Protecting Jobs in the Age of Globalization: Examining the Relative Salience of Social Welfare and Industrial Subsidies in OECD Countries

The relationship between economic openness and welfare policies has become increasingly important to policy makers. While scholars have tended to examine conditions under which budgets for social welfare programs ebb and flow along with countries’ exposure to trade, they have overlooked how governments may compensate domestic labor by subsidizing their employers. To explicitly address the issue of instrument choice, we examine the relative salience of social welfare expenditures to industrial subsidies in a panel of 16 OECD countries from 1980 to 1995. Our results suggest that the relative budgetary salience of social welfare to industrial subsidies is influenced by the interplay between governmental partisan gravity and changes in imports. Unlike Right governments, Left governments tend to favor indirect compensation via industrial subsidies in the wake of negative, zero or moderate increases in imports. Faced with sharp increases in imports, Left governments switch their preferences to compensating workers via more direct and visible policies, namely social welfare.