The paper examines why 'globaphobia' seems to be more prevalent in the US than in Europe, arguing that globalization has generated more wealth, income inequality and adjustment problems in America than in Europe. In the US, the median voter has experienced both lower wages and rising job insecurity because of globalization. By contrast, in Europe, the welfare state has largely insulated the median voter from the pains of globalization. The paper also examines international labour mobility, which is conspicuously absent in the current wave of globalization, and argues that for immigration the phobias are reversed. Sapir claims that the relative generosity of Europe's welfare state makes it less open to migration than the US.

Free Trade

The main opposition to globalization in the US, and to a lesser extent in Europe, comes from the labour force, which claims that international economic integration is largely responsible for the recent deterioration of its economic and social condition. Since the mid-1970s, the US has experienced rising wage disparity between skilled and unskilled workers and falling real wages for large parts of the labour force: between 1973 and 1997 the median real weekly earnings of male full-time workers fell from $700 to $600 in constant 1997 dollars. Europe, by contrast, has experienced rising unemployment with little or no downward pressure on wages: between 1973 and 1997 the unemployment rate in Europe (EU-15) jumped from less than 3% to nearly 11%.

Sapir splits the costs from globalization accruing to the labour force into two kinds: permanent income loss (stemming from inter-industry trade) and temporary adjustment costs (stemming from intra-industry trade). The scale of these costs varies depending on three factors: the nature of trade; the type of labour market institutions; and the kind of redistribution and adjustment mechanisms. Consider first the effect of the nature of trade. Under perfect competition in all product and factor markets, and with different factor endowments across countries (i.e. when only inter-industry trade takes place), the Stolper Samuelson theorem shows that trade liberalization is likely to be detrimental to (unskilled) workers in industrial countries, where (unskilled) labour is relatively scarce. Since countries enjoy overall gains from trade, there is always the possibility, however, of the winners compensating the losers. By contrast, if countries have similar factor endowments and trade is intra-industry, then both scarce and abundant factors are likely to gain from trade. Consequentially, labour is far more likely to oppose inter-industry trade than intra-industry trade.

Sapir then analyses the evolution of trade in Europe and the US over the last 40 years. From 1960 to 1998 trade openess (exports plus imports divided by GDP) for the EU-15 rose from 30% to 50%. This increase was almost entirely accounted for by trade with other EU countries; other EU trade remained fairly constant over the period. As EU countries all have similar factor endowments, the increase in intra-EU trade is likely to be dominated by intra-industry trade. Indeed, Sapir calculates that in 1998 73% of intra-EU trade was intra-industry. Over the same period, trade openess in the US rose from 7% to 20%, and roughly two-thirds of trade is intra-industry. Although the data seem to suggest that the US has experienced a greater exposure to inter-industry trade than Europe, Sapir concludes that it is unlikely that this difference accounts for a sizeable share of the two cultures' different reactions to globalization.

The second factor the paper identifies as determining the scale of the costs of globalization is the type of labour market institutions. Europe has a high level of labour market rigidity in comparison with the US. With rigid wages, a shift in demand such as globalization that favours skilled workers, new sectors or new regions tends to produce unemployment among unskilled workers and in older regions and sectors. In addition, the Stolper-Samuelson effect tends to break down for inter-industry trade when wages are rigid. In the US, declining wages and rising job insecurity have produced an anxious median voter. By contrast, in Europe, the median voter has been largely spared from growing unemployment, the burden falling mainly on the young.

The final determinant of the size of opposition to globalization is the type of adjustment mechanism that each country employs. The previous two factors suggested that globalization may have affected labour somewhat more in America than in Europe, yet Sapir argues that the main reason for the disparity in attitudes comes from differences in adjustment mechanisms. In the US, the Trade Adjustment Assistance (TAA) programme is the federal entitlement programme for workers affected by trade liberalization. In 1993, the NAFTA-Transitional Adjustment Assistance (NAFTA-TAA) programme was introduced specifically to help workers adversely affected by NAFTA. The US Department of Labor, which administers the programme, proclaims on its website: 'If imports from Canada or Mexico cost you your job … Apply for NAFTA-TAA'. Both programmes focus on career counselling, training, job search and relocation. Income support under these schemes is available for one year after unemployment benefit runs out and while the worker participates in an approved full-time training programme.

The stated purpose of both programmes is to assist individuals to return to 'suitable employment'. 'Suitable employment' is defined as that which pays no less than 80% of the person's earnings from their previous employment. The paper argues that the main reason for organized labour's opposition to globalization is that, despite such programmes, TAA and NAFTA-TAA only tackle temporary adjustment costs, whereas globalization is seen by labour as a cause of permanent income losses. In other words, TAA and NAFTA-TAA solve an efficiency problem, whereas labour perceives an issue of equity. When the TAA programme was created in 1963, the US traded very little internationally and imported virtually no manufactured goods from low-income countries. In those days import surges were mainly short-term, cyclical phenomena, requiring only temporary solutions. During the 1990s, however, trade openess and imports from low-income countries increased substantially, thereby adding permanent income losses to temporary adjustment costs. Yet, TAA remains the only response.

