentrated among
females and to some extent among older workers, with smaller and inconsistently signed effects for
other demographic groups. By constrast, trade shocks appear to reduce employment among all
groups of workers that we considered, with a disproportionately large effect among non-college
workers.
In regards to the effects of trade and technology on occupations and tasks this article gives two novel
insights which constitute the second major finding of our paper.
- Exposure to technology and to trade have in common that their largest negative effects are
on the middle category of routine task-intensive occupations. And second, exposure to trade
and to technology differ in that trade has negative employment effects throughout the task
distribution whereas technology does not. The qualitatively distinct impacts of routinisation
on employment by occupation and the qualitatively similar occupational impacts of import
competition are responsible for the divergent effects of these two forces on overall
employment – that is, neutral gross technology impacts and strongly negative gross trade
impacts.
Non-college educated adults suffer disproportionate employment losses from trade shocks. Thus,
non-college adults in all occupation groups appear exposed to greater importer competition from
China.
Sectoral impacts
The final set of empirical exercises considers the sectoral dimension of technology and trade shocks,
which leads naturally into an examination of their timing.
The authors find strong evidence that routinisation led to significant employment polarization in
manufacturing in the 1980s, characterized by a strong decline in routine occupation employment for
production workers and little changes in abstract and manual employment.
The declining secular effect of routinisation on job polarization in manufacturing is matched by an
accelerating impact of technology on routine-task employment in non-manufacturing. The results
suggest that the primary impact of technological change on employment has shifted from
automation of routine production tasks in manufacturing to computerization of routine information-
processing tasks, which are contracted in services. These findings stand in sharp contrast to the
direct impacts of trade exposure on employment.
The negative impact of trade exposure on manufacturing employment has intensified strongly over
time.
Computerisation did have substantial impacts on job task composition in manufacturing, but this
impact was felt with greatest force in the 1980s and 90s, and had little further effect in the 2000s.
This result encapsulates the third major finding of this paper: Whereas the negative employment
effects on manufacturing from import competition have intensified over time, the corresponding
effects from routinisation have weakened. By contrast, the impact of technology exposure on routine

task-intensive jobs outside of manufacturing has intensified, suggesting that the labour market effect
of technology is shifting from replacement of production work to automation of information
processing tasks in the service sector.
4. Conclusions
Technological change and globalization have led to changing skill demands and growing inequality and
rising polarization of labour market outcomes in the US and other rich countries. This paper confirms
that both forces shaped employment patters, its main contribution is to highlight important
differences in the impact of technology and trade on labor markets. The effects of trade and
technology can be observed separately because local labor market exposure to technological change,
as measured by specialization in routine task-intensive production and clerical occupations, is largely
uncorrelated with local labor market exposure to trade competition from China.
Labor markets with greater exposure to trade competition experience differentially large declines in
manufacturing employment, with corresponding growth in unemployment and non-employment.
Especially among non-college adults.
While trade exposure reduces overall employment and shifts the distribution of employment between
sectors, exposure to technological change has substantially different impacts, characterized by neutral
effects on overall employment but substantial shifts in occupational composition within sectors.
The declines in routine employment are largely offset by increasing employment in abstract or manual
task-intensive occupations which tend to comprise the highest and lowest paid jobs in the economy.
Concurrent with the rapid growth of US imports from China, the effect of trade competition on the
manufacturing sector has become stronger over time, while the effect of technological change on
employment composition in the manufacturing sector has subsided. Conversely, the impact of
technology on the non-manufacturing sector is growing as technological change seems to be shifting
from automation of production in manufacturing to computerization of information processing in
knowledge-intensive industries.
Article – Equality, Employment, And Budgetary Restraint – The Trilemma of the Service Economy
• Iversen, T. and A. Wren (1998) Equality, Employment, and Budgetary Restraint: The Trilemma of the Service
Economy. World Politics 50(4): 507-546.
Introduction
The internationalization of capital markets has been blamed for a reduction in the macroeconomic
steering capacities of governments. Growing levels of transnational investment have been seen to
strengthen the structural power of capital and undermine the capacity of governments to pursue
distinct social and economic policies. Greater exposure to low wage completion from newly
industrializing countries has been said to produce a universal rise in the level of wage dispersion and

unemployment. These causes have been named to blame problems since the 1960s (unemployment,
unequality).
This article proposes a different cause.
This paper argues that the most important change in the advanced liberal democracies over the past
3 decades has been the transition from an economy dominated by (exposed) manufacturing
production to one dominated by (sheltered) services production.
Countries face a trilemma: governments choose between budgetary restraint, income equality and
employment growth. It is possible to pursue two of these goals simultaneously, but not all three.
The Argument: The Trilemma of the Service Economy
The economic logic

