How do you compensate losers from globalisation? Werner Eichhorst is the Director of Labour Policy Europe, and Florian Wozny is a Resident Research Affiliate, at the independent Institute for the Study of Labour (IZA) in Bonn, Germany, the world’s largest research network in labour economics with more than 1,300 economists from over 50 countries Globalization has come under attack, being accused of deepening societal tensions and creating new inequalities. Trade is made responsible for job losses and economic decline in some regions, industries, affecting the middle class in high-income countries. Migration is seen as a major threat to jobs for natives. Oftentimes, some take a reference point in the past with less globalization, less offshoring and shorter, more local value chains, lower import penetration and fewer migrants, assuming this situation was better for most of the domestic population, in particular workers in the manufacturing sector. Now, given the electoral success of Donald Trump and the Brexit referendum in the UK a new wave of protectionist, anti-globalization and anti-migration policies, putting even multilateral agreements such as the WTO at risk looks like a real policy option. If the anti-EU swing continues, eg. with the presidential elections in France this might even challenge the very existence of the post-war European integration process. From a politico-economic point of view we have first to understand where the massive discontent comes from. Who is dissatisfied with the economic and political situation, and for what reason? Who votes in favour of protectionism? Are those really the disadvantaged? If not, there would be less a substantial economic policy issue, but rather a cultural or rhetorical issue regarding aversion against cultural or ethnic diversity or heterogeneity. In fact, recent voting behaviour in western societies like the Brexit and the election of Donald Trump reveal information about the supporters for protectionist policy. Furthermore, continental Europe faces a rise in right-wing parties which promote protectionism. Analyzing their supporters offers information about individuals who perceive to be a looser of the globalization or will be losers. The latter is something we should not overlook because in some prospering countries puzzling pictures occur. Whereas overwhelming majorities of voters state high levels of self-satisfaction they do overestimate the dissatisfaction of the rest of the society which makes them prone for protectionist policy either because of altruism or because they think they will find themselves in such a situation. Although country specific differences exist there are many similarities which protectionist voters or supporters share. Current or past migration inflows often form the basis for discussion between supporters and opponents of protectionism. In that regard, inflow reasons do not seem to play a major role. However, discussions about inflows in some countries are mostly related to labour market migration inflows whereas in others they are shaped by refugees. Thus, the discussion in Austria, France, Germany and the Netherlands, for example, is rather about public security whereas in the US and UK it is more about migration induces job losses. Interestingly, the effect of age tend to be different between countries. In the UK and US, supporters are rather old whereas in continental Europe supporters tend to be younger. Nevertheless, right-wing voting is always induced by a fear of loss, either cultural or economical. From an economic perspective, these fears are not only driven by migration but also by globalization which increases pressure on regional labour markets. We see, for example, that regions in the US which face high globalization induces competition tend to vote more in favour of protectionism, and in the UK areas with declining industries and high long-term unemployment showed larger support for the Brexit referendum. The same can be shown in France where Front National receives particularly strong votes in areas with fewer jobs available. In general, within country variation gives us information about influencing factors. Regions with more heterogeneous origins tend to be less protectionist and less discriminating. On the one hand, this is a mechanical effect because non-natives vote less protective but on the other hand access to other cultures reduces anxieties. In Germany for example, regional variation in the number of refugees is not associated with right-wing voting but rather with voting against the regional governing party. This can be interpreted as concerns about the general allocation of resources and less as protective voting against foreigners. The allocation of resources is fundamental to compensate the losers from globalization. Whereas income per se does not seem to have an effect, poverty as well as income inequality and corresponding fears about the own and general financial economic situation foster protectionist votes or support. This is in line with the already mentioned argument that the own situation is of importance but perceptions about others should not be neglected. Furthermore, voters tend to have lower secondary or secondary education, are unemployed or blue-collar workers and rather male. With regard to these socioeconomic characteristics it is not surprising that protectionist parties activate former non-voters. Thus, the current situation seems to be characterized by an emerging economic, social and political divide. On the one hand more dynamic, urban areas and high-skilled groups benefitting from and supporting economic integration via open borders to trade and migration and on the other hand groups that are more afraid of these changes, calling for a stabilization attempt via reducing the speed and depth of change through closing borders. Both quite successful liberal market economies, such as the UK and US, as well as social market economies in Continental Europe with larger welfare states and elaborate structures of social partnership, such as Germany, Austria, the Netherlands, Denmark or France, are vulnerable to right-wing populism. In fact, in both worlds protectionist policies are