2. Globalisation and the welfare state: A brief literature review

There is a huge literature on the relationship between economic globalisation and the welfare state (for overviews, see Brady et al., Reference Brady, Beckfield and Zhao2007; Genschel, Reference Genschel2004; Hays, Reference Hays2009), which can be roughly divided into three camps. A first group could be named globalisation sceptics (Castles, Reference Castles2004; Iversen, Reference Iversen and Pierson2001; Iversen and Cusack, Reference Iversen and Cusack2000; see Taylor-Gooby, Reference Taylor-Gooby2002 for a critical perspective on this literature). In their view, socio-economic processes such as deindustrialisation and skill-biased technological change are more important driving forces of welfare state development than economic globalisation. Moreover, they claim that the politics of welfare state expansion and retrenchment play out in the arena of domestic politics and that constraints supposedly imposed by the dynamics of economic internationalisation are much less binding than assumed (see also Swank, Reference Swank2002; Potrafke, Reference Potrafke2009). Hence, institutions such as electoral and labour market institutions and the balance of power between domestic actors (political parties, trade unions, employers’ associations, etc.) are believed to strongly condition the impact of globalisation forces on social policy-making (Swank, Reference Swank2002; Hays, Reference Hays2009; Starke et al., Reference Starke, Kaasch and van Hooren2014).

In contrast, two other strands of literature agree that globalisation has significant effects on welfare states, but expect effects in opposite directions. The compensation thesis, going back to the work of Cameron (Reference Cameron1978) and Katzenstein (Reference Katzenstein1985), posits that economic globalisation leads to an increase in popular demand for social insurance, because individual workers exposed to the vagaries of international markets perceive amplified economic insecurity (Scheve and Slaughter, Reference Scheve and Slaughter2004) and demand compensation via the welfare state (more recent contributions are Garrett, Reference Garrett1998; Rodrik, Reference Rodrik1997, Reference Rodrik1998). The so-called efficiency thesis states the opposite view (Kurzer, Reference Kurzer1991; Scharpf, Reference Scharpf1991): economic globalisation constrains public spending in general and on welfare in particular because competition for mobile capital triggers a ‘race to the bottom’ between nation-states (Genschel, Reference Genschel2002): As firms in internationalised markets can credibly threaten to withdraw capital, governments are expected to react to these threats by decreasing the firms’ costs, especially taxes. Decreasing tax revenues, in turn, make cuts in (social) spending more likely.

The empirical evidence on the macro-level is mixed (Benarroch and Pandey, Reference Benarroch and Pandey2012; Brady et al., Reference Brady, Beckfield and Seeleib-Kaiser2005; Brady et al., Reference Brady, Beckfield and Zhao2007; Burgoon, Reference Burgoon2001; Garrett, Reference Garrett1998, Reference Garrett2001; Garrett and Mitchell, Reference Garrett and Mitchell2001; Potrafke, Reference Meinhard and Potrafke2012; Leibrecht et al., Reference Leibrecht, Klien and Onaran2011). Some scholars confirm the existence of a positive association between economic globalisation and welfare state generosity (Garrett, Reference Garrett1998; Garrett, Reference Garrett2001; Rodrik, Reference Rodrik1998; Meinhard and Potrafke, Reference Meinhard and Potrafke2012), whereas others find support for the efficiency thesis (Busemeyer, Reference Busemeyer2009; Jahn, Reference Jahn2006; Marshall and Fisher, Reference Marshall and Fisher2015). More recently, scholars argued that one way of reconciling the competing claims is to think of the effect of globalisation as variable over time – it might be that the nature (or intensity) of economic globalisation changed at some point in time (Busemeyer, Reference Busemeyer2009; Hicks, Reference Hicks1999; Jahn, Reference Jahn2006).