A decline in manufacturing. There is a significant negative relationship between manufacturing
productivity growth and employment in most OECD countries during the 1980s. Manufacturing
wages improved, while employment declines.
This decline in manufacturing is accompanied by a shift in demand toward services. The services
sector increased employment growth. A problem is that service production is less conducive to
productivity growth. (Baumol effect).
High growth in market-provided services – necessary to compensate for declining manufacturing

employment - therefore presupposes a more inegalitarian wage structure.
The Service Economy Trilemma
Two responses:
- wages in services, especially in the lowest-paid occupations, can be permitted to fall in order to
lower prices and increase demand and employment
- the government can assume the responsibility for employing workers at relatively high wages by
expanding public sector consumption (leading to higher taxes)
Budgetary restraint is therefore difficult to combine with earnings equality and high employment in
the emerging service economy. This set of trade-offs = trilemma of the service economy.
The authors categorically reject the notion that the rise of the service economy is tantamount to a
decline in distributive politics.
This article makes a distinction between the Neoliberal, the Social-Democratic and the Christian-
Democratic models of welfare states. The Service economy trilemma is clear: neoliberal solutions
impose the costs of rising private service economy on people who cannot afford health care or
education so inequality increases, Christian-democratic solutions emphasize associational self-
regulation which fails to provide adequate employment opportunities for all who want to work and
thereby breeds labor-market exclusion and resentment among the outsider classes. The social
democratic model generates its own set of political divisions by pitting the interests of public and
private workers against each other.
Conclusions
The evidence presented in this paper clearly supports the existence of a trade-off between
intersectoral wage equality and the expansion of employment in the private services sector. Given
the declining capacity of the manufacturing sector to generate employment in most OECD countries,

the existence of this trade-off presents governments with a trilemma, between the goals of earnings
equality, budgetary restraint and employment growth. Employment growth can only be achieved in
the private services sector, at a cost of higher levels of wage inequality; or in the public services
sector, at a cost either of higher taxes or of higher deficits. Strict adherence to the goals of budgetary
restraint and wage equality simultaneously will therefore result in an inferior employment
performance.
Three different political ideologies have an impact on the choices of governments. For example, the
neoliberal model rests on the free operations of markets, and the outcome has been employment
growth and budgetary restraint accompanied by increasing levels of inequality. Hence, we can see
that it is impossible to pursue all three options of the trilemma simultaneously.
1. Fiscal discipline or budgetary restraint. 2. Employment growth. 3. Earnings equality.
Article – Economic Globalization, Domestic Politics, and Income Inequality in the

Developed Countries. A cross-national study.
Mahler
• Mahler, V.A. (2004) Economic Globalization: Domestic Politics, and Income Inequality in the Developed
Countries. Comparative Political Studies37(9): 1025-1053.
This article assesses the impact of economic globalization and domestic political factors on income
inequality and state redistribution in the developed countries over the past two decades, using
household-level data. Focus on three modes of internationalization: trade, direct foreign investment,
and international financial flows – as well as four domestic political variables – the partisan balance
of national cabinets, electoral turnout, union density, and the centralization of wage-setting
institutions.
Result: only scattered relationships between global integration and income distribution or
redistribution but reasonably strong positive relationships between several domestic political
variables and an egalitarian distribution of income and/or extensive state redistribution. So there is
resilience of domestic political factors in the face of economic globalization.
This article offers an empirical assessment of the relative impact of international and domestic
factors on the distribution of income generated by the market and the ability and willingness of
states to redistribute it.
International and domestic sources of income inequality and redistribution
Globalization has winners (skilled, high-income people) and losers (unskilled, poor people). Also
governments are affected: Rodrik: increased demands on the state to provide social insurance while
reducing the ability of the state to perform that role effectively.
On the contrary, scholars argue that globalization spurs economic growth to the benefit of everyone.
The effects – positive or negative – of globalization largely depend on domestic political factors,
determining the extent of public-sector redistribution.

Modes of globalization: trade, investment, and financial flows
Trade. Stolper-Samuelson Theorom: groups controlling relatively abundant factors of production

benefit from free trade, those holding relatively scarce factors suffer from it.
In rich countries, skilled labor is abundant and unskilled labor is scarce. A state can compensate for
this with redistribution.
Investment. Outbound investment harms domestic workers (removing capital from the local
economy and by replacing exports with goods produced by foreign firms) whereas inbound
investment benefits domestic workers for the opposite reasons. However, economists disagree
about these effects.
Financial flows. Liberalization of financial markets spurs inequality. High-income groups benefit
more, reduces options for political leaders to stimulate the economy, makes tax avoidance easier for
companies.
Domestic explanations: politics and labor market institutions
Domestic political sources of (re)distribution that are covered in literature: political participation (the
consequences of voter turnout, the impact of leftist parties) and the nature of labor relations
(unionization, degree of coordination of wage-setting institutions)
Variables
3 Dependent variables: Gini index of earnings inequality; the difference between pre-and posttax
and transfer income (labelled ‘fiscal redistribution); and the Gini index of disposable income
inequality.
Disposable income is the broadest measure of income inequality in that it reflects market income,
direct redistribution by the state, and any indirect redistribution arising from government actions.
Most other studies focused on a single indicator of inequality, usually pre-government earnings or
welfare effort.
7 Independent variables: Economic globalization (measured in: trade from less developed countries
LDCs, or LDC Imports; outbound investment flows as % of GDP; financial openness).
Domestic factors: ideological balance of a country’s cabinet (Cabinet Balance); electoral turnout;
union density; and wage coordination.
Analysis
Methods: two statistical tests. CSTS regressions.
Results
The measure of financial openness is positively related to income inequality. This is consistent with
other empirical work that finds that the traditional mechansims of international economic
interaction, trade and investment, are less important than exposure to international finance.
The variables Trade and (Outbound) Investment have no significant relationship with inequality.
With respect to the political variables, two significan relationships are uncovered.
- A negative relationship between earnings inequality and wage coordination. This confirms that: the
more wages are determined in a centralized fashion, the more equal the distribution of earnings.
- A relationship between voter turnout and earnings inequality: the higher the turnout in elections,

