Smith

Globalisation and policy options: Social policy and income distribution
by Alasdair Smith

The main problems which "globalisation" poses for social policy and income distribution are:

* Is international competition responsible for the dramatic increases in inequality there have been in the UK and the USA since the late 1970s and the substantial increases in unemployment in the rest of the EU?

* Does international competition force countries to have low social standards? Is it desirable to impose common social standards within the European Union?

*** Unemployment is heavily concentrated among the less skilled, so increased inequality and unemployment are both signs that unskilled workers are doing badly in the labour market. It is widely believed that globalisation is responsible for inequality and unemployment, not least because these problems have become worse at a time when international trade with developing countries has been growing rapidly. As economic reform proceeds in China, in other developing countries, and in eastern Europe, international trade with these countries will continue to grow rapidly, it would seem that inequality and unemployment will get worse.

Many economists are sceptical about using trade to explain much of the labour market difficulties of the unskilled. Even though trade with poor countries has grown rapidly, it still accounts for a small fraction of the economic activity of developed countries, and simple arithmetic suggests that it does not account for much of the change in labour markets. Technological change, associated with the IT revolution, is seen as the more plausible explanation for the fall in the demand for unskilled labour. The two competing explanations are not independent: international competition may be a spur to technological change. The academic debate continues, and the issue is still open.

Politics matter too. It is surely not a coincidence that the biggest increases in inequality happened in Reagan's America and Thatcher's Britain. It is hard to explain the rise in the relative income of chief executives either by globalisation or by technological change. The top managers of British privatised utilities have not benefited from a change in economic conditions but from a change in political climate.

The case of Japan, which has survived intense competition from fast-growing lower wage countries without significant increases in inequality or in unemployment, is striking and seems to show the value of an education system which provides good education to the less able.

But so long as the unskilled are at increasing risk from labour market pressures, there is a serious policy problem. Insulating the economy from technological progress would obviously be harmful. Insulation from international competition is less obviously harmful, and the case for protectionism is gaining ground (Perot, Goldsmith), but the long run effect of protection it to reduce national income. If inequality is agreed to be a problem, then it should be tackled directly: in the long run by putting more resources (including public expenditure) into the education and training of the less able; in the short run by making the tax and social security system more redistributive.

The political unpopularity of taxation is a problem! When government takes more than 40% of national income there will be resistance even from middle-income voters to more redistribution. Giving inequality a higher priority in public expenditure has got to mean cutting back on other claims to tax revenue. My own view is that we have to think the unthinkable, and shift significant shares of education, health and old age provision out of tax and on to insurance (public and private) and private provision.

The conservative attack on the social chapter is largely based on the notion that social provision makes countries uncompetitive. High levels of European unemployment are contrasted with the successes of the deregulated British labour market. There are two responses. First, it is not at all obvious that the British labour market is in better shape than European labour market. Male unemployment rates in France are about the same as in the UK - the higher French aggregate unemployment rate is accounted for by differences in female unemployment rates, a statistic that is very sensitive to the treatment of women by the social security rules. More fundamentally, the notion of "competitiveness" in the sense that it is used in this argument is incoherent: European exchange rates float against the dollar and the yen, and high social costs can be compensated for by lower exchange rates (lower dollar wages for European workers) - its simply a matter of the balance between cash wages and non-monetary compensation in how workers are paid.

Badly designed social provision does have harmful effects. For example, legislation that makes it very hard to fire workers will make employers excessively cautious about hiring. But this has nothing to do with "competitiveness" or "globalisation". Social provision that workers don't value may lead them to try to keep up the dollar value of their money wages which will make them ÒuncompetitiveÓ.

But the fundamental problem with social provision is again an issue of distribution. The costs of social provision are typically a higher share of the wage of low-paid than of high-paid workers. The real problem is not that French workers are made uncompetitive with Japanese workers, but that unskilled French workers are made uncompetitive with skilled French workers. This is the basis for the case against uniformity of social protection, and it brings us back to the proposition that inequality is better tackled directly through the public budget.

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