be favoured by those who feel left behind and the political camp they support. However, closed borders will hardly work in practice, and they would probably not really help those that feel threatened – in terms of more jobs for domestic workers or higher incomes. Rather, in economic terms such a policy shift would be harmful for all in the medium and long run. Supporters and policy actors might still want to continue in that direction, however the disappointment with the socio-economic conditions will most probably not go away. But obviously, over the last decades many policy makers and economists may have underestimated the perceived or actual costs, in particular distributional consequences of openness to trade and migration. So how can we make sure that the gains from openness can be realized without undermining support for trade and migration? One way is to still try to reap the benefits from globalization but to compensate those who do not benefit that much or are hurt by trade or migration in a systematic, yet economically effective way. This can be achieved without putting a break on the dynamic innovation and adjustment processes triggered by globalization. But it would mean that those who benefit the most from technological innovation, global economic integration and open borders in general, ie. through more job opportunities, higher wages and income from capital, have to contribute more to efficient ways of redistribution. That would imply a partial redistribution of the gains from globalization from those who win to those who lose – or at least perceive to be benefitting less. Apart from a substantial policy issue this is about communication, making clear that policy makers care about those who feel left behind and take the distributional effects of globalization seriously. However, policies to ensure efficient compensation should also make sense economically and cannot suppress globalization itself. Rather, supporting the dynamic character of globalization allows for the generation of resources for compensation more easily than trying to redistribute within a (potentially poorer) less open economy. What does that mean in practice? First, welfare states using progressive income taxation and social insurance to fund social benefits, active labour market policies and training exist and in Continental Europe they are larger than in Anglo-Saxon countries. They continue to redistribute market incomes for social purposes and welfare states have not declined in terms of their size or capacities. However, they might need to be adapted to strengthen their role in the age of globalization. It might make sense to review the progressivity of taxation, in particular regarding top income earners and corporate taxation. If globalization and technological progressive leads to rising top incomes, a more progressive tax model might not only make sense as a political symbol, but also substantially. Second, it makes sense to avoid contributing to even higher levels of actual or perceived insecurity via a massive deregulation or a deterioration of social standards. In this context eg. minimum wages, clear rules regarding self-employment, crowdworking and (sub) contracting are useful, also attaching flexible forms of work to social protection. Third, policies to compensate those at risk of being in precarious employment or unemployment should not primarily focus on passive benefits – ie. transfer payments – but also provide for active support so that they are better equipped to cope with a changing labour market. This calls for educational policies at different stages of live, from schooling to vocational training and continuous life-long learning systems. As these policies work more indirectly and only in a more long-run perspective, from a political point of view the visibility of the support in phases of actual economic restructuring is most critical. One interesting example of such a visible mechanism of compensation can be found in the EU. The European Union provided foresight when the European Globalisation Adjustment Fund was introduced in late 2006. By supporting workers it should cushion negative consequences of unemployment resulting from trade liberalization without co-financing purely passive social protection measures such as early retirement. Thus, it is not a transfer mechanism. However, it provides for funding for up to 60% of the cost of projects designed to help workers made redundant to find a new employment opportunity such as assisting job search and mobility allowances, careers advice, mentoring and coaching and training or entrepreneurial support. Support is managed and implemented by national or regional authorities. Projects run for two years. The European Globalisation Adjustment Fund kicks in if over 500 workers are made redundant by a single company, or if workers are laid off in a particular sector in one or more neighbouring regions. Furthermore young people not in employment, education or training (NEETs) in regions with high youth unemployment are also entitled. The European Globalisation Adjustment Fund is an interesting and promising example, well designed, but not prominent and visible enough. The latter is certainly the result of the low funding with a current annual limit of €150 million. For comparison, the total spending of the EU is currently about €145 billion. However, reinforcing the basic principle of this fund through higher spending and increased visibility by letting people know that they are directly supported by the European Union can probably help further the acceptance of open economies and the European Union as a mechanism to assist citizens under such conditions. Clearly, well-designed policies alone will not be sufficient. Apart from policy design and effective implementation this has something to do with communication about benefits and costs, and there must be a visible link between the resources mobilizable through a dynamic open economy and useful forms of targeted compensation, where those being supported also see and understand the links.
So how can we make sure that the gains from openness can be realized without undermining support for trade and migration?