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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Global index of the sharing economy

Timbro SEI

2018 Bergh Funcke Wernberg - Timbro Sharing Economy Index-1fHemsidan.jpg

Andreas Bergh, IFN and Lund University, is one of the authors of this book. The Timbro Sharing Economy Index is the first global index of the sharing economy. The index has been compiled using traffic volume data and scraped data, and provides a unique insight into the driving factors behind the peer-to-peer economy.

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