International Integration and the Welfare State

This paper discusses how international integration affects the need and scope for welfare state activities. The first part reviews the main mechanisms, which have been considered in the literature, namely, tax base mobility, risk and race to the bottom effects in welfare policies. The second part considers in more detail the implications that arise via labour market effects, and it is argued that the latter are crucial since product market integration affects the mobility of jobs, even though labour mobility across nations remains small. This may in turn have important consequences for the financing of welfare state activities through taxes levied on labour, but also the need for welfare state activities. The paper ends by discussing some policy options.