Recent scholarship has also significantly expanded our knowledge about the micro-foundations of the globalisation-welfare nexus. Scheve and Slaughter (Reference Scheve and Slaughter2004) prepare the ground by showing that – supporting compensation theory – globalisation increases individual perceptions of economic insecurity. Balcells Ventura (Reference Balcells Ventura2006) finds that trade openness fuels demands for redistribution but that these demands are moderated by a country's economic wealth and the relative size of sectors losing from free trade. Taking this argument further, Walter (Reference Walter2010b) analyses the impact of openness on individual social policy and partisan preferences in the case of Switzerland. She shows, in line with compensation theory, how exposure to international competition makes individuals more likely to demand social insurance and that this demand in turn affects partisan choices during elections. In a related paper using data for a larger set of European countries from the European Social Survey (ESS), Walter (Reference Walter2017) finds that the effects of globalisation are mediated by individuals’ skill profiles: low-skilled individuals exposed to the economic forces of globalisation are more likely to perceive greater labour market risks and demand social protection than high-skilled individuals.

In general, however, and in particular compared to the wealth of studies on the macro-level association between globalisation and the welfare state, the micro-level foundations remain under-researched. This is surprising, because the compensation thesis explicitly develops the argument that globalisation should first and foremost enhance popular demands for social protection, so that, eventually, a more generous welfare state regime will boost support for a further liberalisation of trade (Hays et al., Reference Hays, Ehrlich and Peinhardt2005; Hays, Reference Hays2009). Rather than exploring attitudes towards particular social policies, most of the work on the micro-level foundations of economic trade theories has focused on explaining individual trade policy preferences (Mayda and Rodrik, Reference Mayda and Rodrik2005; Mansfield and Mutz, Reference Mansfield and Mutz2009; Schaffer and Spilker, Reference Schaffer and Spilker2016). Understanding the compensation argument, in its entirety, requires confirmation not only of the link between welfare state generosity on the macro-level and individual-level support for trade liberalisation, but also of the consequences of economic globalisation for popular demand for social policies. The important contributions by Walter (Reference Walter2010a, Reference Walter2010b, Reference Walter2017) are a first step towards filling this research gap on the link between globalisation and social policy preferences. However, these studies focus on popular support for redistribution or social protection more generally defined. This broad focus glosses over important differences between different kinds of social policies (see also Burgoon, Reference Burgoon2001): in particular, the distinction between compensatory social policies more narrowly defined and policies geared at the provision of human capital.

3. Globalisation and demand for different types of social policies

Similar to compensatory social policies, social investment policies promoting human capital formation might play an important role in cushioning the negative side effects of economic globalisation. Recent work in comparative welfare state research emphasises that the welfare state does not only compensate for income and job loss via social transfers, but also promotes the formation of human capital via education, training and active labour market policies in order to ‘prepare’ individuals for labour market participation. This is in order to try and avoid the ‘repairing’ of labour market risks ex ante (Bonoli, Reference Bonoli2013; Hemerijck, Reference Hemerijck2013; Morel et al., Reference Morel, Palier and Palme2012; Van Kersbergen and Hemerijck, Reference Van Kersbergen and Hemerijck2012). In line with this way of thinking, some studies have provided initial evidence of a positive association between economic globalisation and spending on education at the cross-country level (Ansell, Reference Ansell2008, Reference Ansell2010; Boix, Reference Boix1998; Dreher et al., Reference Dreher, Gaston and Martens2008), but the causal mechanisms behind these associations remain underdeveloped and the evidence is not conclusive.Footnote ¹

Contributing to, but also moving beyond, the existing literature on the effects of globalisation on the micro-level of policy preferences, this paper broadens the traditional perspective of the compensation thesis by paying greater attention to the dual function of the welfare state: compensation and human capital formation. By exploring the varying association between globalisation and welfare state support across a range of policies, we follow in the footsteps of the important work of Burgoon (Reference Burgoon2001). In spite of the fact that his empirical analysis focuses on macro-level aggregate data rather than micro-level survey data, Burgoon's theoretical argument is that the association between globalisation and welfare state politics should be stronger ‘the closer the connection of a program to the direct and near-term needs of working people made vulnerable by openness’ (Burgoon, Reference Burgoon2001: 521). In line with this argument, Burgoon expects that (both active and passive) labour market programmes should be particularly affected by globalisation as they ‘provide the most immediate and direct relief for vulnerable groups’ (Burgoon, Reference Burgoon2001: 521). As education is less directly connected to the immediate needs of vulnerable workers, Burgoon expects a much weaker relationship between this policy and globalisation. In contrast, in the following section, we develop an argument as to why globalisation might have even stronger effects on support for education policy compared to traditional social transfers programmes since the development of human capital might be perceived as a more viable long-term strategy to face the challenges of economic internationalisation.

