Iversen and Cusack: The Causes of Welfare State Expansion

Iversen, Torben, and Thomas Cusack. 2000. The Causes of Welfare State Expansion: Deindustrialization or Globalization? World Politics 52: 313-349.

"It is commonplace to argue that the increasing openness of national economies has meant growing economic insecurity. This insecurity once supposedly fueled demand for larger welfare spending as a form of insurance. The rising tide of globalization, however, is now widely seen as a hindrance to a government's ability to meet these demands and even as a cause of government cutbacks. An alternative view combines this 'second image reversed' with a concern for the political power of labor and the left. This revisionist perspective suggests that the challenges promoted by globalization when met by strong left-labor power within the domestic political system combine to produce a compensation strategy that entails a large and vibrant welfare state. This paper challenges both these views. Our argument, in short, is that most of the risks being generated in modern industrialized societies are the product of technologically induced structural transformations inside national labor markets. Increasing productivity, changing consumption patterns, and saturated demand for products from the traditional sectors of the economy are the main forces of change. It is these structural sources of risk that fuel demands for state compensation and risk sharing" (313).
The economic structure of employment has shifted dramatically. There is no longer such a strong focus on agriculture or industry, two sectors that previously were quite important. This paper contends that governments have responded to this change in three ways: 1| governments have promoted the movement towards jobs in service sectors and have compensated those who take this risk; 2| promote employment in public services; 3| have not promoted public or private opportunities and have promoted things like early retirement.

"The argument that globalization leads to welfare state expansion rests on two causal mechanisms. First, trade and capital market integration is said to expose domestic economies to greater real economic volatility, which implies higher income and employment risks for workers. Second, greater labor- market risks are hypothesized to generate political demands for expansionary spending policies that will cushion and compensate people for such risks" (317). This is strange, as international labor market risk may be a substantive reality, but the most important question is whether this international labor market risk is greater than the domestic labor market risk. The authors do not find increased labor market volatility in the countries explored during this period, thus brining previous analyses into question.

"Our results strongly suggest that deindustrialization, not trade or capital market openness, is the driving force behind the expansion of government spending on both transfers and services. Nevertheless, it could be objected that deindustrialization may itself be a consequence of trade and financial openness or that it was caused by, not causing, government spending" (339).