Economic Competitiveness and Social Policy in Open Economies

While many studies have shown that greater trade openness affects the overall size of social spending, this study emphasizes that it also affects types of social policies that a government prioritizes. When faced with deepening trade competition, governments tend to use different policy measures to address the opportunities and challenges stemming from their economic competitiveness in the international market. Policy makers in countries with high relative labor costs are likely to privilege social insurances and income transfer. This is because as high labor costs make their workers more vulnerable in the trade competition, governments seek to protect skilled labor in order to maintain their economic advantage in advanced industries. In contrast, when relative labor costs are low, human capital investment programs are likely to be emphasized to enhance productivity and the quality of labor to capitalize the cost competitiveness of a country’s workers. The findings from empirical analyzes of 26 OECD economies from 1991 to 2012 support these arguments.