Working Paper No. 1273

The Compensation Hypothesis Revisited and Reversed

Published: April 16, 2019Pages: 9Keywords: Economic integration; Welfare state; GlobalizationJEL-codes: F10; H53; E02

The Compensation Hypothesis Revisited and Reversed Andreas Bergh


This note describes how research on the link between globalization and openness has changed over time. Early contributions assumed that countries develop welfare states to compensate for volatility caused by economic openness (the compensation hypothesis).

Recent findings have cast doubts on several steps in the causal chain implied by the compensation hypothesis. In many ways economic openness has been shown to be particularly beneficial for countries with high taxes and high income equality. Countries with large welfare states can use economic openness to mitigate some of the unintended side-effects of social protection and high taxes.

The compensation hypothesis can thus be reformulated: Through trade, the citizens in large welfare states can enjoy some of the benefits associated with cheap labor and high wage dispersion despite their domestic economy being characterized by the opposite.

Andreas Bergh

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Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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