Traditional compensatory social insurance policies amount to an ex-post compensation of the negative effects of globalisation, i.e. increased labour market risk. Among different types of social protection policies, unemployment insurance is most closely related to the compensation argument, since other types of social insurance such as pensions and health care insure against life-course related risks that are less directly affected by economic globalisation (as also argued by Burgoon, Reference Burgoon2001). The availability of generous unemployment insurance might indeed enhance individuals’ willingness to accept higher average levels of labour market risk. But if unemployment actually occurs, individuals only receive a partial compensation of their lost income and this only for a limited amount of time. Also, longer spells of unemployment have negative repercussions for other forms of social insurance, in particular pensions.

Therefore, individuals might alternatively favour a pro-active approach when dealing with the challenges of economic globalisation. Rather than demanding ex post compensation for globalisation-related job losses, working-age individuals might be interested in upgrading and updating their skills via further training or education in order to prevent job loss ex ante. Investing in human capital boosts individuals’ employability, acting as an effective form of insurance against changing labour market demands (for a related argument regarding the impact of deindustrialisation, see Jensen, Reference Jensen2011). Since individual decisions on human capital investment also depend on the availability of such opportunities, we expect that individuals confronted with the economic forces of globalisation will demand more government spending and involvement in the provision of human capital.

What is more, from a political perspective, it could be argued that economically weak and vulnerable groups – the globalisation ‘losers’ – are also weak politically (Emmenegger et al., Reference Emmenegger, Marx and Schraff2015), and therefore, in the aggregate, the demands from the middle class for more investments in human capital might dominate demands from the economically vulnerable groups for compensation via social transfers. In line with this thought, work by Van Oorschot (Reference Van Oorschot2006) on deservingness shows that the unemployed are generally perceived as least deserving of support via social policies compared to other groups. Of course, it is important to recognise that the group of those affected by and vulnerable to globalisation is larger than the group of unemployed people (and not all of the unemployed lost their job because of globalisation). Nevertheless, following the basic logic of economic trade theory (in line with Hekscher and Ohlin, Ricardo and Viner, and Samuelson and Jones trade models), it is plausible to expect that globalisation in advanced democracies will further erode the labour market position of those who are already disadvantaged. This in turn affects their political power and the degree to which their particular demands for compensatory policies are eclipsed by demands from the middle classes to support social investment policies.

Finally, individual-level support for public educational investments could also be fuelled by ‘sociotropic’ perceptions (Mansfield and Mutz, Reference Mansfield and Mutz2009) about the link between globalisation, education, and the welfare state. Sociotropic perceptions refer to perceptions about ‘how trade affects the country as a whole’ (Mansfield and Mutz, Reference Mansfield and Mutz2009: 427), i.e. individual perceptions about how policies and other macro-level factors influence the wealth of the economy as a whole independent of the individual's own situation. For instance, parents (in globalised economies) can be expected to demand educational investments in order to ensure that their children are able to deal with the challenges of internationalised, skill-intensive labour markets. From that perspective, but also depending on the individual's labour market position, expanding educational opportunities for the next generation would be more attractive than compensating current globalisation losers by increasing spending on unemployment insurance. On the societal level, individuals might believe that expanding and improving their country's stock of human capital is more likely to contribute to continued growth than investing in passive transfer payments – particularly so in the ‘age of the knowledge-based economy’. Assuming (although this may be a strong assumption) that individuals are aware of the implications of human capital investments for the future economic wellbeing of their country, a higher degree of exposure to economic globalisation could go along with more support for continued investments in human capital formation. This may be because the public is more aware of the positive linkage between education and economic growth in globalized, as compared to protectionist, countries.

