By Will Young

Economic globalization, specifically international trade, leads to greater inequality with a country, but higher social protection spending may create a cushioning effect against rising income differences, according an OECD study.

In Economic globalisation, inequality and the role of social protection , Andreas Bergh on Lunds University in Sweden and Alexandre Kolev, Caroline Tassot of OECD Development Centre in France tried to establish whether economic globalisation is associated with higher within-country inequality of net income and whether social protection expenditure is associated with lower within-country inequality of net income.

The researchers use income inequality data from both the Luxembourg Income Study (LIS) and the Standardized World Income Inequality Database (SWIID) to examine the relationship between the variables.

“The importance of looking at the role of social protection in the inequality-globalization nexus follows directly from the consideration that when economic globalization creates both winners and losers, the demand for social protection may increase, leading to a rise in public social spending that could mitigate the impact of economic globalisation on inequality,” Mario Pezzini Director, OECD Development Centre and Special Advisor to the OECD Secretary-General on Development, states. “Testing such hypotheses requires research aimed at identifying how economic globalisation and social protection relates to inequality across countries.”

Bergh, Kolev and Tassot conclude that economic globalization, in particularly trade flows, increases income inequality.

The researchers also find that social protection expenditure is associated with lower income inequality, but they warn that this finding cannot be interpreted as a causal effect.

“Overall, the evidence produced in this analysis confirms previous findings that economic globalization, especially economic flows, is associated with higher income inequality, and that social protection expenditure is negatively associated with inequality,” Pezzini explains. “While the sample is too small to appropriately capture an interaction between social protection and globalization and thus to draw conclusions on the potential cushioning effect of social protection expenditure in the globalization-inequality nexus, descriptive findings suggest that among countries with high social protection expenditure, the more globalised countries display lower levels of inequality.”

This paper was produced as part of the research component of the EU Social Protection Systems Programme implemented by the OECD Development Centre and the government of Finland’s National Institute for Health and Welfare (THL).

[Photo Credit: Richard Allaway]