the better the interests of low earning groups are reflected in policy affecting wage inequality,
worker protection etc. Higher turnout -> lower inequality.
Some hypotheses are not found in evidence:

- there is no relationship between trade with LDCs and earnings inequality
- Outbound investment is not related to wage inequality
- Partisan orientation of a countrys ruling cabinet is not related – in either direction – to earnings
inequality.
- Union density is not related to earnings inequality.
None of the three indicators of economic globalization (LDC imports, Outbound investments,
Financial openness) is significantly related to the measure of state redistribution. This undermines
the race-to-the-bottom hypothesis but also undermines the domestic-compensation hypothesis
which states that governments use adjustment mechanisms for redistribution to low income groups
who are vulnerable to globalization!!!
The political variables: wage coordination is strongly positively related to the relative extent of fiscal
redistribution across the countries examined, which is consistent with the strong negative
relationship between this variable and earnings inequality.
Neither cabinet balance nor union density are related to fiscal redistribution. Nor is there a
relationship between voter turnout and earnings inequality.
For the variance in the distribution of disposable income the results are: none of the 3 measures of
globalization is significantly related to the distribution of postgovernment / disposable income.
Of the 4 political variables only 2 are related to disposable income.

- The higher the level of wage bargaining, the less the inequality
- The higher the union density, the lower the level of household income inequality.
The surprising finding is that cabinet balance / partisan effects have no relationship with the
indicators of inequality and redistribution. So this analysis calls into question the often assumed
relationship between partisan outcomes and inequality.
To sum up: the analysis offers little evidence of a systematic relationship between the 3 modes of
economic globalization and earnings, fiscal redistribution, or disposable income. With one exception:
the relationship between the financial openness variable and earnings inequality.
With respect to the 4 political variables, this evidence confirms the claim that domestic political
factors continue to matter in an era of globalization. Especially the wage coordination variable. Only
cabinet balance is not significantly related.
Conclusion
- Little evidence of systematic relationship between economic globalization and the

distribution of household earnings, fiscal redistribution by the public sector, or the
distribution if disposable income.
- Exception: relationship between openness to international finance and earnings inequality,
which seems to support evidence that financial openness constrains governments’’ use of
tools to stimulate the economy.
- Domestic politics continues to matter.


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Political Economy in International

The Marketplace to Buy and Sell your Study Material

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Article Arts & Gelissen

Scandinavian, social-democratic welfare states show: high decommodification and strong

Continental European countries: corporatist and etatist, and modestly decommodifying.

Three criticisms on Esping-Andersen’s classification:

The Liberal model (USA as prototype)

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Different Conceptualizations of Welfare State Retrenchment

Retrenchment in cutbacks (cuts in benefits levels for instance)

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Retrenchment as Institutional Change

Cutbacks or Institutional Change: Does it make a difference?

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Article – Plümper, Troeger & Manow

Panel data analysis in comparative politics: Linking method to theory

The de facto Beck-Katz standard

Pooling offers two advantages:

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The New Politics of the Welfare State

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The role of ideas

Some Persistent Issues

Means of retrenchment: obfuscation, division and compensation, framing, social pacts.

Article: Political Partisanship and Welfare State Reform in Advanced

Allan & Scruggs

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Contemporary Welfare States: resilience or retrenchment?

Another End of Ideology? Political Partisans and Welfare Retrenchment.

Do Partisan Differences Matter?

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They do a Pooled OLS Regression.

Conclusion: Politics as Usual?

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Insider/Outsider politics and job security regulations

Empirical evidence & Conclusion

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Article – The New Politics of the Welfare State

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I. Why the politics of retrenchment is different

1. The politics of retrenchment is treacherous, because it imposes losses on concentrated

II. The Limits of Existing Theories

From Theories of Expansion to Theories of Retrenchment

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Retrenchment Politics in 4 countries (US, Germany, Sweden, UK).

Pierson’s research in these four countries proves the following claims:

Retrenchment does happen in particular cases:

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Insider-outsider politics of employment promotion

Factors mitigating the effects of insider-outsider differences

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Some hypotheses emerge from this:

- Decreasing levels of employment protection should be associated with increasing levels of

Employment protection and employment promotion in Britain

The effects of government partisanship on policy

The results from statistical analysis:

As the insider-outsider model predicted, the increase in the vulnerability of insiders to

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Globalization and Welfare in Contemporary Debate

Globalization and Welfare still in harmony

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Globalization and Welfare unrelated