Trade openness and public expenditure on labour market policies

This article investigates the effect of trade openness on public expenditure on labor market policies, both passive and active, using a panel of 20 OECD countries in the period 1980-2003. Trade openness and, more in general, globalization can increase job insecurity and inequality; governments may want to increase expenditure on labor market policies in order to offer compensation or insurance (compensation hypothesis). On the other hand, the increased competitiveness in the global arena constraints the ability of increasing public expenditure both because of efficiency reasons and of tax competition (efficiency hypothesis). This study shows that both effects play a role in shaping public expenditure on labor market policies and that the degree of protection on the labor market affects the relationship between trade openness and expenditure.