Trade and the Redistributive State

According to popular belief, welfare-state arrangements will become unsustainable in face of low-cost competition from abroad. Yet, in contrast to much of the theoretical work that predicts a race-to-the-bottom, empirical studies do not seem to support the notion that globalization is necessarily the demise of the welfare state. Whereas most of the literature approaches the issue of globalization and the redistributive state from a normative angle, this paper provides a political-economy-explanation. It shows that, with majoritarian redistribution and endogenous labor supply, redistributive tax rates actually tend to be higher in the integrated as opposed to the isolated economy. Depending on factor differentials within the population as well as technology parameters, redistributive budget-to-GNP ratios may nevertheless be lower, even if the redistributive tax rate increases.