We further hypothesize that the effects of economic globalisation percolate from the macro- to the micro-level rather than being confined to the micro-level only. To clarify, we argue that differences in openness across countries are more important than individual-level exposure to globalisation pressures. Individuals in open economies are expected to demand more government investment in human capital on average compared to individuals in closed economies, independent of whether they themselves work in the sheltered or exposed sector. This logic is somewhat different from Walter's (Reference Walter2010a, Reference Walter2010b, Reference Walter2017) approach, which identifies individuals’ exposure to globalisation as a crucial determinant of redistributive preferences. While we see and agree with the logic of her argument, we believe that the macro-level context in a given political economy is even more important for the reasons outlined above. Even if they themselves are not directly affected by globalisation, individuals in open economies will most likely favour public investments in human capital, because they might realise that their jobs in sheltered parts of the economy (e.g. in the public sector) ultimately also depend on the competitiveness of the open sectors. Furthermore, when they have children, individuals in open economies are more likely to demand educational investments for their children since chances are high that they will end up in the open sections of the economy later on. Finally, we believe that a too-strong focus on individual exposure to globalisation underestimates the linkages between individuals in households. In the case of Scandinavian countries, for instance, a typical pattern of labour market segmentation is that women work in the sheltered public sector, whereas men work in the exposed private economy.

Summing up, we extend the compensation argument by differentiating between different types of social policies: our core hypothesis is that individuals in open economies are expected to express a stronger demand for policies promoting human capital formation compared to individuals in more closed economies. The same could be expected of traditional compensatory policies (unemployment insurance), but we have argued that there are plausible reasons to expect that the link between globalisation and social investment policies will be tighter. Thus, our argument is an important modification of the traditional compensation thesis in the sense that, while also expecting that economic globalisation will increase public demands for government involvement, we think that these demands are mostly related to social investment rather than classical social transfer schemes.

4. Empirical analysis

4.2 Results: Individual-level demand for compensation and investment

Tables 1 and 2 present findings of multi-level logit random effects (RE) regressions. In table 1, we focus on preferences for education spending and investigate the determinants of individual-level support, whereas in Table 2 we analyse determinants of support for unemployment spending.

TABLE 1.

Determinants of individual-level support for more public education spending in 17 countries in 2005/06, multilevel logit model

*p < 0.1; **p < 0.05; ***p < 0.01. Standard errors in parentheses. Log likelihood (empty model): -10,957.039

TABLE 2.

Determinants of individual-level support for unemployment spending in 17 countries in 2005/06, multilevel logit model

*p < 0.1; **p < 0.05; ***p < 0.01. Standard errors in parentheses. Log likelihood (empty model): -9950.3566

Of crucial importance for our argument is the impact of trade openness on individual-level support for welfare spending. When included as the only macro variable (Table 1, model 1), the 5-year lagged level of trade openness has a positive effect on individual-level support for public education spending, but this effect is not statistically significant at conventional levels. As model 2 shows, the effect turns significant as soon as we control for the level of inequality in a country. This indicates that inequality works as a ‘negative confounder’ on the association between trade openness and preferences. Once this is accounted for, the effect of trade openness is very robust. The association remains robust when including the status quo in public education spending (model 3). Models 4 through 6 lend support to our proposition that the causal effect points from institutions to preferences and not the other way around, because the effects turn insignificant when we do not use the lagged (2000) but the contemporary (2005) levels of macro-variables.

The magnitude of the effect is sizeable. An increase in trade openness from the country with the lowest values (Japan, 21 per cent of GDP) to the most open economy (Ireland, 184 per cent of GDP), for example, is – according to Model 2 (while holding the controls constant) – associated with an increase in support for education spending from about 64 per cent to 86 per cent of respondents. Put differently, increasing trade openness by one standard deviation (i.e. 33 per cent) above the mean (72 per cent) increases public demand by slightly more than one standard deviation (i.e. to 76 per cent). The 95 per cent confidence interval ranges from 73 to 81 per cent. A similar increase in inequality by one standard deviation above the mean (i.e. from 30 to 34 per cent), is associated with an increase in demand for education spending from 72 to 81 per cent (the 95 per cent confidence interval ranges from 76 to 86 per cent), i.e. by almost two standard deviations. Thus, the change in predicted probabilities associated with an increase in trade openness is considerable, although the predicted change seems to be even larger in the case of inequality.

Our analysis of the determinants of support for public spending on unemployment (Table 2) reveals that there is no statistically significant association between trade openness on the macro-level and individual-level support. This is puzzling from the perspective of compensation theory since unemployment benefits are expected to be of greater immediate relevance for employees, especially in times of economic insecurity. This (non-)finding holds irrespective of whether we include trade openness as the only determinant (Table 2, model 7) or in addition to inequality and/or levels of public unemployment spending and irrespective of whether we use time-lagged or simultaneous variables (models 8–12). These findings are at odds with the classical version of the compensation thesis, which needs to be refined in our view. Instead of increasing demand for ex-post compensation, globalisation boosts demand for forward-looking investments such as education.

