Economic Openness, Job Insecurity, and the Welfare State : A Multilevel Analysis in 25 European Countries

The compensation hypothesis is the most well known explanation of the empirical evidence showing a positive relationship between economic openness and the welfare state. This article argues that the core assumptions of the hypothesis can be tested with two hypotheses: (1) economic openness at the national level increases job insecurity at the individual level and (2) job insecurity at the individual level increases public spending at the national level. The combination of these two hypotheses should account for the positive relation between economic openness and public spending at the national level. Combining data from the European Social Survey (ESS), the KOF Index of Globalization, and the International Monetary Fund (IMF) allowed testing the two hypotheses on a sample of 25 European countries. The multilevel analysis shows no support for the hypotheses leading to the conclusion that the basic assumptions of the compensation explanation need to be reconsidered