The Globalization–Welfare State Nexus Reconsidered

Two hypotheses relate to the globalization–welfare state nexus: the efficiency hypothesis predicts that globalization reduces government sector size and governments' capacity to finance the welfare state. The compensation hypothesis, in contrast, predicts that globalization induces a higher demand for social insurance which results in an extended welfare state. Empirical evidence on the globalization–welfare state nexus is mixed. The evidence is re‐examined by investigating a yearly panel dataset of 186 countries for the 1970–2004 period. This paper uses data compiled by the Penn World Tables on government sector size and employs the Konjunkturforschungsstelle (KOF—Swiss Economic Institute) index of globalization. The results show that globalization increased government sectors around the world. Social globalization especially had a positive influence. Globalization‐induced effects were stronger in Organisation for Economic Co‐operation and Development (OECD) countries. Overall globalization and economic globalization reduced the relative price of government expenditures. These findings suggest that globalization does not jeopardize the welfare state at all.