The Dilemma of Globalisation

Globalisation means gains from trade, but not for everyone. As
gains from trade come along with factor price convergence,
substantial fractions of the working classes in the high-wage
countries of the West are likely to belong to the group of losers.
In this situation it is tempting for the welfare state to help out,
but the difficulties are enormous. On the one hand, the payment of
social replacement incomes makes wages stick, preventing the gains
from trade, causing mass unemployment and turning the economies of
the West into bazaars with excessive outsourcing and offshoring
activities. On teh other, taxes needed for compensation payments to
the working classes can hardly be levied from the mobile factors of
production, given that globalisation has increased their mobility.
This is a double dilemma for the welfare state. The paper discusses
the possibilites of mitigating the dilemmas by paying wage
subsidies for domestic residents and encouraging private savings so
as to give workers a capital income in the future.