Globalisation and the Composition of the Welfare State
The aim of this chapter is to examine the relationship between globalisation and the size of the welfare state taking into account the respective composition. The efficiency hypothesis argues that globalisation leads to a reduction in the size of the welfare state since this can harm international competitiveness and drive away capital flows, while the compensation hypothesis poses that globalisation induces an increase in the welfare state in order to provide citizens with wider coverage against the risks of globalisation. This relationship is analysed for 31 OECD countries over the period 1980-2010 using data on social expenditures and the KOF Index of Globalisation and their different components. The results obtained indicate that overall there is a positive association between globalisation and the size of the welfare state, more intense for spending on housing-related benefits, active labour market programs and other social policy areas, and mostly felt through political globalisation. Globalisation loses significance for the explanation of family and unemployment benefits.