There is no programme resembling TAA in Europe. Sapir suggests two reasons for this. First, the welfare state in Europe is not only much larger but it is also both more equity-oriented and less efficiency-oriented than in the US. Unquestionably, Europe's social policy has been much more effective in limiting income inequality and poverty, and can subsequently be seen as an answer (of sorts) to permanent income loss. Second, the integrationist ideology of the EU seems hardly compatible with having its executive body, the European Commission, proclaim on its website: 'If the Single Market cost you your job … Apply for …'. However, The 1957 Treaty of Rome, the founding document of the EU, did establish a European Social Fund (ESF) designed to improve the employment opportunities for EU workers. Where the ESF differs from TAA is that its purpose is to help labour adapt to economic shocks whatever their origin.

Free Movement of Labour

Although the welfare state may encourage a liberal attitude to the free movement of goods and capital, it has the opposite effect on the movement of labour. In the second part of his paper, Sapir focuses on international labour mobility. This is a topic where phobia runs high on both sides of the Atlantic, with probably a clear advantage going to Europe. The fear of the American median voter is rooted in the same cause as his globaphobia: declining wages and rising job insecurity. By contrast, Europeans seem ready to accept increasing international integration of product and capital markets as long as labour is kept out of the picture.

Estimates by the UN's Population Division indicate that, at current birth and death rates, the EU would need 1.6 million immigrants a year to keep its working-age population stable in the next 50 years. Holding the ratio of workers to pensioners constant would require an additional inflow of 12 million a year. Yet the current objections to EU enlargement centre on the idea that it will entail mass migration into Western Europe. The paper identifies two factors likely to determine attitudes towards migrants: whether the migrants are substitutes or compliments to the existing labour force, and whether they are net contributors to or beneficiaries from the welfare state. In Europe, the vast majority of immigrants are unskilled and are therefore compliments to skilled labour and substitutes to unskilled labour. However, their position in relation to the welfare state is not as clear-cut. Hence Sapir examines the differences in the incidence of unemployment between national and foreign workers.

The graph on the next page presents data on unemployment rates for EU countries in 1998, broken down between nationals, EU foreigners and non-EU foreigners. It reveals two important features. First, for the EU as a whole, the unemployment rate for non-EU foreigners was twice the unemployment rate for nationals or EU foreigners. By contrast, in the US, the unemployment rate for foreigners was only 25% higher than the unemployment rate for nationals. The other key finding is the variance across countries. In Finland, Belgium, France and Sweden, the unemployment rate for non-EU foreigners was far higher than the EU average (30-40% compared with 20%); whereas the unemployment rate for nationals in these countries was similar to the EU average. By contrast, in Italy and Spain, and to a lesser extent in Ireland and Greece, unemployment rates are roughly the same for nationals and EU foreigners.

By calculating the ratio of the unemployment rate for non-EU foreigners to the total unemployment rate, Sapir is able to split the countries into three discernible groups. Those with high ratios (3 or above): the Netherlands, Belgium, Denmark and Sweden. Those with average ratios (between 1.5 and 2.5): France, Finland, Germany, Portugal, Austria, the UK and Greece. And those with low ratios (below 1.5): Ireland, Italy and Spain. These country groupings suggest that countries with the most generous welfare state are also those where foreigners have a higher probability than nationals of being unemployed. Sapir identifies two reasons for a possible relationship between the welfare state and the relative unemployment rates of non-EU foreigners. First, countries with generous welfare states may be those that attract most secondary migrants (i.e. family members of immigrant workers). Primary migrants (usually settled guest workers) may be expected to have unemployment rates similar to those of nationals. Second, countries with generous social transfers are also likely to have large public sectors, where employment is typically restricted to nationals or EU foreigners.

Sapir's regression analysis confirms that the unemployment rate among non-EU foreigners (relative to the total unemployment rate) increases with the generosity of the welfare state, and with the importance of secondary or second-generation migrants. This finding is not evidence that migrants tend to go to countries with generous welfare systems, since the regression does not reveal causality. It does, however, suggest that cross-country differences in the unemployment rate among migrants tend to be positively correlated with cross-country differences in welfare generosity. Sapir claims the correct response to this potentially explosive situation is straightforward: Europe needs to make more efforts to integrate its immigrant population and unleash its productive potential.

There is a broad consensus in Europe that the welfare state must be reformed in order to improve the efficiency of resource allocation as well as for budgetary reasons. An ageing population is expected to increase the gap between social expenditures and revenues. EMU is also likely to increase the demand for social transfers and to reduce the collection of taxes needed to finance them. Given the current high level of taxation in Europe, raising taxes does not seem a politically viable option. The paper proposes two other options. One is to adjust social expenditures downwards. The other is to employ more migrant workers, either by attempting to lower the unemployment rate among the current immigrant population, or by importing new permanent or temporary foreign workers. Either option would require difficult choices on the part of EU governments.

Discussion Paper No. 2595: 'Who Is Afraid of Globalization? The Challenge of Domestic Adjustment in Europe and America' by André Sapir (ECARES, Université Libre de Bruxelles, and CEPR).