The control variables perform largely as expected and confirm previous research (Ansell, Reference Ansell2010; Busemeyer, Reference Busemeyer2012; Busemeyer et al., Reference Busemeyer, Goerres and Weschle2009; Garritzmann, Reference Garritzmann2015): The determinants of support for education spending differ from support for other kinds of social policies in important ways. Income and educational background are strong and robust negative determinants of support for increased spending on unemployment, as would be expected from the Meltzer-Richard (Reference Meltzer and Richard1981) model, but income and educational background do not have a statistically significant impact on support for education spending. In line with previous research, this underlines that the redistributional effects of education spending are less straightforward compared to other social policies.

A similarity between support for education and unemployment spending is the non-linear effect of age. Individuals initially tend to be more supportive of social spending, but this effect levels out in old age. The magnitude of the squared term is quite small. Women are less supportive of unemployment spending but there is no statistically significant association between gender and support for education spending. Respondents working part-time or less hold similar preferences to those of full-time workers. Not surprisingly, students and pupils are more supportive of increased spending on education, whereas unemployed persons are more supportive of spending on unemployment. Respondents living in a one- or two-person household (our proxy for having no children) are less likely to favour education spending, but support more spending on unemployment. Overall, therefore, the micro-level controls perform in line with our expectations. On the macro-level, confirming the general logic of the Meltzer-Richard (Reference Meltzer and Richard1981) model, a high degree of socio-economic inequality is positively associated with individual-level support for more education and more unemployment spending. In the case of unemployment spending, the effect is significant in a few models only. Model 3 in Table 1 and Model 9 in Table 2 include levels of public spending in the respective field to test the ‘thermostat model’ (Soroka and Wlezien, Reference Soroka and Wlezien2010). But the coefficients fail to reach conventional levels of statistical significance.

Robustness

In order to corroborate our results, we conducted a number of robustness tests. Due to space limitations, we can only summarize these briefly here, but offer detailed results in the Online Appendix. First, we checked whether our results depend on the inclusion or exclusion of certain control variables by estimating different models. For example, on the micro-level we additionally controlled for respondents’ ideological self-placement, for their general preference for public spending, and for respondents’ exposure to globalisation utilising Walter's (Reference Walter2010a) transformation of Blinder's (Reference Blinder2007) offshore-ability index (cf. Online Appendix Table B). Moreover, we also tested whether including respondents’ marital status, their religious denomination or service attendance, the size of the city they live in, or the type of employment (public, private, self-employed) alters the resultsFootnote ⁴. Moreover, we checked whether using educational degrees rather than education years makes a difference. Yet, none of these tests undermined the main results reported in the text (for all results and detailed interpretation cf. the Online Appendix, particularly Table B).

Second, to further check the macro-level findings, we tested different operationalisations of globalisation, using instead (or in addition) inward and outward foreign direct investment, an index for capital account openness, and the KOF globalisation index (cf. Online Appendix Table C). Additionally, we checked whether the results are stable when we use changes in globalisation rather than levels, which produces the same findings (at a lower level of significance, though). Moreover, we tested whether deindustrialisation rather than globalisation drives the results (Online Appendix Table B). Finally, we also run models only including the macro-level variables to see whether the individual-level variables might mediate the relationship between trade openness and preferences. Again, the main results remained stable and passed these tests.

Third, to make sure the results are not driven by our decision to dichotomize the dependent variable, we used a different dichotomization (distinguishing those ‘strongly’ in favour against all others), and also used the full, observed variation estimating ordered logit and probit models, partial proportional odds models, and multinomial models. Online Appendix B describes the details of this process and the findings; here we can only briefly mention that the effect of trade openness remained robust. Finally, the results are neither driven by the inclusion or exclusion of survey weights nor affected by missing values.

In sum, the theorised effect of globalisation on demand for public spending seems highly robust as it holds for different variable selections, different operationalisations of globalisation, and across different model specifications, and is not affected by missing values or the inclusion of survey weights. This gives us confidence that the reported results are robust, reliable and substantial.