Globalisation, Labour Markets, and the Welfare State

The project focuses on the interaction between the welfare state (WS), globalisation and labour market institutions in determining a country’s aggregate performance.

The effects of welfare state policies on labour markets have often been studied at a microeconomic level, whilst work on the economy-wide labour market effects of globalisation tends to focus on adjustments that occur across industrial sectors. This project aims to overcome this “micro-macro dichotomy” on the premise that by capturing nuanced interactions between the microeconomic and macroeconomic adjustments that result from globalisation will yield a greater understanding of the role of welfare state policies in countering the labour market and income inequality effects of globalisation, thus addressing some of today’s most pressing policy dilemmas.

Methodologically, the project consist of both theoretical and empirical work. Theoretical models aim to identify the channels through which WS policies affect microeconomic and macroeconomic adjustments to globalisation. Empirical comparative analyses will both assess the theory’s testable hypotheses and identify important stylised facts from inter-country comparative analysis.

Imperfectly competitive dynamic stochastic general equilibrium (DSGE) models have been developed to examine (under different market structure scenarios) both the long-run effects of ‘permanent’ policy reforms and how different policy regimes affect an economy’s dynamic adjustments following exogenous shocks.

Results are often at odds with conventional wisdom. For instance, reform packages exist that can improve upon the labour market outcomes of a liberal WS system, even when they entail a reduction of labour market flexibility and higher WS expenditure. More generally, our theoretical analyses suggest that the efficiency gains stemming from increasing international openness can strengthen the positive feed-back effects between WS policies and the exploitation of aggregate scale economies. Thus, contrary to conventional wisdom, globalisation needs not result in a lower revenue raising ability of governments and in WS retrenchment.

By highlighting the complex interaction between different policy instruments and economic structures, the models are generating testable hypotheses that are guiding the empirical work using data for Germany, Sweden and the UK. In a first paper we study the effect of firm-size distributions on the relationship between employment and output. The theoretical model predicts that output changes have larger effects on employment in industries characterised by a distribution that is more skewed towards smaller firms. We estimate industry-specific shape parameters of the firm size distributions using firm-level data, and use them to augment a relationship between industry-level output and employment. Empirical results confirm that the size distribution of firms is an important determinant of the relationship between changes in output and employment.

In work based on a Swedish linked employer-employee data we examine how global engagement can impact firm organization and the occupations a firm needs. Specifically, we study the effect of globalization on occupational mix using data covering all firms and a sample of the labour force for 1997-2005. We find a robust relationship, with more globally engaged firms using a mix skewed toward skilled occupations. Furthermore, firms have a more skill-intensive distribution when exporting to far-away markets, or when exporting differentiated goods.

More generally, the project is testing our conjecture that intra-industry adjustments at the micro level and changes in the distribution of firms’ productivities are important in shaping aggregate outcomes. By highlighting how WS policies can affect aggregate performance and how they can interact with industrial policy in determining industries’ international performance, this research is of significant potential policy impact.