Aggregate scale economies, market integration, and optimal welfare state policy |
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Authors: | Hassan Molana |
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Institution: | a Department of Economic Studies, University of Dundee, 3 Perth Road, Dundee, DD1 4HN, UK b Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham, UK |
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Abstract: | Using a two-sector-two-country model with aggregate scale economies and unionisation, we show that optimal welfare state policy entails positive levels of unemployment benefits under free-trade and capital mobility. In this setting, economic integration does not reduce the revenue raising capacity of governments and thus does not lead to a race-to-the-bottom in social standards. Instead, trade and capital flows interact with welfare state policies in increasing welfare even when each government acts independently (non-cooperatively) in determining its optimal welfare payment. Cooperation is shown to improve upon non-cooperative outcomes by raising both the generosity of the welfare state and aggregate welfare. |
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Keywords: | E6 F1 F4 H3 J5 |
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