The Welfare State and the Forces of Globalization

Hans-Werner Sinn

No 12946, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The emergence of the Asian tiger countries and the participation of the ex-communist countries in world trade has reduced the equilibrium price of labor in western Europe and elsewhere. However, the actual price of labor hardly reacts, because the welfare state's minimum replacement incomes are fixed. The rigidity of wages causes pathological overreactions of the European economy in terms of excessive capital exports, excessive immigration and excessive structural change towards the capital intensive export sectors. The overreactions cause unemployment, sluggish growth, a current account surplus and a high export volume, but may prevent gains from trade. Moving from a system of wage replacement incomes to one that pays wage subsidies would enable a more efficient economic reaction that would not jeopardize social goals but bring about more employment, growth and gains from trade.

JEL-codes: F11 F21 F22 H53 J64 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-int and nep-sea
Note: PE
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Citations: View citations in EconPapers (22)

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Working Paper: The Welfare State and the Forces of Globalization (2007)
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