Social policy in open economies: Forces for Downward Harmonization to Occur

social policy in open economies

Social policy in open economies: Forces Increasing the Demand for Social Policy Initiatives

Social policy in open economies: Forces Inhibiting Governments from Supplying Social Policies

Social policy in open economies: Forces for Upward Harmonization

Social policy in open economies: Forces for Sustained Divergence

Social policy in open economies: Evidence: Harmonization or Sustained Divergence

For such harmonization to occur and for it be to the lowest common denominator (i.e., to the jurisdiction with the least costly regulations and social policies) a number of conditions have to prevail (Gunderson 1998). First, the regulations and policies have to be enforced; otherwise there is no effective cost on employers. In many cases, initiatives that appear extremely costly ‘‘on the books’’ are simply not extensively enforced in practice. In this case, the intended benefit is also not realized.

Second, for the initiatives to be costly, the benefits to employers must be less than the costs. In many cases, employers themselves benefit from the initiatives, and this can offset at least part of the costs. Workers’ compensation, for example, imposes a payroll tax on employers, but it also frees them from the threat of being sued by injured workers since workers gave up that right as the quid pro quo for essentially receiving ‘‘no-fault’’ coverage in the event of aworkplace injury. Policies that require employers to give advance notice in the case ofmassive layoffs or plant closings can be costly, but they can also facilitate job searches that can benefit other employers.

Third, employers may shift much of the cost of work-related policies forward to customers or backward to workers. Shifting costs forward to customers is increasingly difficult in a world of global competition since customers can purchase from lower-cost sources that do not have such extensive regulatory costs. Shifting costs backward to labor, however, is possible since labor tends tobe the immobile factor of production and hence cannot easily ‘‘escape’’ the cost shifting by moving to employers that do not shift their regulatory costs. Such cost shifting can occur in the formof lower compensating wages paid in return for the benefit workers receive from the policy. In other words, workers who receive those benefits effectively pay for themthrough receiving lower wages in return for the benefits. Evidence suggests, for example, that the majority of payroll taxes initially levied on employers for policies such as workers’ compensation, pensions, and unemployment insurance are ultimately shifted back to workers in return for the expected benefits they receive (Kesselman 1996). In that vein, some of the populist views of imposing regulatory costs on large wealthy corporations are somewhat misguided in that the vast majority of those costs are shifted backward to workers in return for the benefits they receive from the regulations. There is no such thing as a ‘‘free lunch’’ in this area.

Fourth, for the harmonization to be downward, employers must respond to the cost increases by threatening to move their plants and investments to other, lower-cost jurisdictions. Although such a threat is now more credible, given the global conditions outlined previously, business investment and plant location decisions respond to a myriad of factors other than the cost of social programs. Furthermore, social programs can provide benefits to employers in forms such as infrastructure and political and social stability (Rodrik 1997).

Fifth, for downward harmonization to occur, governments must respond to the threat of capital mobility by reducing their costly social policy initiatives. Although there will be pressure in this direction, some governments (reflecting the preferences of their constituencies) may simply be willing to ‘‘pay the price’’ of their regulation. They may opt to be a ‘‘kinder and gentler society’’ and sustain their social safety net even if it costs them business investment and the associated jobs. They may hope to retain and attract what they regard as socially responsible business.

While these links must all be present for interjurisdictional competition for investment and the associated jobs to lead to downward harmonization to the lowest common denominator, the fact remains that the pressures are in the direction of such harmonization. That is, to a large degree each of the links is present: most policy initiatives are enforced; they impose net costs on employers; employers are not able to fully shift the costs; they have a credible threat to move to other jurisdictions that do not impose such costs; and governments do respond to the need to attract investment and jobs. As such, the pressures are in the direction of downward harmonization. The question is: How much? And are there countervailing pressures, often associated with openness and globalization, working against downward harmonization?