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The Causes of Welfare State Expansion: Deindustrialization or Globalization?

Published online by Cambridge University Press:  13 June 2011

Thomas R. Cusack
Affiliation:
Harvard University

Abstract

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An influential line of argument holds that globalization causes economic uncertainty and spurs popular demands for compensatory welfare state spending. This article argues that the relationship between globalization and welfare state expansion is spurious and that the engine of welfare state expansion since the 1960s has been deindustrialization. Based on cross-sectional-time-series data for fifteen OECD countries, the authors show that there is no relationship between globalization and the level of labor-market risks (in terms of employment and wages), whereas the uncertainty and dislocations caused by deindustrialization have spurred electoral demands for welfare state compensation and risk sharing. Yet, while differential rates of deindustri-alization explain differences in the overall size of the welfare state, its particular character—in terms of the share of direct government provision and the equality of transfer payments—is shaped by government partisanship. The argument has implications for the study and the future of the welfare state that are very different from those suggested in the globalization literature.

Type
Research Article
Copyright
Copyright © Trustees of Princeton University 2000

References

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21 Garrett (fn. 3).

22 Our thanks to Geoffrey Garrett for generously providing us with the data he used in his analyses, thereby allowing us to replicate his findings. See Table 4.4 in Garrett (fn. 3,1998), 90. Note that Garrett uses levels of spending on the left-hand side, but this formulation gives an estimate for R-squared that is uninformative since the lagged dependent variable will pick up most of the cross-national variance. Using changes in spending on the left-hand side avoids this problem while leaving the estimated coefficients the same. (In mathematical terms, we are simply subtracting the lagged dependent level variable on both sides of the equal sign, which obviously leaves the coefficients for all other variables unchanged.)

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47 This does not have to be the case. One of the control variables, unexpected GDP growth, can in principal rise indefinitely.

48 The basic results we report below for the deindustrialization and globalization variables are robust to a large number of alternative model specifications. Thus, we have tried to group the data into time intervals using different periodizations; we have run the regression with and without the political variables, with and without the change terms; and we have tried to exclude one country at a time. In all cases the results for deindustrialization are strong and statistically significant, whereas for the globalization variables, they are weak and statistically insignificant, with the exceptions noted in the text.

49 An F-test indicates that the country dummies belong in the model.

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53 Rodrik (fn. 2), chap. 4.

54 We tested whether the effects of employment losses in agriculture differ from those in manufacturing by breaking the deindustrialization variable into two component variables: one variable defined as 100 minus manufacturing employment as a percent of the working-age population, and another defined as 100 minus agricultural employment as a percent of the working-age population. The results for both variables are similar to those for the deindustrialization variable, but when both variables are entered simultaneously, the manufacturing variable has a somewhat stronger effect (0.045 versus 0.035 for transfers, and 0.035 versus 0.022 for consumption). One reviewer suggested that a possible reason for this pattern can be found in social mobility studies, which show that a greater decline in agriculture occurs through intergenerational mobility than in manufacturing.

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57 Ibid.; Iversen and Wren (fn. 8).

58 A typical left government is defined here as one that is 1 standard deviation to the left of the mean on the partisan government variable. A typical right government is defined similarly.

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61 Both figures are slightly exaggerated because there are small negative indirect effects of deindus-trialization (through growth and other variables) that reduce the net impact of deindustrialization. Yet these indirect effects do not affect the gap in the effect of deindustrialization between countries with centralized and decentralized bargaining structures, which is what is of interest here.

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67 We recognize that the debate over trade with LDC countries is broader than the question of whether it has led to widespread deindustrialization. It also involves issues such as the relative performance of particular manufacturing industries, relative prices, and above all, wage inequality. For a good introduction to the debate see the special issue of Journal of Economic Perspectives 9 (Special issue, 1995). For our purposes, however, the key issue is whether or not our main independent variable, deindustrialization, is in large measure the result of competition from low-wage countries.

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71 We could have used change in the log of the deindustrialization variable on the left-hand side in Table 4 without affecting the results (except for switching the signs of parameters, of course). We chose the current setup to stay as close as possible to the analysis by Rowthorn and Ramaswamy (fn. 65).

72 The countries include: Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Sweden, the United Kingdom, and the United States. Missing data problems precluded adding Switzerland. The time frame is the maximum possible given the availability of data.

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